January 22, 2014 2:09 am JST

Kao's Chinese ops seen swinging to black in fiscal 2015

TOKYO -- After years of struggling in China, Japan's Kao is poised to generate a profit there for the fiscal year ending December 2015 by expanding sales channels and overhauling its business strategy.

     Kao moved into China in 1993, but its relatively early entrance did not pay off as its everyday goods and cosmetics businesses continued to lose money in the market. It insisted on building its own sales network and offering a lineup of high-quality products based on a business model that succeeded in Japan. But its products have not been well received by Chinese consumers.

     To correct course, Kao is revamping its China strategy. It is expanding sales channels by leveraging the sales network of local partner Shanghai Jahwa United, a major manufacturer of everyday goods and cosmetics. And Kao intends to focus its resources on disposable diapers, laundry detergent and sanitary products.

     "We'll increase offerings for the middle class, instead of concentrating on just luxury products that use Japan's state-of-the-art technologies," said Kao President Michitaka Sawada.

     The company's everyday goods and cosmetics operations in Asia outside Japan likely logged their first profits in a decade last fiscal year, thanks to efforts that began last year to improve earnings in China. It is also rushing to tap markets in Southeast Asia.

     In a bid to compete with such global players as Procter & Gamble, Kao is planning roughly 60 billion yen ($568 million) in capital investments this fiscal year, mainly in Asia outside Japan, about 20% more than the planned capital investment by Japanese rival Unicharm. In particular, Kao aims to triple annual sales in Vietnam from the fiscal 2012 figure in two years.

     With compensation payments due to the recall of skin-whitening products by subsidiary Kanebo Cosmetics getting into full gear, Kao will have to depend on increased profits in Asia outside Japan to achieve its target of boosting operating profit this fiscal year.

     The company is aiming for an operating profit margin of almost 11% for fiscal 2015, up from slightly less than 9% last year. Sawada said the firm hopes to lift its operating profit margin in Asia outside Japan to 5% or higher.