May 11, 2017 4:50 pm JST

Japan's Toray prepares for change in South Korean economic policy

Carbon fiber maker's 'second home' is key to achieving record profit target

YOSHIFUMI UESAKA, Nikkei staff writer

Toray Industries President Akihiro Nikkaku speaks to analysts about the company's Fiscal 2016 results on May 10.

TOKYO -- Toray Industries of Japan is paying keen attention to the economic policy of new South Korean President Moon Jae-in, as the neighboring country is the chemical fiber manufacturer's biggest market.

Toray said Wednesday its group operating profit for the fiscal year ended in March declined 5% on the year to 146.8 billion yen ($1.28 billion), the first contraction in four years.

For fiscal 2017, however, Toray hopes to push profit to new heights -- a 12% increase to 165 billion yen -- and it is counting on its fiber and film businesses to propel that growth.

It is also counting on its "second home" -- South Korea.

Along with Sumitomo Chemical, Toray has become one of the largest Japanese corporate investors in the country. Roughly 10% of its group sales are generated there. 

Toray has flagship manufacturing plants for battery separators and unwoven filaments, which are used to make products such as diapers, based in South Korea, and it plans to expand production capacity. 

To reach its profit target for fiscal 2017, Toray is counting on production facilities to keep humming along in the home of Samsung Electronics and LG Display. It has a close relationship with these manufacturers, supplying them with optical films and other materials, and getting more work from them will be vital for Toray to meet its target. 

Politics in play

Moon was elected president on Wednesday. He is a member of the Democratic Party, South Korea's reform-oriented largest opposition party. 

On the same day, at a news conference announcing Toray's fiscal 2016 results, Executive Vice President Koichi Abe said, "While we will study the new government and determine how we should promote our business, we nonetheless retain a strategy of working together for greater prosperity and business expansion."

But optimism may not be warranted for Toray under Moon's leadership because he won the election, in part, by denouncing Samsung, LG and other chaebol, South Korea's conglomerates formed and run by several powerful families. Moon labeled them as enemies of the public. 

Moon stressed the need to amend the chaebol and pledged to set aside outlays to address economic disparities through the tax system and other reforms. 

The political and economic winds in South Korea may shift under Moon as he is expected to take policy stances different from his predecessor, Park Geun-hye, who was considered friendly to business. Toray will be closely watching the new administration's economic policy.

Ebb and flow

There are other factors that may affect Toray's ability to reach its profit target this year as well. One is its production of carbon fiber composite materials, where Toray holds the biggest global market share.  

Toray President Akihiro Nikkaku suggested during a meeting with analysts on Wednesday that the company might delay the launch of operations at a new carbon fiber plant under construction in the U.S., noting that reducing the inventory of carbon fiber used in aircraft will continue in fiscal 2017. 

The company is maintaining a 20% cut in manufacturing carbon fiber, patiently waiting out a slowed hike in production of the Boeing 787, which uses the lightweight synthetic fiber for some 50% of the plane's body. 

On the other hand, Toray is seeing brisk sales by its U.S. subsidiary Zoltek, which produces "large tow" carbon fibers, which have a lower tensile strength but are less expensive. Flooded with orders for use in wind power generators, Zoltek is struggling to keep up with shipments from its plants in Hungary and Mexico.

Although Toray saw a 34% drop in operating profit in its carbon fiber composite materials business in fiscal 2016, it expects profit to level off in fiscal 2017 thanks to Zoltek.

Toray's Abe said the company has achieved results from doing groundwork in Japan and developing and manufacturing products in South Korea. This business model has helped it grow globally. 

But Toray faces two challenges to attain its profit target: a strong performance no matter what the new South Korean president's policies are and making up for slowed growth in the carbon fiber business with its extensive chemical materials lineup, which ranges from films to medicines.

Toray Industries, Inc.

Japan

Market(Ticker): TKS(3402)
Sector:
Industry:
Process Industries
Textiles
Market cap(USD): 14,847.3M
Shares: 1,631.48M
Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 297,879M
Shares: 148.18M
Asia300

LG Display Co., Ltd.

South Korea

Market(Ticker): KRX(034220)
Sector:
Industry:
Distribution Services
Electronics Distributors
Market cap(USD): 9,499.11M
Shares: 357.81M

Sumitomo Chemical Co., Ltd.

Japan

Market(Ticker): TKS(4005)
Sector:
Industry:
Process Industries
Chemicals: Specialty
Market cap(USD): 9,861.52M
Shares: 1,655.45M

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