Tonen Corporation - Company Profile, Information, Business Description, History, Background Information on Tonen Corporation

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History of Tonen Corporation

Tonen Corporation specializes in oil refinery operations, importing, manufacturing, and selling petroleum and petrochemicals. Exxon and Mobil, each of which holds a 25 percent stake in Tonen, supply the majority of the crude oil that Tonen uses. Tonen operates two main refineries in Kawasaki and Wakayama, which together can process 406,000 barrels of crude oil per day. The refineries utilize advanced technology to produce a range of value-added oil products, including gasoline, naphtha, kerosene, gas oil, heavy fuel oil, lubricants, liquified petroleum gas, paraffin, asphalt, sulfur, and natural gas. These products are then sold by the Japanese subsidiaries of Exxon and Mobil, under their own brand names. The gasoline produced by Tonen's refineries hold a 15 percent market share in Japan.

Early History

In July 1939, Towa Nenryo Kogyo Co. Ltd.--the company name was changed to Tonen Corporation in July 1989--was established as a partnership of ten Japanese oil-related companies: Nippon Sekiyu, Kokura Sekiyu, Chosen Sekiyu, Aikoku Sekiyu, Sayama Sekiyu, Mitsubishi Sha Holdings, Mitsubishi Shoji Trading, Aratsu Sekiyu, Maruzen Sekiyu, and Mitsubishi Mining Co., with a capital of ¥50 million and 59 employees under the guidance of the Ministry of Defense and the fuel department of the Ministry of Commerce and Industry. Keizaburo Hashimoto, president of the Nippon Sekiyu Co. Ltd., was appointed chairman of the board, and Fusazo Kokura, president of Kokura Sekiyu Co. Ltd., became president. The larger corporate investors dispatched managerial officers to the company.

At the start of the refinery operation, sales and the procurement of crude oil and finance were supported and ensured by the Japanese Ministry of Defense. However, the choice of an industrial site and the question of which technologies to adopt for the refinery operations were major concerns. As the result of cooperative discussions among shareholders, a research and development center was located at the Shimizu plant site in the Shizuoka prefecture, and the refinery facilities were located in the Wakayama plant site in the Wakayama Prefecture.

In September 1939, the production and distribution of oil products in Japan fell under the influence of the national policy promoted by the fuel department of the Ministry of Commerce and Industry. All Japanese oil companies' independent business activities were severely restricted. However, the effects of the national policy were limited in the case of Towa Nenryo (Tonen), which was heavily engaged in munitions production.

In 1941, normal-pressure distillers began to operate in the Wakayama refinery and successfully produced engine starter volatile oil, airplane fuels, automobile gasoline, mineral turpentine, solvent, kerosene, light oils, and heavy oil. From 1941 to 1945, the Wakayama refinery processed 842,000 kiloliters of crude oil, 53 percent for munitions and 47 percent for civilian use. In 1943, a crude oil heating distillery was built at the Wakayama refinery and processed 86,000 kiloliters of crude oil before the end of World War II--77 percent for munitions and 23 percent for civilian use.

On the Shimizu site, research and development activities started as a result of the serious shortage of natural resources caused by the war. The major projects at the research and development center were the substitution for petroleum products of other materials, such as high-octane gasoline developed from artificial oil and lubricants made from raw natural rubber; and the processing of heavy tar oil produced in Southeast Asia and volatile oil, made from pine-tree gum. The construction of the Shimizu refinery was hindered by the shortage of materials under wartime conditions and was not realized on a large scale until 1950.

Postwar Restructuring and Expansion

After the war ended, Tonen experienced a considerable fall in sales when the need for airplane fuel for munitions use ceased abruptly. Three-quarters of Tonen's 2,600 employees were dismissed in 1945. The major board members, including chairman and president, were banned from public duties by the Supreme Commander for the Allied Powers (SCAP) because of their involvement in Japan's war effort, and they were obliged to resign from the company. Nobuhei Nakahara became president. SCAP prohibited crude oil imports to Japan and banned refinery operations on the Pacific coast site. Tonen almost ceased to operate until 1947.

In December 1948, Tonen cooperated with the Standard-Vacuum Oil Company (Stan-Vac), which intended to reenter the Japanese market. To start up its refinery business again, Tonen needed a crude oil supply, distribution outlets, and technical and financial support for production facilities, and a tie-up with Stan-Vac was thought to be indispensable. To acquire the highest production technology from Standard Oil Development Company (SOD), later renamed Exxon Research and Engineering Company, Tonen transferred 51 percent of its ownership to Stan-Vac. In July 1949, oil refining on the Pacific coast site was again permitted by SCAP, and Tonen started operations in 1950.

In the 1950s, Tonen pursued two basic strategies. First, the expansion of production facilities had to take place as quickly as possible to enable Tonen to take advantage of domestic market opportunities. As the strategic importance of its Pacific coast location increased, the Shimizu refinery's production capacity had to increase very quickly. Second, using advanced technology licensed from SOD, the quality of products and the efficiency of refinery processes had to be improved. As the motorization of Japan was expected to take place in the near future, the development of high-octane gasoline and high quality lubricants was necessary. The establishment of production methods was of great importance to Tonen.

In November 1954, fluid catalytic cracking (FCC), a refinery method using catalysts to make fuel oil, was introduced in the Wakayama refinery, processing 4,700 barrels per day. In 1953, Tonen's refining capacity reached 28,500 barrels per day. The Wakayama refinery processed 21,000 barrels per day of crude oil, and the Shimizu refinery processed 7,500 barrels per day, at that time the largest refinery operations in Japan.

Expansion projects continued after this period. In 1955, a new 36,000-barrel-per-day refinery was completed, and another 10,200-barrels-per-day FCC refinery was built in 1956. In 1957, after the completion of alkylation equipment, production volume of airplane fuels reached 90,000 barrels per year, almost equal to the annual airplane fuel consumption of the country. Tonen almost monopolized the airplane fuel market in Japan.

From 1949 to 1957, Tonen's investment in production capacity expansion amounted to ¥12.2 billion. The company made seven issues of stock to finance its expansion. Consequently, the company's equity grew 84 times in this period, from ¥37.5 million in 1950 to ¥3.159 billion in 1955.

1960s Vertical Integration

Tonen's aim in the 1960s was vertical integration into oil-related fields, including transportation of crude oil, new product development, diversification into petrochemicals, and alliance with other industrial enterprises. These changes were achieved in several stages. Tonen founded Toa Tanker Co. Ltd., with a capital of ¥1 billion. Minao Furihata, vice-president of Towa Nenryo, became Toa Tanker's president and in 1961 the company's name was changed to Tonen Tanker Co. Ltd. In the 1960s, transportation costs represented a relatively large proportion of the total cost of crude oil. To bring down crude oil prices, the reduction of transportation costs was essential.

Tonen decided that its technological dependence on SVOC had gone too far, and that independence in research and development activities had to be regained. In 1961, Tonen acquired a 25-acre site, and spent ¥800 million on establishing a research and development center.

Under the policy for promoting Japan's petrochemical industry, enacted by MITI--the Ministry of International Trade and Industry--Tonen diversified into petrochemicals. In 1960, Tonen founded Tonen Sekiyukagaku (Petrochemical) Co. Ltd, with capital of ¥4 billion. Tonen's president Enpei Nakahara was also president of this new company. Steam-cracking and oxyalcohol plants were built in the Kawasaki refinery, and production of ethylene, propylene, and butane began.

In 1958 two joint ventures were established: General Sekiyu K.K., capitalized at ¥1 billion and owned on a 50-50 basis with General Bussan Kaisha, Ltd., which became General Sekiyu Seisei Co. Ltd. in 1967; and Nichimo Sekiyu Co. Ltd., equally owned with Nippon Gyomo Sengu Co. Ltd. By entering into joint ventures, Tonen was able to operate at higher capacity and thus benefit from economies of scale. To finance its expansion the company made seven new stock issues between 1956 and 1962, when it was capitalized at ¥8.9 billion, having grown almost three times over this period.

The next decade, from 1962 to 1972, saw further continuous growth at Tonen. This intensive growth was stimulated by a reorganization of the parent company. In 1962 Standard-Vacuum Oil was split in two and the resulting companies integrated, respectively, with Mobil Oil Corporation and Esso Standard Eastern--now Esso Eastern. Tonen's arrangement with SVOC was transferred to these two companies. Consequently, SVOC's stake in Tonen was split into two stakes of 25 percent each. Both companies supplied crude oil to Tonen and distributed its products under their own brand names and through different marketing channels. Competition between Esso Standard Sekiyu K.K. and Mobil Sekiyu K.K. in the Japanese market gave impetus to the company's growth.

At the Wakayama refinery, the first stage of the expansion project in the Ogake area was completed in 1965, and the second expansion project in the area in 1968. This made the refinery the newest and the largest in Japan. The first stage of the expansion project at the Kawasaki Refinery was completed in 1970. Equity participation in Kygnus Sekiyu K.K. in 1972 boosted the Kawasaki refinery's economy of scale. By 1969, Tonen's total assets reached ¥73.2 billion, and the company was capitalized at ¥14.3 billion.

Challenges in the 1970s and 1980s

In the 1970s, during the two oil crises and severe recession in the Japanese economy, Tonen reduced excess production capacity, cut its costs, and stopped new employment to adjust to slower economic growth. During the oil crisis Tonen recognized that the oil industry in Japan had already matured, and that new fields of business had to be developed. Tonen Technology K.K., established in 1971 as a crude oil reserve company, diversified into computer sciences. In 1977, Tonen Energy International Corporation was established, with its headquarters in New York and a branch in London, to obtain finance for the crude oil transactions of the company.

In 1981 the price for Arabian light oil amounted to $34 per barrel, and the total annual deficit of Japanese oil industry amounted to almost ¥350 billion. Tonen concentrated its efforts on the rationalization of production. Through the successful development of energy-saving technologies, Tonen achieved a saving of almost 220,000 kiloliters--¥10 billion annually compared with the 1973 level. As a result of improvements in its production process and management system, Tonen's business situation gradually improved. From 1984 through the end of the decade, the company's financial statements showed a profit each year. The long-term orientation of management policies resulted in the improvement of Tonen's equity ratio to 60 percent in 1989, among the highest in the Japanese oil industry.

Tonen aimed to develop an intelligent refinery by employing the most advanced information technology and operation backup systems. In terms of new product development, Tonen chose to focus on new energy sources, new materials, life sciences, and information technology. Tonen's major development in the field of new energy was an efficient, low-cost amorphous silicon for electricity, and a clean combustion system--supersonic fuel injection--used in the F3000 racing car. In the field of new materials, Tonen developed and patented a high quality pitch-based carbon fiber with a host of applications in airplane bodies, automobile frames, and mechanical parts. In the field of life science, Tonen established a reputation as a pioneer in genetic engineering and cell technology, including a leukemia vaccine, which enabled a double-digit increase in the general potency of a wide variety of vaccines. In the field of information technology Tonen benefited from years of experience in computerized operational control and plant maintenance systems. For this purpose, Tonen System Plaza Inc. was established in 1985.

1990s and Beyond

The 1990s have been a more troubled time for Tonen. In addition to a February 1994 fire at the Kawasaki refinery which cut into the company's 1994 earnings, its safety record was further tarnished by a May 1995 gas leak at the same refinery. Most importantly, however, behind-the-scenes clashes between Tonen's management and its Exxon and Mobil major shareholders came to light in the early 1990s that raised doubts about Tonen's future.

According to an article in Tokyo Business Today, the roots of the conflict were found in Tonen's diversification efforts and conservative management philosophy. Tonen had entered a period of slow growth in the 1980s because of the mature nature of the refinery business. Under President Nobuyuki Nakahara, the company began to build up larger cash reserves to save for future investments in new growth areas. But Nakahara began to be stymied in his efforts to diversify by Exxon and Mobil, as these shareholders pressured him for higher dividend payouts, which in turn started to draw down Tonen's cash reserves. According to some analysts, the oil giants in addition to wanting a higher return on their investment also wished to keep Tonen from diversifying into areas where it would compete with them.

From 1988 into the mid-1990s, Tonen had in fact invested little in its existing facilities or in developing new ones, with its late 1994 decision to add an H-Oil hydroconversion unit to its Kawasaki refinery--the first such unit in Japan--being one of the exceptions. Meanwhile, Tonen's dividend payout ratio, historically in the 30 to 40 percent range, exceeded 90 percent from 1988 to 1991, then surpassed 100 percent starting in 1992. Nakahara reportedly fought over the increased dividends, but to no avail, and was eventually pressured to resign early in 1994.

Nakahara's successor--Tamehiko Tamahori, who had been president of Tonen Tanker K.K.--developed a new corporate strategy to become a "World-Class Refiner." Therein he outlined four challenges for the company: attaining global cost-competitiveness through reengineering, employing world-class technology such as the H-Oil unit, offering "full cooperation" with Exxon and Mobil, and pursuing growth opportunities after "carefully evaluating the business risks." It appeared then to some analysts that Tamahori intended to be even more cautious about diversification and would work more closely with Exxon and Mobil than his predecessor.

Japan began to deregulate the oil industry in the mid-1990s, which posed additional dilemmas for Tonen as it headed toward the end of the century. Deregulation would mean increased competition, which might depress the company's earnings even further. Clearly, the company faced further diversification moves if it were to survive the competitive climate, but the question of whether Exxon and Mobil would allow such movement remained unanswered. Nevertheless, it was reported in early 1996 that Tonen was considering a move into the power generation industry, an indication that it was beginning to seek growth areas that would not compete with Exxon and Mobil interests.

Principal Subsidiaries: Kygnus Sekiyu K.K. (50%); Kygnus Sekiyu Seisei K.K.; Tonen Chemical Corp.; Tonen Tanker K.K.; Tonen Properties Inc.; Tonen Sogo Service Co. Ltd.; Tonen System Plaza Inc.; Tonen Technology K.K.; Tonen Energy International Corp. (U.S.A.).

Additional Details

Further Reference

Asai, Hideki, "Gaiatsu in the Boardroom: U.S. Oil Companies Run Tonen as They Like," Tokyo Business Today, May 1994, pp. 22-24.The Course of Tonen's History, Tokyo: Tonen Corporation, 1980.Hardy, Quentin, "Tonen President's Resignation Reflects Culture Clash Between Japan, U.S. Firms," Asian Wall Street Journal Weekly, January 24, 1994, p. 3.Park, Christopher, "Uncertain Start to Japan's Deregulation: Refiners Look to Diversify," Platt's Oilgram News, April 2, 1996, p. 1.Sterngold, James, "Lesson in Shareholder Power for Japanese Refiner," New York Times, January 17, 1994, p. C2(N), p. D2(L).Thirty Years of Tonen: From 1939 to 1969, Vols. 1-2, Tokyo: Tonen Corporation, 1971.

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