The Impact of Overseas Business on Japan's Glass Makers
Three companies -- Asahi (5201), Nippon Sheet (5202), and Central (4044) -- have long held 90% of the Japanese glass market, and it's unlikely that their competitive environment will suddenly change. Moreover, in July of last year, Nippon Sheet bought Britain's Pilkington, and thus the oligopolistic character of the industry on a global scale has been enhanced. Together, Nippon Glass, Asahi, and France's Saint-Gobain now have 65% of the world glass market for construction and automotive use, and relative to the excessively competitive markets often seen in raw materials industries, the glass sector has been stable.
However, while global restructuring of the industry has not had a big effect on the financial strength of Japanese firms up until now, their ability to exploit overseas expansion will have a big impact in the future. Notably, Central Glass has little room to boost revenue and cut costs because its business focus is the domestic construction business where times are tough. Thus, the disparity between Central and the big firms that are geographically diversified is expected to grow significantly.
So while the Pilkington acquisition won't have a drastic impact on the industry's structure or competition, it does affect the profitability of the top players. The margins of glass manufacturers are influenced by the price of crude, and companies try to push oil price hikes along to users. This is difficult in Japan, as the major customers for glass are recession-affected building/construction, and the auto industry, where material costs are strongly controlled by the auto makers and are difficult to negotiate.
However, overseas, especially Europe, it is easier to pass along hikes in material costs through the transfer surcharge system, and better market demand helps pricing too. Therefore, by adding a big U.K. company to its group, Nippon Sheet has boosted its profitability: Fourth-quarter operating margins before depreciation were 12.9% versus 8.5% a year earlier. Asahi Glass also benefited from the recovery in results of its European subsidiary, and with profits in the sheet glass business up, the contribution from overseas operations for both companies is notable. (This story is substantially based on information provided from S&P Japan; subscription required).
Three companies -- Asahi (5201), Nippon Sheet (5202), and Central (4044) -- have long held 90% of the Japanese glass market, and it's unlikely that their competitive environment will suddenly change. Moreover, in July of last year, Nippon Sheet bought Britain's Pilkington, and thus the oligopolistic character of the industry on a global scale has been enhanced. Together, Nippon Glass, Asahi, and France's Saint-Gobain now have 65% of the world glass market for construction and automotive use, and relative to the excessively competitive markets often seen in raw materials industries, the glass sector has been stable.
However, while global restructuring of the industry has not had a big effect on the financial strength of Japanese firms up until now, their ability to exploit overseas expansion will have a big impact in the future. Notably, Central Glass has little room to boost revenue and cut costs because its business focus is the domestic construction business where times are tough. Thus, the disparity between Central and the big firms that are geographically diversified is expected to grow significantly.
So while the Pilkington acquisition won't have a drastic impact on the industry's structure or competition, it does affect the profitability of the top players. The margins of glass manufacturers are influenced by the price of crude, and companies try to push oil price hikes along to users. This is difficult in Japan, as the major customers for glass are recession-affected building/construction, and the auto industry, where material costs are strongly controlled by the auto makers and are difficult to negotiate.
However, overseas, especially Europe, it is easier to pass along hikes in material costs through the transfer surcharge system, and better market demand helps pricing too. Therefore, by adding a big U.K. company to its group, Nippon Sheet has boosted its profitability: Fourth-quarter operating margins before depreciation were 12.9% versus 8.5% a year earlier. Asahi Glass also benefited from the recovery in results of its European subsidiary, and with profits in the sheet glass business up, the contribution from overseas operations for both companies is notable. (This story is substantially based on information provided from S&P Japan; subscription required).
posted by Bob at 1:08 PM
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