TOKYO -- Major homebuilder Sumitomo Forestry and midsize contractor Kumagai Gumi will forge a capital and business partnership, with an eye toward survival amid an anticipated cool-off in construction demand after the 2020 Tokyo Olympics.
The duo said Thursday they will create a capital link by purchasing each other's shares on Nov. 28. Sumitomo will pay roughly 34.6 billion yen ($305 million) for a 20% stake in Kumagai in a private share placement, becoming the general contractor's top shareholder. Kumagai will take a 2.85% interest in Sumitomo Forestry by buying some 10 billion yen in newly issued shares.
"We must develop our housing, construction and urban development businesses globally in order to ensure future growth," Akira Ichikawa, president of Sumitomo Forestry, said at a Thursday press conference.
"We must strengthen our general contracting capabilities," Ichikawa added, explaining a key motivation behind the deal. "We are weak in essential engineering knowledge for medium and large projects. And our reinforced concrete housing technology is also lacking."
A committee will be set up Friday, with a goal of drawing up a road map for their tie-up by March 2018. Cooperation will mainly concentrate on timber-frame construction, greening, overseas operations, renewable energy and other fields.
Sumitomo Forestry's strength in single-family wood-frame homes and Kumagai's expertise in reinforced concrete will be combined to create so-called hybrid products.
The companies also plan to take part in urban development and other projects in Asia. A joint venture will also be established to handle biomass power generation.
The last time housing starts in Japan topped 1 million units was fiscal 2008. Some estimates predict the number could sink to as low as 540,000 units in fiscal 2030, given current population decline.
A shrinking market has forced major housing companies like Sumitomo Forestry to diversify into planning and design for apartments, nursing facilities and other medium- to large-size buildings. But these companies will need to offer comprehensive proposals from planning to construction and improve their building capabilities to win orders and make profits. Partnering with Kumagai is an effective way for Sumitomo Forestry to fill in the knowledge and labor gap.
The partnership also benefits Kumagai, whose business is hot right now but expected to cool after the Tokyo Olympics. The company plans to use Sumitomo Forestry's planning and design capabilities as well as its sales network.
"We are headed toward a contracted equilibrium," said Yasushi Higuchi, president of Kumagai. "Accelerating growth will be difficult alone, so we are partnering now while things are good."
Sumitomo Forestry and Kumagai predict that synergies from their tie-up will boost their combined sales by around $150 billion yen, and operating profit by about 10 billion yen, in the medium- to long-term. Sumitomo Forestry is currently the fourth largest conventional wood-frame house maker in Japan by sales. Kumagai boasts experience building tunnels, among other engineering projects.