Review of Operations: Engineering Group

A Solid Performance

In fiscal 2016, the Engineering Group’s net sales amounted to ¥84.2 billion (US$747.1 million), an improvement of 11.1% over fiscal 2015. The group’s operating income climbed 37.4%, to ¥4.6 billion (US$40.6 million). The group accounted for 11.2% of Tosoh’s consolidated net sales, compared with 9.4% the previous fiscal year. Its operating margin was 5.5%, a decline of 6.5% from fiscal 2015.

Domestic sales of water treatment facilities, services, and related chemicals were up. This reflected growth in plant construction and requests for maintenance and renovation overall in the water treatment industry, primarily for the electronics sector. Overseas sales rose largely as a result of increased demand from a rising number of electronics plants, one demand driver being Taiwan. Sales were down at construction subsidiaries.

Strategic Collaborations

Organo has taken steps to consolidate its businesses and expand its service capabilities. Those steps include forming a business alliance with Katayama Nalco Inc. in fiscal 2014 that sees the two companies collaborating to expand their water treatment businesses. Organo’s chief products are in water and wastewater treatment chemicals, while Katayama Nalco’s core lines are process-related chemicals for steel, petrochemicals, and pulp and paper. The alliance should contribute significantly to the Engineering Group’s net sales in the years ahead.

A fiscal 2016 Engineering Group highlight was the launch of a water treatment joint venture in India in September 2015 with the India-based Muragappa Group. Organo owns 49% of the joint venture, called Muragappa Organo Water Solutions, which targets Japanese and non-Japanese customers in India and aims to serve the emerging needs of manufacturers there.

Water Treatment

In fiscal 2017, Tosoh subsidiary Organo Corporation intends to bolster its earnings capacity, develop and improve technologies and products that strengthen its businesses, and allocate resources to bolster R&D activities as part of efforts to generate long-term growth. Organo’s management expects that sales will remain basically unchanged but that operating income will probably decline, reflecting a downturn in solution business sales in its water treatment business. Organo’s management also anticipates significantly increased capital investment.

Large electronics industry projects should again contribute to Organo’s performance, although domestic and overseas orders in that industry will probably be down. In addition, Organo will target sales to the water treatment chemicals industry and reinforce its solutions business while continuing to reduce costs to improve profitability.

Organo hopes to capture opportunities emerging from planned construction in the Tokyo area. This includes in particular construction for the 2020 Tokyo Summer Olympics and Paralympics and the linear motor car project of Japan’s major railway company.

A mature domestic market, meanwhile, compels Organo to increasingly look abroad for business especially in water treatment for power stations. Organo is thus leveraging its network of subsidiaries and affiliates in China, Thailand, Malaysia, Taiwan, Vietnam, and Indonesia and converting its overseas activities to local operation and staffing as appropriate.

Organo has revised its medium-term business plan in view of a more challenging business outlook for Japan and overseas, particularly in view of a prolonged slowdown of the Chinese economy. It has accordingly positioned itself to expand market share and to secure solid revenues even in shrinking markets, largely by updating its management plan annually to address fluctuations in its business environment.

Construction

Tohoku Denki Tekko will continue to enhance its cost structure and public works labor and material costs. The subsidiary’s strategic objectives include adopting a solutions-oriented sales approach in its industrial electrical machinery businesses that goes beyond hardware to planning, construction, and installation. New business is always a priority. And the subsidiary will develop its bag filter system business to lift its reputation as a systems provider.

Over the next three years, Organo will prioritize areas offering the most potential. It will cultivate domestic business for power plants and establish operations overseas where electricity demand is expanding. It will also enhance its equipment and systems businesses for the supply of ultrapure water and other washing agents. Measures for functional products will include developing and improving the functionality of products for standardized water treatment equipment, developing functions for ion-exchange resins and other materials, and expanding scale by cultivating new markets.

The Engineering Group’s construction-related priorities will be on bolstering Tohoku Denki Tekko’s technological and service capabilities. This will be part of efforts to optimize customer satisfaction.