Japan's Government-Led Restructuring: Implications [Business Restructuring Petrochemicals]

1990s Recession-Led Restructuring Implemented
Production Facilities Integrated and Corporate Mergers Promoted
"Government and Companies Need to Discuss Business Reorganization"

Editor's NoteThe domestic petrochemical industry, represented by naphtha cracking complexes (NCC), is facing a crisis. As exports to China, the largest market, decline, domestic production has also turned red. Experts warn that if the current business, focused on general-purpose products, is not restructured, survival will be threatened. If high oil prices persist, the profitability of domestic petrochemical products, which heavily rely on petroleum-based raw materials, is expected to deteriorate. The era-defining shift toward carbon neutrality is also pushing petrochemical companies toward restructuring. We have examined the current status and solutions for the domestic petrochemical industry.

Shin-Etsu Chemical, the world's leading producer of polyvinyl chloride (PVC) used in pipes and semiconductor wafers, is cited as a successful case of high value-added specialization in petrochemicals. Founded in 1926, Shin-Etsu Chemical started with fertilizers. However, in the 1960s, it succeeded in producing silicon wafers and then entered the PVC business in the 1970s, specializing in its own product lineup. In 2001, when the IT bubble burst, it invested 70 billion yen in facilities and succeeded in dominating the market.

When the petrochemical industry faced a downturn in the 1990s, Japanese petrochemical companies, together with the government, undertook bold restructuring. Having entered the petrochemical industry in 1958, Japan had long been leading the global petrochemical industry.

Shin-Etsu Chemical CI

However, with the emergence of latecomer competitors like South Korea and Taiwan in the 2000s, Japan has been reducing general-purpose product facilities and restructuring its business toward high value-added products over several decades.

For example, in 2015, Sumitomo Chemical closed its ethylene production facilities, and Mitsubishi integrated three affiliated chemical companies. In 2016, Mitsubishi and Asahi merged their ethylene production facilities into one. Additionally, Idemitsu merged with Showa Shell, and JX merged with Tonen.

The reduction of general-purpose product production continues even now. Japan's ethylene production capacity decreased from 8.023 million tons in 2010 to 7.433 million tons in 2015, and further to 6.817 million tons in 2020.

Continuous investment is being made in research and development (R&D) for high value-added products. According to global consulting firm McKinsey, the R&D investment ratio relative to sales of major Japanese petrochemical companies was 3.5% in 2021, overwhelmingly surpassing South Korea (1%) and Taiwan (1.3%).

In this process, the Japanese government led business restructuring with petrochemical companies and supported the transition to high value-added materials industries through R&D support. Notable examples include the enactment of the 'Industrial Vitality Law' in 1999 and the 'Industrial Competitiveness Enhancement Law' in 2014, which supported companies' proactive business restructuring. Efforts were also made to adjust so that each company could focus on producing specific products.

Experts point out that South Korea's conditions and circumstances differ, making it difficult to directly apply Japan's government-led business restructuring model. However, they advise that the government should play a role in reviewing and adjusting the business directions of petrochemical companies. It has been reported that the government has recently been contacting companies individually regarding this matter.

Jo Yong-won, a research fellow at the Korea Institute for Industrial Economics and Trade, said, "Japan's government took the lead in adjusting business sectors or conducting big deals, but in South Korea, due to issues like fair trade, the government cannot do that. However, the government must review the current status with petrochemical companies and undertake macro-level adjustments of business areas."