Thursday, May 5, 2011

Itochu Targets China, Emerging Markets

Thursday, May 5, 2011

Pastry sales and TV-home shopping in China may not merit much discussion in the boardrooms of Asia's biggest companies seeking a response to the global financial crisis. But for Japan's Itochu Corp., they are typical of the bets that transformed it over 150 years from a tiny linen seller into a $15-billion trading giant selling everything from clothing to coal. Itochu Chairman Eizo Kobayashi says Itochu's business is grounded in knowing what people want and where. Investments in assets as diverse as uranium mines and bakery chains are simply a means to achieve that end.

China and other emerging markets are central to Itochu's strategy, Mr. Kobayashi says. Japan's population is aging, which means it will need fewer of the commodities that are the cornerstone of Itochu's business. On the other hand, China's population is growing, incomes are rising and its consumers are becoming more sophisticated at breakneck speed. Capturing a slice of that nascent demand is now the challenge.

Mr. Kobayashi talked to David Winning in Sydney.

Bloomberg News

Eizo Kobayashi, chairman of Itochu Corp.

WSJ: Japan's demand for oil and many other commodities is falling, in part due to its aging population. How is that affecting Itochu's business strategy?

Mr. Kobayashi: This situation is affecting not just Itochu, but all corporations in Japan. It's one of the most serious problems that we have to overcome. In Japan, the ratio of people over 65 years old will rise from 25% of the total population at this moment to about 30% by the 2030 timeframe. Our response is to try and expand our operations overseas. There are many new, young generations rising in Asia and we must meet their demand for commodities. In Japan, we have to be patient for another 20-30 years, so during that period we must grow more in other countries.

WSJ: Explain what you mean by being "patient for another 20-30 years"?

Mr Kobayashi: As a trading company, Itochu has made most of its profits up to now by importing foreign goods and resources to Japan. But the Japanese market is shrinking, so we cannot continue to grow if we continue to pursue the same strategy as before. We have to develop new business to support us in the future, and Asian countries offer great opportunities to do this. We are looking to China, in particular, especially at trading food and consumer goods.

WSJ: Can you give us examples of your push overseas?

Mr Kobayashi: Itochu set up a bread-making joint venture with Shikishima Baking Co. and Wei Chuan Foods Corp. in 2008. Wei Chuan is part of Ting Hsin International, which is China's leading food business group. The Chinese diet is becoming increasingly Westernized, and demand for bread is growing by around 30% every year. The factory will start operating in May2011, and the JV will be selling pastries and loaves in Shanghai. The JV is targeting sales of about 300 million yuan within five years. Another good example came in August when we invested in TV home-shopping company LuckyPai Ltd. in Shanghai. We made the investment in tandem with Korea's Lotte Group, which has a great deal of experience across Asia in TV home shopping. Now, individual incomes of people living in inland China are growing, Here is a window of opportunity for TV shopping. The size of the TV home-shopping market in China was 23.4 billion yuan in 2009, and this is expected to rise to 30.4 billion yuan this year. This is an increase of 30%, and more growth is expected over the coming years. A large part of our profits from China is generated by businesses targeting Japan. These include petrochemical products sold as raw materials to Japanese manufacturers.

But, in future, we aim to secure growth from our new investments specifically targeting the Chinese market.

WSJ: Do you have a regional breakdown of Itochu's profits?

Mr Kobayashi: It's difficult to classify all of our profits by region. But about half of our net profit in the last fiscal year (ending in March, 2010) came from our natural resources and energy business. It's been like this since prices of natural resources surged a few years ago. All other Japanese trading houses are experiencing a similar situation. We aim to balance our investment equally across our three main sectors: natural resources and energy, consumer products, and all our other businesses.

WSJ: In your energy and natural resources business, are you prioritizing some resources over others?

Mr. Kobayashi: Itochu's plan is to focus on iron ore and coal, and increasingly uranium. Itochu is the second-largest uranium trader on a global basis, so it's quite natural to try and get some equity in a uranium mine. Recently, we announced our investment in Australia's Extract Resources Ltd., which has a uranium deposit in Namibia. We took 15% of equity in that company.

WSJ: Why choose a company which has a uranium deposit in Namibia as an investment target?

Mr. Kobayashi: We view Namibia as a stable and open country for an investment. It also ranks as the fourth-largest uranium producer, with a long operational history.

WSJ: Do you have any concerns that valuations of resources assets are too high?

Mr. Kobayashi: It's very difficult to say. When we try to forecast pricing in the coming years, our view is based on supply of resources increasing only gradually, but demand growing drastically. So, the bottom line is that we think resources prices will be at the high end, maybe for the coming decade. Although I don't think equity prices of resource assets are cheap, I think they are reasonable right now.

WSJ: What do you personally see as the key to successful management in Asia?

Mr. Kobayashi: I always encourage my people to think how we can respect, understand and cooperate with different cultures, different values. We have to understand different races, different sexes, different cultures and a different way of doing business. We have to respect all differences and try to cooperate despite those differences. That's the key to success.

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