RISI Asian CEO of the Year Award for 2016 has recently been named as Kiyoshi Otsubo, Chairman, President and CEO of Rengo Co., Ltd. Mr Otsubo has been President and CEO at Rengo since 2000, and also became Chairman of the company in April 2014. PPI Interviewed Mr Otsubo who shared some of his thoughts on the industry in the Asian region and beyond.
PPI: Your international expansions have been groundbreaking, particularly in Southeast Asia. Do you expect this to continue? What is your vision for Rengo’s future international presence? May it eventually move west, to South Asia?
Otsubo: The Rengo Group is engaging in six core businesses — paperboard, corrugated packaging, folding cartons, flexible packaging, heavy duty packaging, and overseas business — as a General Packaging Industry (GPI) based on its hexagonal business structure. In Japan, Rengo took a stake in Sun Tox Co., Ltd., a plastic film manufacturer, last year. Both in domestic business and in overseas business, we intend to focus efforts on petrochemical-based packaging operations, in addition to packaging made of wood fiber-based materials, with the aim of creating GPI Rengo in a real sense. Rengo has overseas operations in China, Southeast Asia, and Hawaii, and will consider the feasibility of expanding into India as a new market.
Many of your overseas investments have been in converting or printing operations, but your Vina Kraft venture with SCG is starting a new 243,000 tonne/yr BM in Vietnam soon (note: this startup is planned in the second quarter of 2017). Do you envisage Rengo investing in more board mills in growth markets in the near term?
We decided to build a new containerboard machine on the anticipation that demand for containerboard in Vietnam is expected to grow in the future, driven by continued direct investment from overseas and a rise in domestic consumption. While demand for containerboard has virtually reached saturation in Japan, demand is still growing rapidly in growth markets in Asia, where we see business opportunities. On the other hand, establishing a new paper machine requires a large capital investment, and we are not planning to make any further capital investments in growth markets at this time.
Rengo has a very interesting vertically integrated structure, internationally. But at the same time, it seems that you offer a great deal of autonomy to your international businesses, employing local management to a high level. How have you achieved this balance?
I have experience of working overseas in Malaysia and the U.K., which taught me the importance of localization in overseas business operations. That is to say, it is virtually impossible for Japanese employees who are sent from Rengo to its overseas operations to take charge of everything. What is important, therefore, is how we foster excellent human resources locally.
Our corrugated packaging business in Hawaii has been showing improvements recently, and the reason behind this is that its American president and Japanese staff dispatched from Rengo are using great teamwork by taking advantage of the strengths of both American and Japanese work practices.
Rengo’s packaging production equipment and mills are extremely energy efficient and many of your products and products from your subsidiaries, like Vina Kraft, are FSC certified. How important are these environmental factors to your direct customers and to end users in Asian markets?
We believe that environmental responsiveness is an important factor for our direct customers. In fact, some of our customers have established procurement guidelines that limit them to only purchase papers and pulps (for use in products), packaging materials, and office paper that are made from recycled paper or made with environmental sustainability in mind. We believe that more and more customers will request shipment of FSC-certified paper products in future
What is the philosophy behind your environmental policies?
The Rengo Group has established the Environmental Charter and has set out the Fundamental Philosophy: “Rengo group endeavors to observe all laws, regulations and protocols relating to the environment, and actively carries out environmental conservation activities to further reduce environmental impacts.”
Based on this idea, Rengo is pursuing various initiatives for the protection of the global environment, including the reduction of CO2 emissions and promotion of effective use of resources, in addition to observing environmental laws and regulations.
Rengo is also working resolutely to achieve innovation in production activities and product development in order to provide high quality and high value-added packaging, while reducing our global environmental footprint with the key concept of “Less is more.”
Many Japanese pulp and paper firms have been investing in energy. Your company has started up a new steam turbine and generator at its Kanazu plant in Fukui prefecture some time ago to sell power to the national grid, and has just announced the start of biomass power generation at your Yashio mill. Do you see power as a growing business for Rengo into the future?
Rengo has established power-generating facilities mainly at paper mills of Rengo and Rengo Group companies. The new steam turbine generator, which was completed last year at the Kanazu Mill, has been providing electricity to meet the electricity consumption of the whole mill in addition to selling power to local power utilities and wheeling off power to Rengo’s Yodogawa Mill, and is making profits.
However, Rengo has introduced power-generating facilities mainly for the use at its own mills and in order to reduce CO2 emissions through the effective use of biomass resources and fuel conversion to city gas (pipeline gas). Rengo will not expand the power business as a profit-making business further from where things stand now.
What are there benefits to the company in investing in renewable energy, especially after the events following the Fukushima nuclear plant meltdown in March 2011, which effected some of your operations directly?
Rengo has actively been introducing renewable energy by installing photovoltaic power-generation facilities and biomass boilers. One of the purposes of this is to provide electricity to meet (part of) the electricity consumption of plants. We see renewable energy as a solution to realize “Less is more”, the keyword of our environmental management, by achieving “less energy consumption,” “less carbon emission,” “high quality products with more value-added.” Therefore, our main purpose of introducing renewable energy is to reduce CO2 emissions–a greenhouse gas—by establishing a production system with low environmental impact, which will contribute to conserving the global environment.
In Japan itself, it seems that the board market has reached a certain point of saturation, with prices lingering at low levels and capacity very high relative to demand. How can market conditions change in a way that would see domestic demand growing there again?
Looking at the paperboard market in Japan, demand for boxboard is on the decrease while that for containerboard is growing. But the growth is low, reflecting the effects of the trends toward lightweight packaging. In addition, folding cartons are being replaced by flexible packaging in accordance with the trends towards minimal packaging. On the other hand, demand for corrugated packaging is expected to increase for the time being with the growth in the Japanese economy. Considering that most of the demand is in the food sector, however, corrugated packaging will inevitably be affected by population decline in the long run.
On the supply side, do you feel that industry consolidation is called for?
There are oversupplies in the containerboard industry, and thus companies in the sector are in excessive competition on price and service. As a result, the containerboard industry has become a low-profit one.
In the early 2000s, the industry saw progress in restructuring and business closure
, however structural reform has hardly progressed for more than a decade because the containerboard industry has experienced relatively stable market conditions during this period. I believe the industry needs to undergo further structural reform.
Lately Rengo’s results seem to have been boosted, in Japan, by some shifts into the flexible packaging business. Is this shift likely to continue, and be apparent internationally, as with your recent acquisition of Tin Thanh Packing in Vietnam and TC Flexible Packaging in Thailand?
Rengo and the Siam Cement Group (SCG) established a joint venture, TC Flexible Packaging, which acquired Prepack Thailand in Thailand and Tin Thanh Packing in Vietnam.
SCG’s core businesses are petrochemical, cement, pulp and paper operations. SCG and Rengo are moving our businesses in the same direction and will aim to expand flexible packaging and heavy duty packaging operations mainly in Southeast Asia.
The Japanese economy has seen some interesting shifts in recent years, notably in currency terms. How has the changing value of the yen affected your business and your raw material procurement processes?
As far as Rengo is concerned, fluctuations in the yen/dollar exchange rate have a larger impact on procurement than sales. The stronger yen has a positive impact and the weaker yen has a negative impact on our profit and loss.
The yen has shifted slightly to an upward trend since the end of last year. However, the yen-dollar exchange rate applicable to the second half of FY2015 - from October 2015 to March 2016 - is weaker than that applicable to the same period of the previous year, and the depreciation in the yen-dollar exchange rate caused profit to decline.
Likewise, fluctuations in crude oil prices affect our profit and loss through changes in the prices of LNG and city gas we use. The impact of crude oil price fluctuations will show half a year later. Therefore, our business performance for the second half of FY2015 is affected by the crude oil price applicable to the first half of FY2015--from April 2015 to September 2015. Since the crude oil price applicable to the first half of FY2015 dropped from the same period of the previous year, this fall in the crude oil price will translate into a profit increase for our business performance for the second half of FY2015.
Rengo at a glance
Founded in 1909, Rengo Co., Ltd. is a large paperboard and packaging producer headquartered in Japan with an annual turnover of over 500 billion yen ($4.5 billion) consolidated. The Rengo Group manufactures and sells paperboard, corrugated board, corrugated boxes, folding cartons, as well as making and supplying flexible packaging, heavy-duty packaging and related production machinery.
Rengo operates across Japan from Hokkaido in the north to Kyushu in the south from 35 manufacturing plants. The company also has 55 plants and 8 offices located in China, Thailand, Singapore, Indonesia, Malaysia, Vietnam and the US. The company employs around 14,000 people.