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Investment > Korea Success Story ]
 mong the many success stories of foreign investment in Korea, none are more dramatic or satisfying than those involving companies that are not only brought back from the brink of financial disaster but also go on to virtually reinvest themselves and become leaders in their business areas. A prime example is Toray Saehan Inc. (TSI) a chemicals material joint venture created in December 1999 by the former Saehan Inc. of Korea and Toray Inc. of Japan, and facilitated by a refinancing effort that had the support of the Korean and Japanese governments. Like many companies across Asia at the time of the continent-wide crisis toward the end of 1997, Samsung affiliate Saehan found itself faced simultaneously with the twin hardships of an unmanageable debt load and dwindling demand from its client base.
Intervention by Toray has since boosted the successor company to the position of a global powerhouse in its core competencies of polyester (PET) base film, polyester (PET) filament, and polypropylene (PP) spun-bond nonwoven fabric. TSI’s PET film is used worldwide under the Excell brand in products as diverse as video/audio tape, notebook computer screens and food packaging. TSI’s Eslon brand polyester (PET) filament is used extensively for weaving and knitting applications and is renowned for its excellent spinning and dyeing properties. Meanwhile, TSI’s PP spun-bond non-wovens under the Jesbon label find uses in packaging, hygiene products, farming, gardening, bedding, household goods, clothing, wallpaper, filters, and printing; and the company’s polyester (PET) spun-bond marketed as Techbon, is used in athletic footwear as well as a host of civil engineering, agricultural, and industrial applications. Such has been Toray Saehan’s record of quality, delivery and ability to add value to downstream operations that a recent survey of customer satisfaction levels placed the company no. 1 in all its major product categories for the first time.
Toray is a multinational chemicals giant with interests in the fiber and textile, plastics, film, pharmaceutical, medical and information technology (IT) industries and has a presence in Asia, Europe and North America. What was the attraction of Saehan to Toray when it was such dire economic circumstances? How did it overcome its difficulties? Why did the case attract such high-level government attention and how has it risen to such prominence in the chemical materials sector?
Toray Saehan president and CEO Young-Kwan Lee explained that there were two major motivations in the decision to invest in ailing Saehan. “Even prior to the joint venture, Toray had had a long partnership with Saehan, so when Saehan faced serious financial problems, Toray management thought of ways to support the Samsung subsidiary,” he said. “One solution was to takeover Saehan’s No. 1 and No. 2. plants in Gumi, Gyeongsangbuk-do, since from the perspective of Saehan, Toray seemed to have the kind of cost competitiveness, quality competitiveness, and talented workforce that held great potential for Toray. ”
On more practical level, Toray perceived that Saehan held the kind of assets that would give the Japanese multinational a strategic advantage. “Toray was looking to Saehan’s 90,000-ton per year film capacity, since this was one the targeted areas the company was trying to grow as a strategic business for the future,” said Mr. Lee. “So by acquiring Seahan they saw a way to become a world market leader in those areas, that is, polyester film as well as spun-bond, a vision that has since been realized.”
STIMULATING MUTUAL INVESTMENT He pointed out that Toray’s film capacity of 240,000 tons added to Saehan’s 90,000 tons amounted to 330,000 tons or one-third of annual world demand of 1 million tons. “This would enable Toray to gain global leadership in this area and the same held true of spon-bond nonwoven fabric,” said Mr. Lee. Underpinning the decision to invest was Saehan’s manufacturing efficiency in synthetic filaments, a base material of the textile industry, and the high standard of its products. “TSI’s filaments were highly competitive regarding cost and quality, and Toray was fully aware of this,” said Mr. Lee. “When you visit the TSI plants you can see the whole process is fully automated. TSI’s filament has always been the best.” While TSI’s production costs are 10 percent below those of the competition, its pricing is 5 percent higher.
Mr. Lee explained that Toray laid down strict rules for its involvement in order to overcome the financial difficulties it had inherited from the original company. “Toray wished to set terms so that no problems would occur with the joint venture company,” said Mr. Lee. “The basic conditions were a debt/equity ratio of 50 percent, which means a debt ratio of 100 percent. As was expected, the financial structure has proven extremely robust, so from the beginning, TSI experienced no financial problems.”
With a combined equity of $250 million owned on a 70/30 split between joint venture partners Toray and Saehan, a matching debt portion was sought and granted under unusual circumstances. At their October 1998 summit meeting, then Korean president Kim Dae-Jung and Japanese premier Keizo Obuchi agreed to form a $3-billion fund to stimulate mutual investment. Provided jointly the following year through the Japan Bank for International Cooperation (JBIC) and the Korea Development Bank, the $250 million debt granted to the fledging joint venture of Toray Saehan Inc. was one the first disbursement from this fund, and as such, opened a new chapter in Korean/Japanese cooperation.
Toray Saehan has undertaken two major expansions since the joint venture was formed in 1999. The first - the expansion of the PP spun-bond manufacturing capacity - took place in two phases. An investment of 30 billion won was made while the ink was still wet on the joint venture agreement in December 1999 to expand spun-bond output by 10,000 tons. The second expansion, begun September 2002 and involving a 50-billion won investment, is slated for completion by October 2003 at the time of writing and will provide an additional annual spun-bond capacity of 15,000 tons. When completed, the new addition will make TSI’s spun-bond facilities the largest in Asia. Another area of expansion is in products to supply Korea’s burgeoning IT sector. The company made a 15-billion won investment in the manufacture of IT-sector products in 2002, and will make an additional investment in 2003. The range of products will include items for flat panels display (presently imported from Japan), plus battery and semiconductor components. “Our sales to the IT sector will amount to 25 billon won this year, and we are predicting that they will increase to 100 billion won by 2008,” said Mr. Lee.
 A SHIFT TO HIGHER-END PRODUCTS, MARKETS In the case of spun-bond, the heightened demand comes from the use of disposable diapers, for which the nonwoven material provides the waterproof cover. In fact, 90 percent of all spun-bond material produced by Toray Saehan is used in disposable diapers. “We are currently aware that consumption is increasing,” said Mr. Lee. “Although the birth rate in Japan and Korea is not increasing - and we can say that these markets are saturated - the potential lies in China since demand there continues to rise.” He said world trends indicate that once a national GNP per capita surpasses $1,000, parents start using disposable diapers for their children. “When you look at coastal cities of China,” he continued, “income per capita has surpassed $6,000 and parents there have already started to use disposables. This means future demand for diapers in China will be exponential.” He also believes the aging society phenomenon of Japan and Korea will work to Toray Saehan’s benefit. “Many elderly people in Japan have started using diapers and we feel same trend will occur in Korea,” he said.
Toray Saehan has, in fact, recorded impressive production and market gains since the joint venture was formed. Whereas production the Excel brand of film under TSI was 70,000 tons per year, the company is predicting sales of 90,000 tons in 2003 that translates into an increase in market share of almost 30 percent. Second ranking product Eslon filament has not made substantial gains but the lines to produce Jesbon/Techbon spun-bond products have expanded from three to five since 1999. “This means our market share as well as output will increase,” said Mr. Lee. “Previously, we produced only some 20,000 tons of spun-bond but we are more than doubling capacity to almost 45,000 tons.”
He emphasized that an important factor in this growth is that compared to the Seahan period, TSI produces more high-end and technically advanced products and sells them at higher prices. “Also, our target market has changed,” said Mr. Lee. “Previously we focused on Northeast Asia and China. Now, these areas constitute hardly any of our markets. Most of our products are sold instead in North America, Europe and Japan. You can say we’ve seen a total shift in the market map’ of TSI.” In the process, Toray Saehan has become a global supplier with 70 percent of its production destined for overseas. It is now the world’s fifthlargest film producer and Asia’s second largest. TSI is also Asia’s largest and the world’s fifth-largest spunbond producer. (Taking the Toray group as a whole, it ranks as Asia’s no. 1 film producer). Mr. Lee cited the transfer of technology from Toray in TSI achieving significant market and customer satisfaction gains. “It’s Toray’s technology that has played a vital role in increasing our market share and the success of TSI in Korea,” he said. He added that it was the group’s advanced technology and knowhow, successfully configured into Korean facilities, that has enabled the company to provide greater satisfaction to customers in terms of cost, quality and delivery. “This is the most remarkable change in our relations with our customers,” said Mr. Lee, “and it’s related to the switch of our target market to the more advanced countries, because we have been able to improve our product quality.”
STAYING AHEAD OF CHINA No business is without challenge. In the case of Toray Saehan it is manifest in the form of the competitive power of China but it is a challenge that the company is more than ready to meet. “First off, the best thing we can do is to make better products than elsewhere in Northeast Asia or China,” said Mr. Lee. “To do this you have to be more competitive in terms of cost. Second, you have to have better quality, and third, you must advance your technology to develop new products faster than the competitors.” Because labor costs in China are only one-seventh those of Korea the only solution open to Toray Saehan is to automatize its processes and minimize the manpower being used. On this topic, visitors to TSI’s Gumi plants are struck by the relative scarcity of workers. Given these competitive pressures and to prepare for any kind of changes in industry itself, it is thus vital for Toray Saehan to develop new forms of business and new items. “This is why we are planning investment and why we are already investing in the IT, biotechonology and nanotechology areas,” said Mr. Lee.
 Localization has worked for Toray Saehan on two fronts: in terms of local sourcing, and in terms of management. Whereas at one time the company relied on imports from the United States or Japan because local products were not of the right quality, the bulk of materials are now sourced locally. “The two major materials the company uses in making polyester are terephthalic acid (TPA) and ethylene glycol (EG),” said Mr. Lee. “Regarding TPA we now procure it 100-percent domestically. For EG, we procure one-third domestically and two-thirds from overseas through Toray’s global sourcing network.” While TSI previously had to incur costs through managing a large volume of inventory, localization obviated this cost so the company was able to lower overall product prices.
Localization has also been a proven success at TSI where all the top management is Korean. Describing localization among multinationals as a global trend, Mr. Lee said that in order to do business in Korea one has to be well aware of the market situation and have a good personal network, especially with the authorities. “It’s also important to be fully aware of mindset of the local people - one example is labor management relations,” he explained. “So, if a foreigner first comes into the company and tries to understand all these particular situations, it can not only be slow going but also very challenging.”
Meanwhile, company insiders say it is testimony to the confidence that Toray has in Mr. Lee in appointing him to be CEO of TSI, since it is rare for the founding CEO in a joint venture to be a local person. This confidence is based on his vast experience in factory establishment, product development and planning during his career with Saehan, which he joined on graduating in chemical engineering, and has since been borne out by TSI’s continued sterling performance. So valued is Mr. Lee’s counsel is that he has been appointed to the board of the Toray Group.
Mr. Lee paid tribute to the professionalism of TSI’s employees (who stay with the company for an average of 12 years) in spurring the development of high-end, advanced products. He also pointed to the regard that the employees have for their company. “We do have a union but unlike other companies, ours is very cooperative and one of the biggest factors in the failures of foreign-invested companies is conflicts with the labor unions,” he said. “This is not the case with TSI and I think that these two factors have been the biggest contributors to our success.” TSI was the only foreign-invested company to win a Ministry of Labor New Labor & Management Culture Award in 2002.
The near-term vision for TSI is to boost sales revenues from their current level of 500 billion won to 1 trillion won by 2008, and net income from a projected 50 billion won in 2003 to 130 billion by 2008. The company’s strategy will be to maintain its edge in its existing core areas of film, spun-bond and filaments. “We’re planning to secure our market leadership by expanding or rationalizing our facilities as well as enter new areas on the strength of Korea’s technological prowess, namely IT, BT or NT components,” Mr. Lee said. “It doesn’t mean we will launch a vast project. What it does mean is that we will enter these related areas based upon our core competences.”
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