A converter process of Nippon Steel’s Kimitsu iron mill plant at Kimitsu city in Chiba prefecture (Credit Photo @ AFP )
OKYO — The proposed merger of two Japanese steel giants is a sign of an industry looking to reassert itself and an example to Japan Inc. that restructuring is crucial to take on competition, say analysts. Japan’s biggest steelmaker Nippon Steel and third-ranked rival Sumitomo Metal Industries are working towards a merger that would create the world’s second-largest steel firm by 2012, behind Luxembourg-based ArcelorMittal. The agreement is the first steel industry merger in a decade in the country, and analysts say the move sets an example to the rest of Japan Inc. as it grapples with a weak home economy, a strong yen and rising overseas rivals. “There is a desperate need for mergers and acquisitions to stitch together Japan’s diffuse corporate base,” said Nicholas Smith, director of equity research with MFGlobal in Tokyo. The Nippon Steel-Sumitomo Metal move is seen as indicative of the growing need for steelmakers to gain leverage as prices for coal, iron ore and other raw materials of steel touch record levels. “Increased scale will make them stronger in negotiating with raw material suppliers — the rapid run-up in material prices had really hammered profitability,” said Smith. “The merger will give Nippon Steel the scale to consider acquisitions of raw material suppliers, like the Chinese steelmakers have done,” he said, noting Chinese crude steel production has more than quadrupled in the last 10 years. The deal also serves as an example to the rest of corporate Japan. Many see consolidation in Japan’s corporate space as essential to taking on overseas competition, with too many companies making the same products compared with the likes of South Korea and industrial champions such as Samsung. “Often in comparison with South Korea, Japan is said to have too many players in such markets as autos and electrical machinery,” added Hideyuki Araki, economist at Resona Research Institute. “They vie for the same pie and can be worn out in domestic competition. There is no doubt that a single company that has a strong grip on the industry can better compete in international markets,” he said. Sony partly blamed a fall in third quarter profit on falling TV prices amid heavy competition in a sector where it is up against compatriots such as Toshiba, Panasonic and Sharp. “Japanese companies are forced to cut prices and have only slim margins amid too much competition,” said Hiroshi Watanabe, economist at Daiwa Institute of Research. The Japanese government has recognised the need for consolidation and is promoting M&As because it sees the need for more reorganisation in a wide range of domestic industries, including materials and electrical machinery. Tokyo is looking to encourage more mergers and acquisitions by simplifying the tender offer process, speeding up anti-monopoly vetting of merger plans and providing loans for deals, Japanese media reports said this week. The number of mergers and acquisitions by Japanese firms tumbled 13 percent on-year to 1,707 in 2010, slipping far below a recent peak of 2,775 in 2006, according to M&A advisory firm Recof Corp, the Nikkei business daily reported. But merger efforts have met with failure in the past year, with executives on both sides unable to iron out integration problems. Shinsei Bank and Aozora Bank last year scrapped a merger plan because they could not agree on a business strategy. Japanese drink giants Kirin Holding Co. and Suntory Holdings Ltd. last year abandoned ambitious plans to merge and create one of the world’s biggest brewers, unable to overcome differences over who would own and manage the future company. However, on Thursday drinks maker Sapporo announced it would boost its stake in soft drink firm Pokka, the latest in a series of deals in a shrinking market where players are searching for growth. While it is important to expand scale in the way Nippon Steel and Sumitomo Metal plan to as they seek more control over prices, a balance needs to be struck to retain enough domestic competition to drive innovation, analysts say. In particular, Japan must not risk ceding its advantage in high-end products where it still has a commanding share, analysts say. Its steel is seen a symbol of its manufacturing expertise. Toyota buys nearly 60 percent of its sheet steel for auto bodies from Nippon Steel and Sumitomo, analysts say, and Mazda and Honda buy around 70 percent. On the other hand, “anybody can make construction steel, and a dizzying array of companies do,” said Smith.