C&EN: COVER STORY - SHIN-ETSU'S MAESTRO

JEAN-FRANÇOIS TREMBLAY, C&EN HONG KONG

PHOTO BY SATORU SHIRAI

It's not often that a chemical industry boss is held up as a business hero. But it is clearly the case in Japan, where the views of Chihiro Kanagawa, president and chief executive officer of Shin-Etsu Chemical, are regularly reported by the mainstream business media. His photo has graced the pages of the Nihon Keizai Shimbun, Japan's leading business newspaper, several times, and he even appears on NHK, the leading TV station.

Kanagawa is one of those people who don't slow down as they get older. In fact, he speeds things up. Two years ago, he urged managers of the company's silicon wafer business to move faster on a project to invest hundreds of millions of dollars in the construction of a plant producing 12-inch silicon wafers, the first company to do so. Shin-Etsu's decision to go ahead with the project raised eyebrows because it wasn't clear at the time that the semiconductor industry was indeed moving toward chip manufacturing on the larger wafers.

The fast-forwarded project paid off. Competitors could offer wafers no larger than 8 inches, and Shin-Etsu became the only company with the larger sized ones. Chip manufacturers, some of which built 12-inch facilities earlier than expected, bought Shin-Etsu's wafers as fast the company could produce them, allowing Shin-Etsu to enjoy a monopoly position for more than a year.

"I had a hunch that if we are ahead of our competition by several months--the earlier the better--then we win," Kanagawa says. "And it has turned out that way." He adds that Shin-Etsu's financial muscle enables it to make faster investment decisions than its competitors. Shin-Etsu ended the fiscal year to March 31 with more than $2 billion in cash.

Kanagawa has been at the helm of Shin-Etsu for 12 years. By any common standard, he has done a phenomenal job. In terms of the stock market, Shin-Etsu is the world's fifth most valuable chemical company, behind Bayer and just ahead of Air Liquide.

The company's net profit, including income from subsidiaries, has been increasing for at least 10 years. It now stands at 8.8% of sales, as good as any well-regarded U.S. chemical company and far surpassing other major Japanese chemical makers. And as profit quadrupled over the past decade, staffing grew only 42%, demonstrating a significant improvement in productivity at Shin-Etsu and its subsidiaries.

THE COMPANY'S business falls into three main categories. It is the world's largest producer of polyvinyl chloride. It is a leading producer of silicon products and enjoys the dominant market share in certain areas such as the 12-inch wafers. Shin-Etsu also has a motley crew of various products that, depending on market conditions, can be significant sources of profit.

For example, the company's optical fiber preforms, made of synthetic quartz, enjoyed high profit margins until recently amid a worldwide rush to connect homes and offices with faster data lines. And Shin-Etsu captured one-third of the market for KrF semiconductor photoresists when it entered the business in 1998.

Kanagawa is widely described as a hands-on boss. When talking, Kanagawa typically uses the words "I" and "Shin-Etsu" as synonyms. In fact, in the company's annual reports, he appears to take personal responsibility for what happened to the company, good or bad, over the previous year.

"I try to check only the key points [of various projects], as much as my time and energy permit," he says. "If someone does business completely against my philosophy or my principles or day-to-day operations techniques, and then fails, I have to take responsibility."

Kanagawa's success in managing Shin-Etsu illustrates that there is a big difference between knowing and doing. He doesn't mind sharing his management principles and business views with journalists or business analysts. Unlike many Japanese CEOs who are rarely seen in public, Kanagawa appears several times a year at question-and-answer sessions with financial analysts. And he says that he never turns down an interview request with a journalist.

Shin-Etsu's success under Kanagawa draws comparisons with other successful companies, General Electric, for example. Jack Welch, GE's legendary former CEO, is "a genius," Kanagawa insists. But Shin-Etsu was already very successful before Kanagawa ever met Welch.

KANAGAWA DEVELOPED his own management principles and style when he was heading Shintech, Shin-Etsu's PVC subsidiary in the U.S., from 1978 to now. He says he learned how to manage by managing and is not one to learn from books.

One of his principles is that a company is always limited in the number of things it can do. Limits on the amount of capital that a company can use and on the number of "capable" individuals within its ranks act as a powerful incentive to avoid business overdiversification. "These are the two major reasons why I tried to concentrate on just three or four businesses," Kanagawa says. When a company diversifies, he adds, it must do so gradually, with managers closely monitoring progress one project at a time.

Although Shin-Etsu took a large and calculated risk when it decided to invest in 12-inch wafers, Kanagawa is in many ways risk-averse. He says he is particularly keen to avoid wasting his company's assets by taking unmanageable risks. But he will spend money to increase, even incrementally, the reliability of its supply to customers.

Shin-Etsu, he says, does not invest in countries where the political situation is unstable or the legal system is immature. This explains why the company has not made any significant attempt to expand in China, despite Japan's geographical proximity.

But Shin-Etsu goes to extremes to ensure that its customers get the products that they have ordered. One example is the company's complex in Freeport, Texas, where it built three PVC plants capable of running independently of each other.

Kanagawa says the production process used by the plants in Texas is "completely reliable," adding that there hasn't been an accident in 30 years. An outsider might question why a company would build three nearly identical plants next to each other instead of one big one. Kanagawa explains that "I must be prepared for the unexpected; as president, this is my duty to my customers."

Shin-Etsu's financial management is similarly conservative. On a consolidated basis, Shin-Etsu's financing is roughly two-thirds equity and one-third debt. The financial structure of leading U.S. companies such as Dow Chemical and DuPont, hardly examples of financial recklessness, is more or less the opposite--their equity represents 25 to 30% of financing, and the rest is debt.

Kanagawa considers it a virtue to rely on equity as much as possible. So Shin-Etsu's debt load is likely to decrease further. For him, the financial structure of U.S.-based Shintech is exemplary. "That company is my brainchild, so this is the model for Shin-Etsu," he says. Shintech carries a debt load of only 12%, meaning that Shin-Etsu's own cash finances 88% of the U.S. business.