In February 2020, we celebrated DIC’s 112th anniversary. One of the world’s leading diversified chemicals companies. DIC is also the core of the DIC Group, a multinational organization comprising 174 companies in 64 countries and territories. In addition to commanding the top share of the global market for printing inks, a core business since our establishment, the Group has succeeded in growing pigments and polymers, both derived from printing inks, into prosperous components of our business portfolio. Amid rising environmental concerns, including climate change and marine plastics, falling birthrates and lengthening lifespans, and the evolution of social structures attributable to the rapid spread of digital technologies, the Group continues to marshal its capabilities to address increasingly urgent social imperatives with the aim of helping ensure a sustainable society.
1. DIC111 Progress Report and a Review of Fiscal Year 2019
In fiscal year 2019, we kicked off our current medium-term management plan, DIC111—the two basic strategies of which are “Value Transformation” and “New Pillar Creation”—with the aim of shifting to a business structure that is less vulnerable to macroeconomic conditions. Unfortunately, shipments of epoxy resins, polyphenylene sulfide (PPS) compounds and other highly profitable products that had been expected to see high growth were hampered by shrinking demand for use in semiconductors, electrical and electronics equipment, and automobiles, a consequence of slowing global economic growth attributable to, among others, trade friction between the United States and the People’s Republic of China (PRC). As a consequence, consolidated net sales slipped 4.6%, to ¥768.6 billion, and operating income declined 14.6%, to ¥41.3 billion. While we acknowledge that our efforts to maximize the benefits of Value Transformation fell short, we made significant headway in eliminating the gap between costs and sales prices—a temporary difference resulting from delays in revising sales prices to reflect fluctuations in raw materials prices—which had hampered our performance in fiscal year 2018. We also benefited from cost reductions achieved through rationalization, one result of which was that operating income in Southeast Asia recovered to the fiscal year 2018 level.
2. Promoting Businesses Focused on Social Change and Transforming Our Business Portfolio
We have traditionally recognized the impact of macroeconomic conditions, including factors affecting raw materials prices and
supplies, and exchange rates, on the DIC Group’s operating results as a major structural issue. Guided by DIC111’s two basic
strategies, we are thus working to create a more robust operating foundation by transforming our business portfolio, that is,
by building a sophisticated portfolio focused on environment, safety and health (ESH)-related issues and social changes by
advancing qualitative reforms in existing core businesses and creating new businesses with the potential to become mainstays.
We define Value Transformation as clarifying competitive advantages and shifting to products capable of withstanding the impact of changes wrought by macroeconomic and other external factors. As an example, given the changes in demand resulting from the spread of digitization we have for the past several years sought to modify our business portfolio, reducing the weighting of publication inks and increasing that of inks and other materials for packaging. Grouping various businesses together under the heading “packaging” will bring together common issues such as food safety and food loss, positioning us to develop comprehensive proposals for packaging materials, including by forming partnerships across the value chain and revamping business models. At the same time, we will promote the establishment of standards for withdrawal that we will use to review and perhaps replace certain businesses dealing with commoditized products.
To facilitate New Pillar Creation, we established the New Business Development Headquarters to oversee efforts to create new
growth-driving businesses and develop them into mainstays in four priority areas in which social imperatives and DIC competitive
strengths overlap. We will accelerate this process by making extensive use of corporate venture capital (CVC) and by seeking
advantageous mergers and acquisitions (M&As).
The four priority areas outlined in DIC111 as the focus of portfolio transformation are areas that offer potential for enhancing both social value and economic value. To underpin this transformation, we recently established the DIC Sustainability Index, a proprietary index that will allow us to gauge the social value of our products. This index will be used in all DIC Group businesses to assess the environmental impact of products from raw materials procurement through to disposal and social contribution when customers use our products from shipment until the end of their useful lives. This index will be incorporated into future product development, procurement, sales and distribution. We will also use it to communicate these efforts to stakeholders in an easy-to-understand manner, thereby allowing us to identify activities we should pursue.
For example, our ability to successfully grow our packaging businesses depends on us effectively confronting such challenges as the need to cut back the use of plastics and eliminate marine plastics. So, how do we go about doing this? The key to how much our packaging business contributes to society will be our ability to provide packaging solutions that help increase social value by advancing the reduction, recycling and reuse of materials. In the past, improving convenience was our principal concern, but our focus now must be on balancing convenience and environmental impact. Chemicals companies have always been expected to provide convenience, but today our sales and our survival hinge on our ability to deliver both convenience and a lower environmental impact.
Use of the DIC Sustainability Index commenced in fiscal year 2020. Going forward, we will continue to capitalize on this index to ensure we maintain a healthy awareness of the social value created by addressing social imperatives and in so doing reinforce our long-term management direction.
3. BASF SE’s Colors & Effects Business: Acquisition and Outlook
Even before launching of our Value Transformation strategy, we had begun looking to reinforce our functional pigments
business, a key strategic product area. We have long manufactured highly profitable ultraviolet (UV)-curable functional pigments
and have earned recognition in the market for high-value-added specialty pigments, including those for cosmetics, optical
equipment and color filters, all of which are small in terms of production volume but deliver exceptionally high value. In our
search for ways to expand operations, we became aware of BASF’s plan to divest its Colors & Effects business. After carefully
assessing the business’ regional strengths and product portfolio, we came to the conclusion that integrating the Colors &
Effects business’ functional pigments and ours would yield significant potential synergies. Although closing is not expected until
later in 2020, we anticipate that the total cost of this acquisition will be approximately ¥120 billion, well within the ¥250 billion
earmarked for strategic investments under DIC111, making it a highly attractive proposition. To date, stakeholder evaluations of
this acquisition have been generally positive, thanks to the complementary nature of our business sites in geographic terms and
of our product portfolios, as well as to the rationality of the acquisition from a monetary perspective.
Given the economic slowdown in the PRC in 2019 and the global health crisis arising from the spread of COVID-19, we have to assume that growth in the global economy will weaken to a certain degree in fiscal year 2020. Although it is difficult to predict the full impact of this pandemic, ensuring the health and safety of our employees worldwide remains our first priority. I call on everyone in the DIC Group to join forces to promote measures within and across regions to help us overcome this challenge. Looking at materials used in electrical and electronics equipment, for example, inventories of intermediate materials have largely been cleared and we saw improved shipments of high-performance resins in January and February. However, as COVID-19 has disrupted global automobile industry supply chains, there is no way to accurately project what will happen going forward. While the negative impact of the current situation is thus impossible to accurately gauge, we know what we need to do. The task immediately ahead of us is to accelerate the implementation of our Value Transformation and New Pillar Creation strategies.
Looking at the various challenges we have faced over the years between the Great East Japan Earthquake and the COVID-19 pandemic, it is clear that it is absolutely essential for us to ensure the effective management of DIC Group supply chains. Accordingly, we recently established the Supply Chain Management Unit. Whereas until now supply chain management has been the responsibility of individual product divisions, we see this new unit functioning on a a Groupwide linked to the new global management configuration that will be put in place once we have completed acquisition of BASF’s Colors & Effects business.
From the perspective of business continuity planning (BCP), the Great East Japan Earthquake also exposed the risks associated with highly fragmented supply chains. A solid grasp of supply chain–related issues and the ability to swiftly enact BCPs following the outbreak of a pandemic or in the immediate aftermath of a major disaster are both critical. Recognizing that both are also dependent on a company’s competence, we will continue working to formulate effective BCPs tailored to our supply chains.
4. Building a Stronger Management Infrastructure and Addressing ESG-Related Issues
Conscious of the many implications of the spread of digitization, we also recently established the Digital Transformation
Promotion Department, a dedicated department that is charged with advancing digital transformation. I see the importance of
digital transformation as being that it is a process for modifying a company’s corporate structure and business model, rather
than simply for advancing systems capabilities through digitization. It is a way to fundamentally transform a business or a
company. Of course, we also understand the importance of digital marketing and of materials informatics—i.e., the use of
material properties databases and artificial intelligence (AI) in the selection and deployment of materials—and will continue to
promote efforts to apply both to various processes.
However, in this era of social change, the most important thing for us is to determine what sort of corporate reforms are necessary going forward to ensure we achieve our vision for the DIC Group. We are combining two approaches to this challenge. The first uses backcasting, that is, working backwards from our vision to determine what actions must be taken to achieve that goal, while the second uses forecasting, i.e., analyzing and extrapolating trends to predict the future and determine appropriate actions and leveraging digitization to facilitate the efficient implementation thereof.
In the area of production, for example, we have identified two key themes: Ensuring operating safety and increasing productivity. Rather than simply treating these themes as an extension of existing efforts, we are looking at what reforms we need to implement to realize unattended and smart production facilities and clarifying what can be done at present. Digital transformation is what will allow us to translate such ideas into execution.
02Human Resources Management
Under DIC111, we are promoting a human resources management strategy called WING, which centers on four core themes. As a
global entity, we will continue to leverage the fact that approximately 60% of our labor force is overseas as a key competitive advantage.
To facilitate more strategic human resources management, in fiscal year 2019 we established the Human Resources Strategy
Department. To date, we have taken active steps to empower women in the workplace and reform work styles by introducing telework,
flextime and systems to support employees striving to balance their career with, for example, treatment for an illness. At present, we are
working to take such initiatives a step beyond structural changes by emphasizing efforts to foster a new corporate culture.
The challenge of shifting from a work style predicated on lifetime employment, a fixed retirement age and promotion on the basis of seniority to new work styles is not the responsibility solely of human resources departments. Changes to systems are simply a means to an end. What is important is to secure increasingly talented human resources. When anticipating future social changes, it is also important to consider what sort of key reforms are necessary here. As an example, while our telework infrastructure is now in place, we still have many jobs that cannot be done remotely. There is still ample scope for ingenuity to make operations more conducive to telework by integrating procedures. If such efforts are successful, telework will truly become something that helps resolve the issue of overwork by eliminating commuting time.
Through efforts to “reform work styles to capitalize on diversified individuality” (one of the themes of WING), we will strive to create a fertile ground that accepts varied perspectives and encourages active discussion. In so doing, we will endeavor to marshal the diverse individuals who make up our labor force, drive organizational dynamism and, by bringing together people with diverse views and ideals, to create new value.
Both the management and employees of the DIC Group approach their responsibilities recognizing operational safety as the cornerstone of our business activities as a manufacturer of fine chemicals. Nonetheless, in August 2019 we experienced a serious fire at our Saitama Plant that regretfully caused considerable inconvenience and concern to residents in the vicinity of the plant and other sites. Reflecting on shortcomings that led to this sad occurrence and reminding ourselves that our ability to locate sites and manufacture products is thanks to the understanding of local residents, we have renewed our pledge to act as a responsible corporate citizen, take part in the community and, in the event an issue arises, immediately take steps to provide reassurance. In addition to independent efforts aimed at fulfilling our obligation to ensure operational safety and improving the effectiveness of safety audits, it is important for all departments involved in manufacturing to work together to increase awareness and, through full employee participation, to promote production under a meticulous configuration in a manner that reflects a commitment to ensuring safety while maintaining pride in our capabilities as a manufacturer.
In fiscal year 2019, we declared our support for the Task Force on Climate-related Financial Disclosures (TCFD), acknowledging that responding to climate change and disclosing climate-related information is critical to advancing our business strategies. We are committed to fulfilling our responsibility to analyze and provide investors with sufficient nonfinancial and in so doing to clarify the impact thereof on financial information. The DIC Group is a global entity with operations in 64 countries and territories. As such, we understand the importance of all Group companies responding to climate change issues in an integrated manner, aggregating pertinent data and converting it into financial data to ascertain the impact (risks and opportunities) of climate change on our operations. In fiscal year 2019, we attempted scenario analysis, which the TCFD encourages. We will continue to expand this effort to prove the resilience of the Group’s strategies for responding to risks and maximizing opportunities related to climate change.
05An Integrated Global Management Team
Owing to the fact that 60% of the DIC Group’s consolidated net sales is in overseas markets, we are highly conscious of the
importance of effective global communication and not just as it pertains to the TCFD. Thanks to steady efforts to enhance
communication capabilities in recent years, when the president and CEO issues a statement now it is instantly transmitted to
core Group companies in 64 countries and territories and posted the next day, together with an image of Mr. Ino, for Group
employees in all of these countries and territories to see.
Since our 1986 acquisition of the Sun Chemical Group, which is based in the United States and Europe, DIC has worked steadily to build an integrated global management team. Today, the phrase “single global entity” is used extensively by Group employees across the globe. Looking ahead, the integration of the Colors & Effects business acquired from BASF will amplify our expectations of employees in terms of their ability to function on a global stage. For example, we will need to rethink what our official language of business should be. We will need to put forward a more forward-thinking concept of global operations, including the management of businesses and human resources.
While defining what exactly constitutes “global operations” may present its own difficulties, I believe it is more or less accurate to say that operations are global if they are governed by a unified global strategy. There are various ways to look at global management. Do you treat Group operations management and product-specific management as independent responsibilities or parts of a greater whole? Is the current format of corporate (Japan) and regional headquarters the best option or should we take it one step further and create a global corporate headquarters configuration? All of these are issues we need to consider over the next two to three years.
The integration of the Colors & Effects business, scheduled for late December 2020, will further expand the DIC Group’s global presence. Although uncertainty persists worldwide owing to the spread of COVID-19, we will continue seeking ways to apply chemistry to resolve challenges and working to, in the words of our future vision, become a unique global company that is trusted by society by providing value, that is safety and peace of mind, as well as color and comfort. In these and all our endeavors, I look forward to the ongoing support of our stakeholders.