TOKYO -- Japan's UACJ, the world's third-largest producer of flat-rolled aluminum products, is on an expansion spree, focusing on the automotive industry in a bid to catch up with the two leading aluminum giants, Novelis and Alcoa of the U.S., by far the largest players in the field.
UACJ's latest plans call for 16 billion yen ($141 million) in capital investment for a new line to produce automotive aluminum materials, quadrupling the company's total Japanese production capacity to over 130,000 tons. The line, announced Oct. 30, is scheduled to go into operation at the company's plant in Fukui Prefecture on the Sea of Japan in 2020.
The company's aggressive stance is a stark contrast to the situation at domestic rival Kobe Steel, whose aluminum and copper business is mired in scandal over falsification of its production quality data.
Becoming the top global player has been UACJ's goal since it was formed in October 2013 from a merger between Furukawa-Sky Aluminum and Sumitomo Light Metal Industries, Japan's first and second-ranked flat-rolled aluminum makers, respectively, at the time.
The company's name, an abbreviation of United Aluminum Company of Japan, reflects its ambition to be the Japanese industry flagship. At its inauguration four years ago, President Mitsuru Okada said the goal was to become "a major aluminum group with global-leading competitiveness."
In an earnings news conference in early November, Okada said demand for automotive aluminum products is getting a "tailwind" from the global growth in electric vehicles. Light materials like aluminum are crucial for electric vehicles to get better mileage, as batteries are a major weight factor. That is motivating UACJ to expand production capacity at home and abroad.
UACJ's business performance has been solid this fiscal year. Consolidated pretax profit for the April-September period grew 73% from a year earlier to 12.8 billion yen. But investments have grown so rapidly that any major trouble at an overseas plant could wipe out much of the profit.
For the year ending March 2018, UACJ expects consolidated revenue of 630 billion yen and pretax profit of 30 billion yen, both short of medium-term targets, as it pays the price of aggressive investments, mainly in the form of large depreciation expenses.
"Don't let jitters about financial results distract you from seizing opportunities," Okada has been telling his team. Production capacity when UACJ was formed was about 1 million tons annually, compared with 2.5 million-3 million tons for Alcoa and Novelis. To catch up, some risks had to be taken.
UACJ sees no reason to stop its aggressive expansion, a major part of Okada's three-year plan through March 2018 to lay the groundwork for future growth.
A recent standout move was the 2015 launch of a 55 billion yen plant in Thailand, which it decided to expand a year later with an additional 37 billion yen to capture the current spurt in demand for aluminum drink cans in Southeast Asia.
The expansion of local production is crucial to UACJ's expansion in Southeast Asia, where it expects intense price competition from Chinese rivals.
In North America, a plan to start full production at an automotive body sheet plant in Kentucky has been delayed after partial production started before final checks were complete. The joint venture with Dutch aluminum maker Constellium, which operates the plant, is hiring more engineers to achieve more stable production capacity.
UACJ's free cash flow has remained negative since its 2013 debut as a result of aggressive investments. Some investors have expressed concerns, but the company remains adamant about its direction.
Not ashamed of deficits
"We are not ashamed of deficits, and we're going to speed up our growth strategy," Senior Managing Executive Officer Takayoshi Nakano said at the early November press conference.
Since the falsification of Kobe Steel's quality data recently came to light, the aluminum industry in Japan has faced renewed pressure to maintain high quality standards.
At the press conference, Okada said UACJ had no quality issues. He went on to explain that the company had completed its quality inspections in October instead of the normally scheduled November.
Asked about the possibility of receiving windfall orders as Kobe Steel's customers switch over to UACJ, Okada was guarded.
"A number of potential deals came to us in various areas, and we are going through them one by one," he said.
When Furukawa-Sky and Sumitomo Light Metal merged to form UACJ, many industry insiders remained cool to the tie-up, expecting it to take a long time before the two parties would generate synergy at the new company.
Okada, previously president of Furukawa-Sky, originally served as co-chief executive officer with former Sumitomo Light Metal President Shigenori Yamauchi. Many expected a power struggle to hinder the company's performance.
But Okada and Yamauchi, now chairman, managed to bring the two camps closer together by outlining ambitious goals for overseas expansion, creating a distraction from internal struggles.
The Thai plant, for example, is the result of close collaboration between employees from both predecessor companies, and the leadership believes this helped bring them closer.
UACJ's remaining challenge is to how to grow profits while managing the risks associated with aggressive expansion as it tries to narrow the gap with its U.S. rivals.