TOKYO -- JFE Shoji Trade, a subsidiary of Japanese steelmaker JFE Holdings, is hastening a shift to China and other Asian markets where electric vehicle sales are expected to flourish.
The shift is already in full swing and has the key trading house of JFE Holdings in talks to buy a stake in a Chinese motor component maker. If a deal materializes, the Japanese company can locally process electrical steel sheet -- a key material for the fledgling EV industry and one Japanese steel-makers excel at making -- and expand sales to Chinese manufacturers.
A deal would also come on the heels of JFE Shoji Trade's investment in a Thai motor component maker.
The negotiations with the Chinese company are in their final stage. JFE Shoji Trade has not disclosed how much it intends to invest or how much of a stake in the target company it expects to end up with.
Electrical steel sheet goes into motor iron cores, used in electric vehicles and home appliances.
Although China's new car sales are in a slump, the country's electric vehicle market is expected to take off. Demand for electrical steel sheet remains strong due to the material's high energy-saving performance and the Chinese government's increasingly strict environmental regulations.
JFE Shoji Trade already has three processing plants in China, but the products these factories turn out mainly go to Japanese auto component and appliance makers. Its plan to purchase a stake in a Chinese company is intended to expand sales channels to non-Japanese producers.
The trading house handles large amounts of steel materials made by JFE Steel and has advanced processing technologies of its own. It is experiencing an increase in orders from battery component makers in China and Southeast Asia, not only for electrical steel sheet but also for local processing and other services.
This led JFE Shoji Trade last month to acquire a stake in a Thailand-based subsidiary of Ichinomiya Denki, a Japanese industrial motor maker. Thailand, sometimes referred to as the Detroit of Southeast Asia, has become a regional auto hub.
Naosuke Oda, president and CEO of JFE Shoji Trade, said he expects the electric vehicle market to drive sustained demand for electrical steel sheet.
"Profitability of our overseas business has improved thanks to structural reforms over the past three years," Oda said. "We are finally ready to make investments. The share of revenue contributed by our overseas business remained at less than 30% during the past three years, but we aim to raise the figure to about 50%."
The trading house exports electrical steel sheet made by JFE Steel and other Japanese steel-makers. It also sources the material from local manufacturers. In addition, its overseas subsidiaries process the sheet into motor components that are sold to makers of car components and electric appliances.
As part of its pivot to Asia, JFE Shoji Trade in April set up an overseas business planning office at its Tokyo headquarters. The office is to come up with a structure so planning divisions in Japan, China, Southeast Asia and the U.S. can coordinate beyond their regional boundaries.
The trading house has so far expanded its steel material processing operations and sales networks mainly in regions where Japanese automakers have operations. With the new strategy, JFE Shoji Trade intends to win over overseas customers by combining the company's high value-added products like electrical steel sheet with the cost-competitiveness of local partners.
"We will use not just steel materials by JFE Steel but products by other companies if their quality is high," Oda said. "We will expand our supply networks by not only supplying materials but by selling processing and other services."
The company faces headwinds, though. Earnings from its steel materials business are at the mercy of market fluctuations. And the U.S.-China trade war is taking a toll. JFE Shoji Trade aims to diversify procurement and sales channels by expanding capital relationships with overseas companies.
After becoming a wholly owned subsidiary of JFE Holdings, the company's focus has been on "how to contribute to maximizing group profits," the president said.
"In business areas where we are not contributing, we need to adopt an approach of selective focus," Oda said. "This means we will need to abandon areas that do not contribute" to group profits.
The steel industry is in a realignment phase, but Oda said JFE Shoji Trade is "not thinking of getting involved in the realignment of steel traders."