Online Extra: Avoiding "the Wrong Decision" at Kobe

After clawing its way into the black, CEO Yasuo Inubushi is moving warily. Investments, he says, must be winners
The BusinessWeek 50

Kobe Steel President and CEO Yasuo Inubushi is on a mission to convince people that all steelmakers aren't alike. While the industry's giants, such as Arcelor of Europe and Nippon Steel of Japan, are obsessed with economies of scale, Kobe Steel, ranked only 29th globally, is setting very different targets for itself. After a price war for commodity steel hit Kobe hard in the 1990s, it drastically cut costs and sought out new markets for its steel, copper, titanium, and aluminum.

The results are in -- and they're promising. Following a $248 million net loss in 2002, Kobe's earnings improved three years in a row, to $447 million for the year ended in March -- the highest in nine years. It expects to do even better in 2005. On Sept. 8, Kobe forecast a $653 million net profit on $14.3 billion yen in sales, its best sales tally in its 100-year history.

BusinessWeek Tokyo Correspondent Kenji Hall spoke recently with Inubushi about his drive to remake Kobe as a niche producer of specialty metals. Edited excerpts of their conversation follow:

Where does Kobe fit in an industry dominated by steelmaking giants?

We don't want to be just a bulk-steel maker. Arcelor is aiming for 100 million tons of steel [per year]. In Japan, Nippon Steel and JFE are each making 30 million tons. We only make about 10 million. If we went up against Nippon Steel or JFE, it would be like a child facing a sumo wrestler. Instead, we want to be the top in several niche fields. For example, steel springs make up a small piece of the entire steel market. But in the global market for auto-engine and suspension springs, you can't ignore Kobe Steel.

Why isn't Kobe investing more in new production lines?

We need to be defensive. For the past few years, we've had to cut costs and reduce assets. So we're now at the stage where we have to carefully reassess which businesses should have the priority to grow. And we don't want to make the wrong decision.

How has Kobe girded itself to ride out price swings?

We want to have the type of long-term relationship with companies that generates steady demand and avoids the severe ups of downs that come with shorter-term orders. Steel is widely seen as a commodity. But that image fits only the half of steel production in Japan that goes to the construction industry.

The other half, which goes to manufacturers, includes different specialty products. When you make a spring for a car, you have to produce it to withstand pressure without weakening. That's different from making a run-of-the-mill steel rod. The commodity market is what we've been getting away from. There are fluctuations in the business of supplying materials to manufacturers, such as auto maker and electronics makers, but it's not as bad as on the commodity side.

How important is Japan's auto industry to Kobe?

The auto industry's two targets now are to make lighter, more fuel-efficient cars. There's also a need to make some parts easily collapsible to lessen injuries from collisions with pedestrians. So we're pouring resources into R&D and working with auto makers to come up with different materials for cars -- both stronger steel to withstand a crash and easily collapsible aluminum to absorb impact.

What about the impact of the "digital economy"?

Our market share in making aluminum disks for hard disk drives is perhaps the biggest in the world. Or take flash memory chips --we have a big share in making the copper line connecting the semiconducting element to the rest of the device. And we have a near monopoly in the miniscule metallic connectors used in LCD panels.

What else does Kobe do beyond metal making?

There's one other sector of our business that doesn't fluctuate much: We supply wholesale electricity from our independently run power plant to a local utility company. Sales are about $522 million per year and operating profit is around $174 million. And the utilities company we supply guarantees the amount it buys every year -- even if consumer demand for power falls.

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