TEIJIN: NAVIGATING WATERS OF CHANGE
Byline: Scott Malone
NEW YORK — Teijin Ltd., one of Japan’s textile giants, is taking steps to navigate the changing textile environment, including several joint ventures around the world in the textile and apparel industries, as a way of expanding the reach of its $3 billion fiber business.
Shosaku Yasui, president and chief executive of Japanese fibers giant Teijin Ltd., explained in a recent interview during a brief stopover in New York on his way home from Europe some of the strategies his company has employed to battle the margin pressures in the industry facing the looming abolition of quotas among most nations in 2005
Seated in his room in the St. Regis Hotel, Yasui explained that the Osaka-based company — which began in 1918 as a maker of rayon and now makes polyester, its mainstay, as well as nylon and acetate — has been forming its overseas alliances with a recognition that the global trading environment is becoming more complicated. The abolition of quotas by World Trade Organization-member nations is only a part of the story.
In 2005, he said, “The world will become two parallel sets of regulations. One is the free-trade zone, led by the WTO. The other is the so-called blocs, like NAFTA and the EU.”
The existence of trading blocs means that companies need not only worry about whether they have sufficient production capacity to meet demand, it also means that they need to choose carefully the nations where they produce to make sure they aren’t legally or practically shut out of the trading blocs.
One alliance Teijin struck last year with that in mind is its polyester joint venture with Mexican chemicals market Alpek. The venture, Akra-Teijin, currently has an annual capacity of 100,000 tons, which Yasui said the partners need to expand shortly.
“Within half a year, we need to decide” by how much to increase capacity, he said. Asked how much larger he’d like to see the venture become over the next few years, Yasui responded, “At this time, I have no idea. But it could be at least twice its capacity.”
Located in what Yasui regards as a relatively high-cost production region, the venture focuses on producing technical polyester yarns for high-end garments and industrial uses.
At this point, between 70 percent and 80 percent of the Akra-Teijin venture’s capacity is made into garments or otherwise consumed in Mexico. There’s further growth opportunity there and in selling fiber to U.S. spinners, Yasui said, but he sees the venture as a viable way to serve the European Union market, due to a free-trade agreement that exists between that bloc and Mexico.
“In the case of Europe, we don’t have to set up a fiber plant,” he said. “We can export from Mexico.”
Yasui regards polyester as a major strength of Teijin’s operations. Excluding the venture with Alpek, the company has an annual capacity of 650,000 tons of polyester, two-thirds of which is produced outside Japan in countries including Thailand and Indonesia. (Teijin closed the last of its rayon operations around 1970.)
The company’s Indonesian production is its lowest-cost operation, he noted, and the company over the next few years aims to invest about $20 million to boost its capacity in the commodity polyester area.
Yasui expects low-cost capacity to prove essential to remain competitive outside of trading blocs come 2005, he said.
“For the free-trade zones, we need to have the lowest-cost production possible,” he said. “Indonesia can be that.”
Despite the company’s historic strength in polyester and rayon, Yasui has also worked to boost its presence in other fibers.
In July, Teijin agreed in principle to enter a joint venture with Celanese AG to produce and sell acetate in Asia. The venture, expected to begin operations early next year, is intended to have an initial annual capacity of 10,000 pounds.
David McKinnon, vice president of operations at Celanese Acetate, said his company agreed to the alliance because it believes it will make it easier to penetrate the Japanese market.
“We’ve got a good position in Asia as well, but obviously they provide us an inroad into Japan,” he said. “They’ve clearly got marketing strength in Japan.
For his part, Yasui described the move as a way for Teijin to joint with strong partners in an area of the fibers business where it had been weak. There was a similar motivation behind its signing of a nylon joint venture with DuPont four years ago.
The nylon venture isn’t Teijin’s only alliance with DuPont. Last year, when the Wilmington, Del.-based chemical maker started moving its polyester operations into joint ventures, it reached a joint-venture agreement for the two companies to combine their polyester film operations.
While that deal came together, efforts to form a three-way alliance for polyester filament between DuPont and Akra-Teijin in the Western Hemisphere fell apart this spring, as reported. DuPont officials at the time said the deal’s collapse was largely due to the difficulties of having three parties negotiating.
In the interview, Yasui explained his company’s position: “We had discussions about making a joint venture with DuPont for polyester filament in the U.S., but unfortunately the so-called business value was difficult to agree on.”
In pursuing the polyester ventures, DuPont’s overall goal had been to contribute its existing assets and to find partners to provide cash to continue to fuel the business.
Beyond its fiber units, Teijin also has a few more vertical operations. The company weaves fabric in China, though Yasui described those mills as more of an insurance policy that there will be demand for its fibers.
“We deliver our yarns from Japan to China, process them into fabric there and sell to garment factories in the Shanghai area,” he said. “Then, the garments are imported back into Japan.”
Yasui showed a variety of specialized fabrics Teijin has developed, including a polyester fabric with a soft hand that water rolls right off.
“We’ve developed fabrics for many sportswear applications,” he continued. “Mainly, we tie ourselves with apparel companies in Japan and sell to the department stores.”
The company also owns a mill producing high-end fabrics in Italy.
Stories of completely vertical Asian textile producers tend to unnerve veterans of the traditionally fragmented U.S. fiber, yarn, weaving, knitting and dyeing industries. However, cross-pollination up and down the supply chain is viewed very differently in Asia.
According to McKinnon, that’s one of the most important things Celanese has learned over the past few months working with Teijin.
“The Japanese textile market is very complex. We knew it was complex, but we didn’t understand what complex meant,” he said. “They have these long histories. Companies tend to have very long-term relationships and the fiber companies do a lot of work on developing new fabrics and a lot more pull-through work. There’s a lot more joint development going on.”
He said that joint development is accepted as entirely natural in many areas of Asia, a sign that the elusive “partnership” between suppliers and customers that U.S. apparel industry executives have been jawboning about for years is the norm in Asia.
“The whole chain sees itself almost as an entity,” said McKinnon. “They don’t share profits and they are separate companies, but it’s more integrated. They think that a fiber producer wouldn’t do something that would hurt it’s customers, even if it does move a little further downstream.”
Indeed, beyond developing fabrics, Teijin has some ventures that sell directly to Japanese consumers.
The company also has a small men’s apparel factory and a jeans plant. It also operates a 60-store outlet chain under the Teijin Associa banner that mainly sells men’s apparel.
Further, last year the company teamed up with the Italian designer brand Trussardi to produce apparel under that name, which Teijin sells in Asia both to department stores and through two wholly owned flagships.
The alliance with Trussardi wasn’t the first time Teijin teamed up with a major Western apparel brand. In 1994, it joined forces with Tommy Hilfiger to open that company’s first freestanding franchised store in Japan.
The last of the three Teijin-run Hilfiger franchise shops closed in March, according to a Teijin spokesman.
Yasui said that the company isn’t planning many other vertical operations. It’s necessary to be selective in choosing where Teijin goes vertical to avoid irritating yarn customers, he acknowledged.
For instance, the company’s not considering setting up any fabric mills to work with its Mexican venture.
“If we have our own weaving, then it’s likely our customers will not be happy,” he said.
Even in Asia, it’s taken on a case-by-case basis. The company built mills in Thailand when it started making fiber and yarn there because the country had few weaving and knitting operations at the time. It didn’t do so when it set up shop in Indonesia because that nation already had a strong mill base.
But while verticalization isn’t the company’s main focus, recent financial results have convinced Yasui that strong actions need to be taken to improve fiber margins.
In the fiscal year ended March 31, the fibers unit slipped into the red, reporting an $18.4 million operating loss on net sales of $3 billion. That compares with about $23.9 million in operating income on sales of $2.72 billion the prior year.
(Year-ago figures were converted from the yen at current exchange rates. Current year figures were converted by the company.)
Even before falling into the red, fibers had shrunk to represent a small portion of the company’s earnings, well behind Teijin’s pharmaceuticals and medical products segment. But fibers still contribute more than half the company’s sales.
Last year, Teijin as a whole earned $247.6 million on $5.69 billion in revenue.
One of Yasui’s main cost-cutting initiatives has focused on taking time out of the fiber and fabric production process.
Recognizing that “demand has now completely changed,” Yasui said, the company invested more than $30 million to put quick-response systems in place. That allowed it to cut the time it takes the company to make fiber, weave fabric and then dye it from three to six months to a little more than one month, he said.
Cutting costs will remain critical for the survival of any textile company over the years ahead, Yasui said. He predicted that the industry will continue to consolidate, and that production will continue to move into developing nations.
“In the future, the production sites of most fabrics will move to developing countries,” he said. “The number of companies will be less and less. It’s the same in Japan and Europe. The situation will not change.
“The companies that will survive will have to focus on differentiated products and quick-response systems.”