Kumiai Chemical Industry 4996
クミアイ化学工業
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2022-03-14
2022-03-01
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Summary
Kumiai Chemical Industry is a R&D-focused agrochemical manufacturing and marketing company, with a large proportion of herbicides in sales. The company develops active ingredients for agrochemicals in-house, which it formulates and markets. It is Japan’s fifth-largest producer of formulations by shipment value. The company is one of the largest agrochemical producers affiliated with Japan’s National Federation of Agricultural Co-operative Associations (Zen-Noh). This and other agricultural cooperatives provide a strong sales route and access to farmers.
Chemicals
Key dates
2018-06-01
Coverage initiation
Executive summary
Business overview
Kumiai Chemical Industry Co., Ltd. is an R&D-focused agrochemical manufacturing and marketing company with herbicides occupying a large portion of sales. The company develops active ingredients for agrochemicals in-house, which it formulates and markets. It is Japan’s fifth-largest producer of formulations by shipment value (February 2016 announcement, “Agricultural Chemicals Situation,” by the Ministry of Agriculture, Forestry and Fisheries, or “MAFF”). Kumiai Chemical has developed six active ingredients for agrochemicals from 2010 through 2020, and has registered products containing these in Japan and overseas. It also plans to develop another active ingredient in 2020 or after and is preparing an application to register products containing it. The company is the largest domestic agrochemical producer affiliated with Japan’s National Federation of Agricultural Co-operative Associations (Zen-Noh). Zen-Noh and agricultural cooperatives provide a strong sales route and access to farmers in Japan. In May 2017, Kumiai Chemical merged with Ihara Chemical, then an equity-method affiliate that developed and produced active ingredients. Leveraging the merger, the company is strengthening its management foundation, and in its core agrochemical business, speeding up the development of new agrochemicals by integrating processes from discovery through active ingredient procurement, product formulation, and marketing.
The company has three business segments: Agricultural Chemicals and Agriculture-Related (75% of sales in FY10/21), Fine Chemicals (18%), and Other (7%). Overseas sales make up about 47% of total sales.
In its Agricultural Chemicals and Agriculture-Related Businesses in Japan, Kumiai Chemical sells products for the agricultural field through the National Federation of Agricultural Co-operative Associations (JA Zen-Noh), and for non-agricultural fields (including golf courses) through wholly owned subsidiary Rikengreen Co., Ltd. Overseas, the company sells agrochemical ingredients and formulations to local distributors via local K-I Chemical subsidiaries in Europe and the US, equity-method affiliate T.J.C. Chemical Co., Ltd. in Thailand, and equity-method affiliate Iharabras S.A. Industrias Quimicas in Brazil. In other regions it uses trading companies and local distributors. Core products in Japan and other parts of Asia are herbicides for paddy rice; in North America, herbicides for field crops are the focus. Overseas sales accounted for 55% of segment sales in FY10/21.
In the Fine Chemicals segment, the company manufactures and sells pharmaceutical and agrochemical intermediates, electronic materials, and polymer raw materials, by leveraging its organic synthesis technologies developed in agrochemical active ingredient manufacture. Regarding amine-based curing agents which are raw materials for urethane resin industrial products widely used across various industries, the company is engaged in new product development, manufacturing, and sales. Overseas sales made up 28.5% of segment sales in FY10/21. The Other Businesses segment includes real estate leasing and the sale of electricity produced via mega solar generation.
Trends and outlook
For full-year FY10/21, Kumiai Chemical reported consolidated sales of JPY118.2bn (+10.2% YoY), operating profit of JPY8.5bn (+2.1% YoY), recurring profit of JPY12.8bn (+29.4 YoY), and net income attributable to owners of the parent of JPY9.0bn (+36.3% YoY). Mainstay Agricultural Chemicals and Agriculture-Related Businesses earnings were favorable, offsetting a slump in the Fine Chemicals Business triggered by the COVID-19 pandemic. Sales of field crop herbicide Axeev, the core product in the Agricultural Chemicals business, grew 19.1% YoY to JPY35.5bn.
The company's full-year forecast for FY10/22 calls for sales of JPY123.9bn (+4.8% YoY), operating profit of JPY9.0bn (+6.4% YoY), recurring profit of JPY11.2bn (-12.7% YoY), and net income attributable to owners of the parent of JPY7.8bn (-13.6% YoY). The company thinks the pandemic has only limited impact on the group’s core Agricultural Chemicals and Agriculture-Related Businesses, which are related to essential food production. In the Fine Chemicals segment, the company also expects a diminished impact of the pandemic and growth amid robust semiconductor demand. However, the company expects lingering concerns about expenses increasing more than expected due to rising crude oil prices, environmental regulations in China, higher raw material costs caused by power shortages, and shipping disruptions and cost increases due to pressing demand for marine transportation.
When the company formulated its Medium-Term Business Plan, "Create the Future—The Challenge for New Possibilities" (covering FY2021–FY2023), it ensured that this plan reflected its ideal vision regarding the state that it hopes to achieve in the next 20 to 30 years. In anticipation of future changes agricultural environments, the main focus of this plan is to prepare for risks through business area expansion. For FY10/23, the final year of the plan, the company aims to achieve sales of JPY126.0bn (average annual growth of 5.5% during the period covered by the plan), operating profit of JPY9.8bn (5.7%), and ROE of 7.3%.
Strengths and weaknesses
Shared Research considers Kumiai Chemical’s strengths to be its initiative in agrochemicals, and a broad business strategy for in-house development and manufacturing of active ingredients; experience with field crop herbicides that can be sold worldwide and effective paddy rice herbicides in other parts of Asia; and a solid sales network in Japan, based on relationships with Zen-Noh and agricultural cooperatives. We believe its weaknesses to be that the advantages of being affiliated with Zen-Noh are not effective outside Japan; the company’s lack of experience in key emerging markets (China, Latin America) that are expected to drive global agrochemical demand; and a widening gap in capital scale between Kumiai Chemical and the world’s largest companies.
Key financial data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Segment categorization changed as of May 1, 2017 due to merger with Ihara Chemical Industry
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Q1 FY10/22 results (out March 11, 2022)
Results for Q1 FY10/22 (November 2021–January 2022)
Earnings summary
Sales increased by a greater extent than the company had expected in Q1 thanks to strong performance in terms of domestic and international shipments in the Agricultural Chemicals and Agriculture-Related Businesses segment, favorable results generated through precision chemical business in the Fine Chemicals Business segment, and ongoing and full-fledged recovery in demand within the chlorination business.
Due primarily to this sales growth, gross profit rose to JPY8.2bn (+33.3% YoY). However, the company's GPM came to 24.9% (-1.9pp YoY) due in part to soaring raw material prices and an increase in cost of sales that followed a change in revenue recognition standards. The change in revenue recognition standards had a downward sales impact of JPY148mn and an upward cost of sales impact of JPY57mn. Despite an increase in packing and freight costs related to marine transportation, SG&A expenses were limited to JPY4.7bn (+5.3% YoY) as expenses associated with operating activities remained low as a result of COVID-19-related impact. As a result, operating profit rose 110.4% YoY, and OPM expanded to 10.5% (+3.4pp YoY). Meanwhile, recurring profit grew 99.9% YoY due to foreign exchange gains (JPY364mn) stemming from the weaker Japanese yen, and net income increased 112.5% YoY.
Segment performance was as follows.
Agricultural Chemicals and Agriculture-Related Businesses
Domestic sales
Domestic sales in Q1 amounted to JPY9.0bn (+0.4% YoY). Despite downward impact stemming from the conclusion of sales of products brought in from other companies, domestic sales were essentially level YoY thanks to solid sales of internally developed products, including box-treatment products (such as rice paddy field fungicide Disarta) and rice paddy field herbicide Effeeda (proceeds include sales of raw materials).
Overseas sales
Overseas sales increased significantly, coming to JPY16.0bn (+117.2% YoY). The company generated sales of JPY12.1bn (+55.1% YoY) through field crop herbicide and core product Axeev. Shipments of Axeev increased by a greater extent than expected due to requests for advance shipments to Argentina and favorable market conditions in North America, which is a major wellspring of demand for the product. Meanwhile, sales of Benthiavalicarb-isopropyl, a fungicide for fruits and vegetables, rose n Europe as demand for its use in new formulations grew.
Fine Chemicals Business
Trends in individual businesses
The main businesses the company operates under its Fine Chemicals Business are the chlorination business (production of chlorotoluene and chloroxylene-based chemicals), the precision chemicals business (handles bismaleimides and other precision chemicals used in electronic materials and high heat-resistant resins), the industrial chemicals business (handles polyurethane curing agents used as raw materials for waterproof materials, fungicides and anti-mold agents, and hygiene products), and the styrene foam business (handles styrene foam used as packaging for agriculture and fishery products and consumer electronic parts, household appliance parts, and insulation materials used in construction).
In the Fine Chemicals Business, domestic sales amounted to JPY4.0bn (+28.9% YoY), while overseas sales came to JPY1.9bn (+53.1% YoY). Sales in the chlorination business rose to JPY2.1bn (+61.5% YoY) thanks to recovery in demand for chloroxylene-based chemical products, while sales in the precision chemicals business jumped to JPY1.8bn (+50.0% YoY) due to favorable performance from bismaleimides and other chemicals. These two businesses drove overall performance in the Fine Chemicals Business. Sales in the styrene foam business (JPY1.1bn; +0.0% YoY) and the industrial chemicals business (JPY800mn; +0.0% YoY) were both level YoY.
Other Businesses
Earnings summary
The "Other Businesses" category includes the leasing, electricity generation and sales, construction, printing, logistics, and information services businesses. In the main businesses, performance was level YoY in the printing and logistics businesses and weaker YoY in the construction business.
Company forecast for FY10/22
Note: Figures may differ from company materials due to differences in rounding methods.
Full-year earnings forecast for FY10/22
For FY10/22, the company projects sales of JPY123.9bn (+4.8% YoY), operating profit of JPY9.0bn (+6.4% YoY), recurring profit of JPY11.2bn (-12.7% YoY), and net income of JPY7.8bn (-13.6% YoY). The company made no changes to its full-year forecast at the time of announcing Q1 results (March 11, 2022).
Sales forecast by segment
The company thinks that the direct impact of the COVID-19 pandemic will be limited on the group's core Agricultural Chemicals and Agriculture-Related Businesses segment, which is a business associated with the fundamentals of food production. Its full-year segment sales forecast is JPY91.8bn (+3.0% YoY). The company forecasts sales of JPY39.2bn (+10.4% YoY) for Axeev, its mainstay product for overseas markets, driven by growth in the US and Brazil. It forecasts sales of JPY6.7bn (+19.6% YoY) for Effeeda and and JPY1.8bn (+63.6% YoY) for Disarta, both of which are sold mainly in Japan, due mainly to the launch of new mixture products. The company aims to further improve profitability in the domestic market by increasing the sales ratio of internally developed products.
The company forecasts sales of JPY23.3bn (+12.8% YoY) for the Fine Chemicals Business. Recovery of the mainstay chlorination business, which was impacted by the pandemic, is expected to drive segment sales growth with a full-year sales forecast of JPY8.3bn (+27.7% YoY). The company forecasts continued sales growth of the precision chemicals business to JPY6.7bn (+6.3% YoY) on the back of robust semiconductor demand. It also looks for sales growth of the styrene foam business to JPY4.8bn (+9.1% YoY) on increased demand for packaging for seafood and consumer electronics products. It expects flat YoY sales of JPY3.6bn (+2.9% YoY) for industrial chemicals.
In its core Agricultural Chemicals and Agriculture-Related Businesses, the company plans to act in accordance with the "Green Food System Strategy" formulated by the Japanese government, which aims to establish a sustainable food system. In the Fine Chemicals Business, the company will focus on maintaining and expanding both sales of existing products and the scale of its contracted services operations as well as creating new product items for development while responding to changes in its business environment.
Profit forecast
The company forecasts operating profit of JPY9.0bn (+6.4% YoY) and OPM of 7.3% (+0.1pp YoY), little changed YoY (no segment breakdown disclosed). Although the increased share of in-house products is a positive factor, the company also considered negative factors such as rising prices for raw material procurement used in pesticides and chemical products and SG&A expenses associated with resuming sales activities. The company is also concerned about higher oil prices, environmental regulations in China, increasing raw material costs due to power shortages, and transport disruptions and cost increases due to the marine transportation crisis. The company has not factored forex gains and losses into its FY10/22 budget, and thus forecasts a 12.7% YoY decline in recurring profit. Its forex assumptions are JPY109/USD and JPY130/EUR.
Comparison with past company forecasts
Kumiai Chemical’s sales forecasts have been largely accurate, except for FY10/16–FY10/17, when results were affected by the merger. Its profit forecasts have tended to be conservative. Shared Research thinks this is because the company can forecast sales made via the Zen-Noh and agricultural cooperative route in Japan with some accuracy but overseas business is less predictable, being affected by exchange rates, local weather, and other uncertainties.
FY10/19 sales were affected by underperformance of the mainstay herbicide Axeev. Despite achieving YoY growth, sales of the product fell short of company targets due to unseasonable weather in the US Midwest. In terms of profit in FY10/19, some SG&A expenses were delayed to FY10/20 while the company successfully improved its product mix. FY10/20 sales finished lower than the forecast, but profits were more or less in line with the forecast.
Medium-term management plan (FY10/21–FY10/23)
Overview of previous medium-term plan
Kumiai Chemical’s previous medium-term plan covered the period from FY10/18 to FY10/20. The company’s sales and operating profit in FY10/20, the final year of the medium-term plan, fell short of its initial forecast. However, a key objective of the plan was to achieve sustainable growth, and sales and profit rose throughout the three years, with consolidated sales topping JPY100.0bn in FY10/19. The company thinks the pursuit of its medium-term targets contributed to this achievement.
Progress with key measures
Agricultural Chemicals and Agriculture-Related Businesses
The previous medium-term objectives were to maximize sales of the company’s own products, expand sales of Axeev at an early stage, and get the Nominee business in India off the ground (local production by joint venture). In accordance with the plan, Kumiai Chemical grew sales of Axeev in North America, Australia, and Argentina, and registered the product in India and Brazil, making Axeev available in 16 countries. Meanwhile, its Indian subsidiary PI Kumiai Private Ltd. started local production and sales of Nominee in FY10/20.
Fine Chemicals Business
The previous medium-term objectives were to launch a chlorination business in Thailand and increase efficiency in the Fine Chemicals Business within the group. In accordance with the plan, the company has completed its first and second rounds of investment at Iharanikkei Chemical (Thailand) in the chlorination business and has launched production. It also launched the second round of investment. In addition, it pursued development of new products that utilize proprietary technologies.
R&D
The previous medium-term objectives were to register Effeeda and Disarta, and create a new pipeline of agrochemicals. During the period covered by the medium-term plan, Kumiai Chemical registered both Effeeda and Disarta, launched Effeeda in Japan in FY10/18 and in South Korea in FY10/20. It also started selling Disarta in FY10/21. The company is developing a miticide as a new product.
Production and procurement
The previous medium-term objectives were to optimize the procurement network and pursue innovation in production technologies. The company worked to strengthen its procurement structure and achieve stable supply.
Workstyle reform
The previous medium-term objectives were to promote diversity and improve the work-life balance. During the period covered by the medium-term plan, Kumiai Chemical introduced and expanded measures such as staggered work hours and remote work in response to the COVID-19 outbreak, and it is considering adopting these as full-fledged systems. The company also introduced an integrated core business system that went into operation from November 2020.
New medium-term plan targets FY10/23 sales of JPY126.0bn, operating profit of JPY9.8bn, and ROE of 7.3%
Kumiai Chemical has unveiled a new medium-term management plan “Create the future. The challenge for new possibilities.” Starting in FY10/21, the plan calls for the adoption of high-tech technologies while developing research infrastructure, the expansion of business spheres and research fields, and continued market launches for new products.
The new plan lays out a vision for the group based on long-term market projections, and constitutes a step toward that goal. The three years covered by the plan are regarded by the company as a period to “plant the seeds to become a company with a 100-plus year history” that can continuously provide value over the long term. The four key policies of the plan are expanding research and business domains, diversifying sales routes, improving cost competitiveness, and engaging in corporate activities that focus on ESG.
The key measures included in the new medium-term plan are as follows.
Agricultural Chemicals and Agriculture-Related Businesses
Kumiai Chemical will aim to expand its existing businesses and business domains. The roadmap for existing businesses is as follows. For Axeev, the company will cultivate markets through new mixture products, work to expand its market share, and aim to rapidly launch the product in countries where it has been newly registered. The company targets FY10/23 Axeev sales of JPY35.0bn. For Effeeda, the company plans to expand sales by developing new mixture products for Japan and cultivating overseas markets. It targets FY10/23 Effeeda sales of JPY7.8bn. For Disarta, a new paddy rice fungicide, the company will aim for its launch and sales growth for use in domestic rice paddies. It targets FY10/23 Disarta sales of JPY1.8bn.
In terms of new agrochemicals development, Kumiai Chemical will work to rapidly commercialize pipeline compounds. Specifically, it will push ahead with development of its new miticide Flupentiofenox and continue to develop other candidate compounds. To diversify its sales routes, the company will strengthen its sales network through M&A and other means. It acquired 60% of the shares in Singapore-based Asiatic Agricultural Industries Pte. Ltd. (announced on December 14, 2020), with an aim of diversifying its sales routes, particularly in Southeast Asia and Africa.
Fine Chemicals Business
Kumiai Chemical will aim to maximize sales in its existing businesses by narrowing its business focus.
In the chlorination business, it plans to launch the second plant (terephthaloyl chloride [TPC] plant that manufactures raw materials for bulletproof vests, optical fiber protective resin, and rubber strengthening agents) at Iharanikkei Chemical (Thailand) from Q2 FY10/21, following the start of operations at the first plant (isophthaloyl chloride [IPC] plant that manufactures raw materials for protective clothing and flame retardants). Further, it intends to expand its R&D capabilities and adopt new technologies to support the development of new businesses.
R&D and new chemical laboratory construction project
Kumiai Chemical plans to construct a new chemical research institute. It plans to consolidate its three existing chemical research institutes into one facility with cutting-edge research capabilities. The company expects the consolidation to generate synergies, and aims to strengthen innovation and R&D processes accordingly. The new facility will help develop its existing businesses and create new businesses with a focus on product manufacturing. It will be located in the city of Shizuoka in Shizuoka Prefecture, and the company will invest a total of roughly JPY7.0bn in it. Construction is slated to start in 2H FY10/21 and completed in 1H FY10/23.
Initiatives related to sustainable development goals (SDGs) and environment, society, and governance (ESG)
Kumiai Chemical aspires to be a corporate group that enriches the lives of people through its proprietary technologies, and that contributes to sustainable development of society in harmony with nature. For example, the company thinks it can help alleviate problems such as population growth and energy shortages by tackling areas such as demand for food/animal feed and energy conservation (through biofuels). It has formulated 12 key challenges to achieve corporate growth while contributing to a sustainable society. It aims to be a company where employees engage in meaningful work in a comfortable environment in order to generate value-added by developing and providing innovative products and services that enrich the lives of people.
12 key challenges
1) Creation of groundbreaking agrochemicals, 2) opportunities to engage in meaningful work and training/deployment of human resources, 3) establishment of compliance systems, 4) supply chain, 5) promotion of risk management, 6) occupational safety and health, 7) investor relations communication, 8) customer communication, 9) regional communication, 10) diversity, 11) environmental safety (ISO14001) and reduction in consumption of energy/resources, and 12) quality control (ISO9001) and product/consumer safety.
Note: As of the time of announcement of medium-term plan. FY10/21 results were sales of JPY118.2bn, operating profit of JPY8.5bn (JPY10bn), and ROE of 0.089.
Earnings trends in medium-term plan
Sales of JPY118.2bn and operating profit of JPY8.5bn in FY10/21 surpassed company forecasts of JPY113.0bn in sales and JPY7.3bn in operating profit. FY10/22 company forecasts of JPY123.9bn in sales and JPY9.0bn in operating profit exceed medium-term plan targets of JPY119.0bn in sales and JPY7.7bn in operating profit in FY10/22.
By segment, sales were ahead of forecast in Agricultural Chemicals and Agriculture-Related Businesses despite higher US tariffs on Axeev, because growth of Axeev and Disarta exceeded the company's expectations. In Fine Chemicals Business, growth of the precision chemicals business, which captured semiconductor-related demand, more than compensated for the impact of the pandemic on the chlorination business and spike in raw material procurement prices. Profit also came in ahead of forecast, because the company offset SG&A expense cuts associated with the prolonged pandemic impact against the rise in transport costs. The company sees solid progress toward its medium-term plan targets, helped by strong positive factors for profit growth.
The company is also stepping up its sustainability management initiatives, having formulated nine basic policies in conjunction with its Basic Sustainability Policy. As of November 1, 2021, the company also established a Sustainability Promotion Committee. The Committee reports to the Kumiai Chemical Group Management Top Strategy Meeting. The nine basic policies are ESG-related policy concerning the environment (E), CSR procurement policy, HR management policy, and human rights policy (S), and corporate governance policy, CSR policy, anti-bribery and corruption policy, risk management policy, and compliance policy (G).
Business
Business model
Overview: Sells products developed in-house via Zen-Noh and agricultural cooperatives
Products developed in-house
Kumiai Chemical develops own active ingredients through R&D and sells these active ingredients and formulated products. In Japan, Kumiai Chemical sells products via the National Federation of Agricultural Co-operative Associations (Zen-Noh), agricultural cooperatives, and sells active ingredients and products to other companies. The company exports active ingredients and its products mainly in bulk and sell them via subsidiaries. Agrochemical products include herbicides, fungicides, insecticides, and others.
Distribution routes
In Japan, Kumiai Chemical sells agrochemicals manufactured by itself for farmland use via Zen-Noh. The company negotiates individual product pricing with Zen-Noh every year based on the previous year’s price and agricultural conditions at the time of negotiations. It uses subsidiaries to sell products for uses other than farmland. Overseas, Kumiai Chemical distributes via trading companies, local distributors, and its subsidiaries, which set pricing according to local markets. Prices are affected by local agricultural conditions and exchange rates.
Advantages of being a Zen-Noh-affiliated manufacturer
Two main distribution channels exist for agrochemicals in Japan: cooperative route (a catch-all term for Zen-Noh, prefectural Economic Federations of Agricultural Cooperatives [Keizairen], and agricultural cooperatives) and commercial routes. Cooperative organizations sell products directly to farmers, whereas commercial routes use general wholesalers and retailers.
Kumiai Chemical is affiliated with Zen-Noh, its largest shareholder, so in Japan it sells agrochemicals to farmers mainly through the cooperative route. Zen-Noh has two other affiliated agrochemical manufacturers, but Kumiai Chemical is the largest in terms of sales.
Manufacturers and Zen-Noh determine pricing on individual products based on the previous year’s price, agricultural conditions, and production costs through negotiations each year. Farmers purchase from agricultural cooperatives the agrochemicals distributed by Zen-Noh and Keizairen. In Japan, which is characterized by numerous small-scale farmers, agricultural cooperatives have a major role in procuring and paying for agricultural materials. The split between cooperative and commercial routes is 4 versus 6. Shared Research thinks the cooperative route is favorable for manufacturers as it provides better access to farmers than the commercial route in some categories.
Kumiai Chemical’s distinctive development and distribution channels
Kumiai Chemical’s development capabilities and distribution channels are distinctive. The Ministry of Agriculture, Forestry and Fisheries (MAFF) explains that getting agrochemicals to market typically requires around 10 years, including the time from the development of active ingredients through approval by MAFF (the regulatory authority). From 2010 to 2020, Kumiai Chemical brought to market products containing six active ingredients it had developed. Through its distribution channels in Japan, the company has strong access to end-users (farmers) because it uses Zen-Noh and agricultural cooperatives rather than general wholesalers and retailers.
Merger in May 2017
Combined manufacturing and sales
The company was formed in 1928 as a citrus cooperative in Ihara-gun (former name, currently Shizuoka City), Shizuoka Prefecture. In 1949, it changed format to a joint stock company renamed Ihara Agrochemical and subsequently strengthened collaboration with Zenkoren (currently Zen-Noh). In 1965, Ihara Chemical was jointly established by Ihara Agrochemical (company name changed in Japanese [from Chinese characters to katakana] in1962; English name remained the same) and Nippon Soda (TSE1: 4041). Ihara Chemical’s role was to industrialize and produce the active ingredients for agrochemicals sold by Ihara Agrochemical, which was renamed Kumiai Chemical in 1968.
In May 2017, Kumiai Chemical merged with Ihara Chemical, which at the time was an equity-method affiliate. The merger created vertical integration in agrochemicals by combining active ingredient industrialization and production (under Ihara), agrochemical formulation, and sales. The objectives of the merger were to consolidate the two companies’ management resources and integrate processes from new agrochemical discovery through research, development, active ingredient manufacture, product formulation, and marketing; minimize business risk by speedier, more accurate decision making; boost business efficiency by effective utilization of the merged entity’s management resources; strengthen management foundation; and aim at sustainable growth as a unique, R&D focused company.
Background to the merger
From the start, the former Kumiai Chemical and Ihara Chemical had a close business and capital relationship. Ihara Chemical’s main business was industrializing and producing active ingredients for the agrochemicals Kumiai Chemical sold. Kumiai Chemical owned around 25% of Ihara Chemical’s shares.
The impetus for the merger was Kumiai Chemical’s core business, the agrochemical business. Shared Research attributes the decision to an increasing need for overseas development in light of a changing market in Japan and the growing importance of agrochemicals in sustaining farm productivity amid burgeoning food demand due to global population growth and economic development in emerging markets. We think another underlying aim was a growing realization of the need for closer coordination between the companies given the changing operating environment.
Post-merger, Kumiai Chemical is facing challenges on many fronts, both in Japan and overseas. In Japan, agricultural policies are changing, as is the direction of the cooperative business and farm management. Overseas, markets are growing more oligopolistic, as repeated mergers have created four giant groups (See the Comparable companies section for details). As well as such an oligopolistic environment, the company has to respond to generic agrochemicals and seeds, areas building a new position in crop pest control. Kumiai Chemical thinks it can better address these issues with a structure that integrates R&D, production, and sales.
Types of agrochemical manufacturers in Japan defined by development and manufacturing
Agrochemical manufacturers process active ingredients (whether developed in-house or by third parties) in order to formulate products and sell the products to farmers. MAFF groups Japan’s agrochemical producers according to four business patterns.
Foreign manufacturers: Multinationals’ Japanese entities
R&D-type manufacturers: Japanese companies that develop and manufacture raw materials for agrochemicals and sell those active ingredients to other companies. Kumiai Chemical falls into this category.
Formulation manufacturers: Companies that mainly use purchased active ingredients to produce formulations
Manufacturers handling only specialized agrochemicals: Companies handling items such as lime and soil fumigants
Foreign manufacturers operating in Japan primarily procure active ingredients, either from Japan or overseas, for manufacture and sale to Japanese farmers. Japanese R&D-type manufacturers, on the other hand, produce active ingredients for domestic and overseas sale, and for use in formulating agrochemicals which they sell to farmers in Japan. Japanese companies that do not produce active ingredients themselves purchase active ingredients and sell formulations. Manufacturers that only handle specialty agrochemicals mostly develop their active ingredients in-house.
Kumiai Chemical mixes active ingredients it has developed and registered with other active ingredients and secondary active ingredients to manufacture agrochemicals, which it ships to Zen-Noh prefectural HQ (or Keizairen and prefectural agricultural cooperatives). In general, products Japanese manufacturers sell to Zen-Noh pass through regional agricultural cooperatives before sale to farmers. Products sold through wholesalers are typically purchased by end customers at home improvement stores or other retailers. Kumiai Chemical is affiliated with Zen-Noh, so it basically distributes its farmland products to farmers via Zen-Noh and agricultural cooperatives.
Business by segment
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Kumiai Chemical reclassified its segments due to its merger with Ihara Chemical on May 1, 2017.
Segment changes in FY10/17
Kumiai Chemical changed its segments in FY10/17 to Agricultural Chemicals and Agriculture-Related Businesses, Fine Chemicals Business, and Other Businesses (previously the Chemicals, Leasing, and Other segments), due to the merger with Ihara Chemical. For comparison, the changes are retroactively applied to FY10/16 results.
In sales, the former Chemicals segment, which was mostly agrochemicals and agrochemical-related, was moved to Agricultural Chemicals and Agriculture-Related Businesses. Most of the operations in the newly established Fine Chemicals Business were acquired from Ihara Chemical in the merger. The business of producing and selling chemicals other than those sold by Ihara Chemical to Kumiai Chemical before the merger is now in Fine Chemicals. Business from the former Other and Leasing segments was moved to Other Businesses.
Agricultural Chemicals and Agriculture-Related Businesses
Segment details and earnings trends
In the Agricultural Chemicals and Agriculture-Related segment the company manufactures and sells agrochemicals. Following the reclassification accompanying the May 2017 merger, non-agricultural products and items manufactured under consignment are included to this segment.
Agrochemical business
Sales of mainstay herbicide for field crop Axeev in the agrochemical business have grown since it was launched in 2011, mainly in overseas markets. However, the Japanese agrochemical market remains flat on a monetary basis, so the company has posted a solid domestic sales performance. Kumiai Chemical’s principal agrochemicals in the domestic market are paddy rice herbicides, box granules, insecticides and fungicides for upland crops, and lawn herbicides. This business is further categorized into product sales in the Japanese market, corporate marketing (non-crop land such as golf courses and agrochemical materials), and sales to markets outside Japan.
Segment earnings
The following chart shows sales and operating profit for Kumiai Chemical’s former Chemicals segment and Ihara Chemical’s former “Agrochemical” segment. Because of the segment change in FY10/17, the data are discontinuous, but profit margin was high in the former Ihara Chemical segment that manufactured active ingredients, mostly for sale to Kumiai Chemical. Kumiai Chemical’s cost of procuring active ingredients (posted as cost of sales) accounted for the majority of sales at the former Ihara Chemical.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: FY10/17 results represent Kumiai Chemical’s earnings after the merger in May 2017.
Kumiai Chemical’s operating profit for FY10/17 incorporates six months’ worth (May–October 2017) of active ingredient manufacture by Ihara Chemical. By looking at a full twelve months of production by Ihara Chemical and accounting for the lower costs post-merger, Shared Research estimates that the agrochemical-related business should be able to deliver an OPM of between 5% and 10%. Hokko Chemical Industry Co., Ltd. (TSE1: 4992), another agrochemical company that distributes via cooperatives had OPM of 7.1% (FY11/21).
Main agrochemical offerings (Japan)
As of end-October 2021, 45% of sales in the Agricultural Chemicals and Agriculture-Related Businesses segment came from the domestic sales, and the large part of these were for paddy rice herbicides and rice pest insecticides. A smaller portion came from sales of herbicides for field crops, insecticides for fruits and vegetables, and fungicides.
Herbicides for paddy rice
This type of herbicide to control weeds in rice paddies differs from those used on upland crops, because the rice is mainly cultivated in standing water. The method of dissemination and timing depend on what weeds are being targeted, and a variety of dosage forms exist to suit these conditions. The company’s main products have Pyriminobac-methyl, Pyrimisulfan, Fenoxasulfone, and Fenquinotrione developed by the company as active ingredients and come in various type of formulations and package units. Effeeda, a core product that is enjoying sales growth in Japan, has Fenquinotrione as the active ingredient.
Nursery box granules
Rice plants are usually cultivated in nursery boxes before being transplanted into paddies for cultivation. Chemicals in this category are applied in the nursery boxes before planting to control pests that emerge while rice is being cultivated and after planting in the paddy. Kumiai Chemical’s main products have Clothianidin, Imidacloprid, or Isotianil developed by other companies as active ingredients. In April 2020, the company obtained agrochemical registration for a mixture product (product name: Boon) that contains Dichlobentiazox (brand name: Disarta; jointly developed with Zen-Noh) as the active ingredient, and added it as a proprietary agrochemical (Disarta) to its box granules lineup from FY10/21.
Fungicides
These chemicals are used to eradicate disease on various types of horticultural crops, including apples, pears, grapes, citrus and other tree fruits, soybeans, adzuki, cabbage, cucumbers, tomatoes, and other vegetables. Kumiai Chemical’s lineup includes products which contain active ingredients include Pyribencarb, Benthiavalicarb-isopropyl, and Mepanipyrim it has developed.
Insecticides
These chemicals are used to eradicate pests that damage fruit trees and vegetables. The company’s main products are agrochemicals that contain active ingredients developed by others such as Imidacloprid, Cyazypyr, Pyrifluquinazone, and Methidathion.
The following table outlines Kumiai Chemical’s main products for the Japanese market. Characteristically, products for paddy rice (by crop) and herbicides (by type) make up the core of Kumiai Chemical’s products, and many of these are made from active ingredients it has developed.
Main agrochemical offerings (overseas)
As of end-October 2021, overseas sales accounted for roughly 55% of total sales. Herbicides for paddy rice and upland crops make up the majority. Herbicides for paddy rice are sold mainly in other parts of Asia, while those for upland crops are primarily sold in North America, Latin America, and Oceania.
When exporting agrochemicals, Kumiai Chemical exports active ingredients (e.g., paddy rice herbicide Axeev) to its overseas sales subsidiaries, which formulate and market them as agrochemicals, although it sometimes manufactures formulations in Japan (e.g., paddy rice herbicide Nominee).
Herbicide for paddy rice: Nominee
The active ingredient in Nominee is Bispyribac-sodium, which Kumiai Chemical was granted registration approval for in 1997. Regarding soil applied herbicides, their effect deteriorates unless used shortly after weeds germinate. Nominee, on the other hand, is a foliage treatment product highly selective between rice and weeds, so is highly effective after weeds grow, and on both transplanted rice (plants are first raised in nursery boxes before being transplanted to paddies) and directly seeded rice (seeds are sown directly into dry or wet paddies for cultivation). The product is also effective in low doses.
Herbicide for field crops: Axeev (brand name)
Axeev is a brand name for Pyroxasulfone, which Kumiai Chemical was granted registration for in 2011. It can be used with major world crops such as corn, soybeans, and wheat. The chemical is also effective on a wide range of grasses and small seed broadleaf weeds. Demand for Axeev is growing among large-scale farms in North America, South America, and Oceania, because it is highly selective (effective on weeds while having only a limited phytotoxicity on crops) and effective even on the herbicide-resistant weeds that have begun spreading around the world in recent years.
R&D structure
As an R&D-oriented manufacturer, costs are high
Kumiai Chemical currently has two research institutes (five research centers) that span research into new product development, formulation, and processes through market launch. Before the merger, R&D was divided between Kumiai Chemical, Ihara Chemical, and K-I Chemical Research Institute, which both companies had invested in.
Chemical Research Institute:
New Molecule Research Center (Iwata, Shizuoka Prefecture)
Conducts research on the structure and synthesis of new bioactive chemical compounds, and studies their physiochemical properties
Formulation Technology Research Center (Shizuoka, Shizuoka Prefecture)
Verifies the effectiveness of promising compounds and establishes new formulation technologies to maximize effectiveness
Process Chemistry Research Center (Fuji, Shizuoka Prefecture)
Conducts research on synthesis processes toward the industrial manufacture of promising compounds
Life Science Research Institute:
Agrochemical Research Center / Life & Environment Research Center (Kikugawa/Kakegawa, Shizuoka Prefecture)
Agrochemical Research Center (Tohoku Control Technology Research Center) (Toda-gun, Miyagi Prefecture)
Discovers new active agrichemical ingredients, performs biological evaluation of new compounds, conducts practical research on promising compounds, as well as research on mode of action, toxicity, metabolism, and residue
R&D expenses rising
The following graph shows R&D expenses for the two companies before the merger, and for the combined entity in FY10/17. Before the merger, both companies were incurring expenses on products developed jointly, and R&D expenses were rising from 2013 onward. This trend of rising R&D expenses highlights the extent to which Kumiai Chemical was active in R&D aimed at developing new formulations and expanding applications for existing ones.
Note: Figures for FY10/17 do not include R&D expenses incurred by Ihara Chemical during the period spanning from November 2016 through April 2017.
Source: Shared Research based on company data
Collaboration between research institutes
The company explains that the New Molecule Research Center designs and synthesizes new agrochemical candidate compounds based on information it gathers from several sources and theoretical structures developed in-house. The Life Science Research Institute’s team then screens the synthesized compounds for crops and animals safety and functionality as active ingredients in terms of effectiveness against weeds, diseases, and pests. The New Molecule Research Center uses this information to improve the target compounds, and the process repeats. Meanwhile, the New Molecule Research Center also measures and analyzes the physio-chemical properties of target compounds, investigating the relationship of these properties to bioactivity. In this way, the New Molecule Research Center and the Life Science Research Institute work closely with each other, optimizing compounds through a repeated process of synthesis and bioassay testing as they work to create promising compounds.
The promising compounds ultimately selected through this iterative process proceed to field testing and initial toxicity tests to determine practical utility. If judged to have practical use, the Agrochemical Research Center evaluates them with a view to commercialization, and the Life & Environment Research Center evaluates, toxicity, metabolic, and environmental dynamics. At the same time, the Formulation Technology Research Center considers formulation processes, while the Process Chemistry Research Center studies active ingredient industrial production processes. Based on the results of these tests and considerations, if decided a product can be commercialized, they register an agrochemical application. Agrochemicals containing the new active ingredient can be launched on the market only after registration.
For raw materials, it typically takes around ten years from the start of new compound development until a product goes to market. From 2010 through 2020, Kumiai Chemical gained registration for products containing six raw materials it developed. As of January 2021, it has been developing another raw material and plans to register products containing this. To date, the company has a track record of developing and bringing to market 18 active ingredients, centering on herbicides for paddy rice. Shared Research believes these results are one reason the company’s development expertise is highly regarded.
Fields other than agriculture and subcontract production
Kumiai Chemical’s agrochemicals are sometimes used for purposes other than agriculture, but these are included in the Agricultural Chemicals and Agriculture-Related segment. For example, the company’s herbicides are used on golf courses, and its agrochemicals are used to control weeds in parks and along roads. The company’s lawn herbicides use the same active ingredients as crop herbicides: Bispyribac-sodium and Pyroxasulfone are sold via consolidated subsidiary Rikengreen (delisted after becoming a wholly owned subsidiary on August 29, 2019). Kumiai Chemical harnesses its strengths in chemical synthesis techniques of agents to provide a contract manufacturing service of raw materials and formulations to other companies that sell agrochemicals.
Fine Chemicals Business
Segment details and earnings trends
This segment is essentially Ihara Chemical’s former Fine Chemicals segment. The business is based on organic synthesis technologies the company has developed in agrochemical active ingredient manufacture. The core of this business uses chlorination technology to manufacture and market pharmaceuticals, intermediates for agrochemicals, electronics materials, and polymer raw materials.
Chemical business
This business comprises four main sub-segments. The post-merger share of these four fields is as yet undisclosed, but Shared Research understands that their arrangement within Ihara Chemical’s Fine Chemicals segment (which Kumiai Chemical took over) was as follows.
Chlorination business: Intermediates for agrochemicals and pharmaceuticals, dyes, and chlorotoluene- and chloroxylene-based chemical products for polymer materials
Examples: High-performance fibers and resin materials, intermediates for agrochemical active ingredients, pharmaceutical intermediates
Precision chemicals business: Bismaleimides and other fine chemicals used as raw materials for high-heat-resistant resins used in electronic materials and other products
Examples: Carbon fiber composite materials, laminates, motor varnishes, urethane products such as amine-based curing agents
Styrene foam business:
Examples: Packaging materials used for agricultural and marine products and electronics, consumer electronics parts, insulation materials used in construction.
Industrial chemicals business: Fungicides, anti-mold agents, cleaning agents and other industrial chemicals
Examples: Disinfectants for spas and baths, antibacterials for disposable towels
With an eye on the growth potential of the chlorination and precision fine chemicals businesses, Kumiai Chemical plans to expand them by boosting production capacity. In the chlorination business, it plans to expand capacity of the production base in Thailand of its subsidiary Ihara Nikkei Chemical Industry to shift to chloroxylene-based chemical products that it expects to add higher value. In precision chemicals business, the company plans to further ramp up production of bismaleimides used in electronic materials and high-heat-resistant resins at K-I Chemical. Shared Research understands that the segment will remain largely unchanged.
Segment earnings
Note: The FY10/17 figures for Kumiai Chemical are post-merger. They therefore contain six months (May to October 2017) of results from Ihara Chemical.
As Kumiai Chemical essentially took over this business as is from Ihara Chemical, Kumiai Chemical’s FY10/17 post-merger figures for this segment correspond to those of Ihara Chemical’s pre-merger Fine Chemicals segment. Segment OPM was around 7% immediately after the merger, but dropped to 4.3% in FY10/21 on increased depreciation expenses associated with production capacity expansion of the chlorination business and one-time decline in demand because of the COVID-19 pandemic. As a comparison, among large Japanese chemical manufacturers, OPM was 1.5% for Mitsubishi Chemical Holdings Corp. (TSE1: 4188) and 6.4% for Mitsui Chemicals (TSE1: 4183) in FY03/21.
Other Businesses
This segment contains the following core businesses.
Leasing: The company
Electricity sales from mega solar generation: Company-owned power plant in Iwata, Shizuoka Prefecture
Construction: Handled by Ihara Construction Industry Co., Ltd. (consolidated subsidiary)
Printing: Handled by Nihon Printing Industry Co., Ltd. (consolidated subsidiary)
Logistics: Handled by Kumika Logistics Co., Ltd. (consolidated subsidiary)
Information services: Provided by K-I Information System Co., Ltd. (consolidated subsidiary)
Rikengreen Co., Ltd., one of its consolidated subsidiaries, provides herbicides, insecticides, and other materials to manage non-agricultural greenery, such as golf courses and areas along expressways. This company also sells chemicals for paper manufacturing and industrial use and handles fruits and vegetables and landscaping projects. In the latter category, Rikengreen fills orders by national and regional government bodies to build parks and handle other public projects.
The following table outlines Kumiai Chemical’s subsidiaries and equity-method affiliates. Many company names begin with K-I (“Kumiai Chemical” and “Ihara”), suggesting a long-standing pre-merger relationship between the two companies.
Market and value chain
Japan’s agrochemical market: Remains essentially flat
Gradual decline in agrochemical volume, monetary value flat
Japan’s agrochemical market
The area of land under cultivation in Japan is trending gradually downward. That said, the overall use of agrochemicals remains essentially flat in value terms, because of higher use of agrochemicals per area in response to new demand for rice and farmers’ increasing focus on productivity.
The volume of agrochemicals used on paddy rice is falling gradually. Shipment volumes seem to be declining due to more effective new formulations and the spread of laborsaving formulations (agrochemicals formulated to enable spraying comfortably). Prices are thus on an uptrend. Shared Research attributes these fluctuations mainly to changes in Japan’s agricultural industry. Japan experiences high temperatures and humidity levels, which are conducive to weeds and pests. We understand that highly effective agrochemicals are needed to boost crop yields under these conditions.
Given a limited amount of arable land, increasing total harvest amounts requires higher productivity. Further, there is an issue with farm work given the aging of the farming workforce. There are also special features of distribution. Nearly 60% of agrochemicals sold in Japan are jointly purchased and distributed via agricultural cooperatives, and recommendations by the cooperatives play a major role in the acceptance of new products by farmers. Under the distribution system, farmers can place advance orders for agrochemicals and fertilizers to the cooperatives and thus get a discount on standard pricing.
Japanese agriculture and use of agrochemicals
While demand volume for agrochemicals is falling in Japan, demand is flat on a monetary basis, due to the call for relatively higher price products containing new active ingredients. Within the paddy rice category, cultivation is growing for rice used in feed and to meet other demands. The scope of agrochemical demand is thus broadening, explains the company. Although the area of cultivated land is gradually decreasing, the value of shipments has remained between JPY330.0bn and JPY350.0bn.
Note: The agrochemical fiscal year runs from October through September.
Changing Japanese agriculture and agrochemical demand
Demand for new agrochemicals: More large farmers, new sources of demand for rice
Japanese agriculture has two distinguishing characteristics. First, the number of farmers managing greater acreages is increasing. The following graph shows how plot sizes grew during the decade from 2005 to 2015. The percentage of land comprising plots of five hectares or more rose from just over 50% to nearly 70% during this period. The Japanese government is encouraging farm consolidation and aims to see the number of large farmers or farming companies grow from 16,000 at present to 50,000 by 2020.
The second market characteristic is a growing amount of land planted with rice for livestock feed amid a declining trend overall. As the following graph shows, new sources of demand, mainly for livestock feed and whole crop silage (WCS) rice, are fueling an increase in land under cultivation. With WCS, rice grains, leaves, and stems are harvested, fermented in silos, and used for feed.
To encourage these trends, in 2016 the Japanese government announced the Agricultural Competitiveness Reinforcement Program. The program targets reforms to Zen-Noh, which has a major impact on the price of materials for agricultural production in Japan. Shared Research thinks new and lower-priced agrochemicals, such as generics, are needed to help raise production efficiencies.
Japanese agrochemical environment: Agricultural Chemicals Control Act’s registration system and agricultural cooperatives
Overseas regulations on agrochemicals
The Japanese agrochemical business is governed by regulations under the Agricultural Chemicals Control Act. Organizations with individual roles in Japanese agriculture include the National Federation of Agricultural Co-operative Associations (Zen-Noh), the Economic Federation of Agricultural Cooperatives (Keizairen), and agricultural cooperatives.
In the US, the US Environmental Protection Agency has an agrochemical registration system based on regulations. China has an agricultural registration system that is supervised and managed by the Ministry of Agriculture, an institution directly under the State Council. Agrochemicals are regulated as toxic compounds by individual countries, but regulations differ.
Agrochemicals: definitions and usefulness
Agrochemicals are used to eliminate pests and weeds that affect agricultural crops (rice, vegetables, fruit and other non-crop land plants such as forest trees, grasses on golf courses and in parks, roadside trees). Categories include insecticides, fungicides, herbicides, attractants, and natural enemies and microorganisms used to fight pests. Chemicals used to promote root growth or fruit-bearing or to control the growth of agricultural crops in other ways are also classed as agrochemicals.
MAFF considers agrochemicals one of the most effective ways of augmenting crop yields. Anti-pest methods other than agrochemicals include planting pest-resistant crops or putting down vinyl or straw sheeting to curtail weed growth. MAFF says these methods have limited effectiveness and that agrochemicals benefit farmers by stabilizing and improving yields at a relatively low level of labor input.
MAFF discloses the effectiveness of agrochemicals, by crop type, in improving yields. The following chart shows the rate of decline in yields if no agrochemicals are used to control pests for major fruit trees, vegetable, and grain crops. According to this survey, based on Japan Plant Protection Association test results used by the company, fruit trees yields decline by 80% to almost 90% if no agrochemicals are used. The decline is approximately 40–60% for vegetables although it varies depending on kinds, and around 30–40% for grains.
Agrochemical registration system based on the Agricultural Chemicals Control Act
Japan’s agrochemical registration system
In the interest of safety, the Agricultural Chemicals Control Act regulates the production, import, sale, and use of agrochemicals. The agrochemical registration system is central to this act. (In the past, regulations centered on sales, but legal reforms in December 2002 added regulations on the production, import, and use of agrochemicals.) With certain exceptions, agrochemicals must be registered with MAFF before they can be manufactured, imported, or sold.
Agrochemical registration requires agrochemical manufacturers and importers to conduct a variety of tests (effectiveness against pests, safety for crops and animals, residue remaining on crops) to ensure their quality and safety. Companies then apply to MAFF via the Food and Agricultural Materials Inspection Center (FAMIC). According to Japan Crop Protection Association (JCPA), it generally takes around 10 years and JPY25.0bn–30.0bn* to develop a new agrochemical.
When MAFF receives an application, it instructs FAMIC to screen the agrochemical for registration. Based on the applicant’s submitted test results, FAMIC conducts a comprehensive screening for quality and safety, looking at the agrochemical’s efficacy, toxicity, and the residue it leaves behind on crops and soil, and reports its results to MAFF, which makes the final decision on registration.
Companies involved in agrochemicals in Japan
Types of agrochemical companies, production and R&D
Some agrochemical manufacturers produce active ingredients in-house, while others outsource production. As a result of the merger with Ihara Chemical, Kumiai Chemical has integrated production and sales. Agrochemical manufacturers purchase intermediates from chemical manufacturers and then manufacture active ingredients internally. On April 1, 2017, new arrangements (active ingredient specifications) were introduced for managing key ingredients in agrochemicals. These set the composition of active ingredients and impurities to ensure safety, enabling changes to manufacturing methods for active ingredients used in agrochemicals, which was previously prohibited in principle. Meanwhile, mainstream R&D structures entail research and development of active ingredients in agrochemicals, establishing manufacturing process, and research into formulation.
Most Japanese agrochemical manufacturers fall into one of four categories, depending on their production methods. (See the Business model section for details.)
Kumiai Chemical falls into the “R&D-type manufacturer” category, which follows the production process outlined here.