TOKYO -- With the introduction of Sifone, a shampoo brand designed for consumers in China, Kao Corp., Japan's leading household and personal products manufacturer, has established a toehold on the Asian continent.
"We are working to expand our operations in the growing Asian market by making products to match local needs," says Kao's president, Fumikatsu Tokiwa.
That strategic approach led Kao, based here, to form a joint venture in Shanghai last year that is now manufacturing hair care products for the Chinese market.
Kao began making and selling its Sifone-brand two-in-one shampoo and conditioner in January, at 21.5 yuan ($2.52 at current exchange rate) for a 200-milliliter bottle. The shampoo is formulated to be effective in cold water, an important attribute in rural areas of the country.
Kao, which posted consolidated worldwide sales of $7.7 billion during fiscal 1993, had foreign sales of about $1.4 billion, roughly divided in thirds among the United States, Europe and Asia, says Masaharu Igashima, spokesman for the company.
"Among them, business in Asia has been showing a double-digit growth for recent years," he says.
The joint venture in China is a good example of Kao's aggressive overseas strategies. The company, called Kao Corp. Shanghai, is primarily concerned with producing and selling shampoo and other products, and it began production and sales in January 1994.
The venture began with initial capitalization of $13 million, of which Kao contributed 75% in the form of cash investment. The balance came from Shanghai Yu Long Enterprise in the form of property investment.
The production target for the first fiscal year is 3,000 tons of shampoo, and the projected sales for the first year is $20 million, according to the firm, but "the sales at 15 department stores in China are increasing more than expected," says Igashima.
Kao started the Chinese company with about 100 employees, according to the company. Half that number work in production and the remainder in management and sales.
The selling territory for Kao Corp. Shanghai will be confined within China for now, but the company says it expects to export products to other Asian and Middle Eastern countries in the future.
Indeed, analysts see the establishment of the Chinese arm as Kao's launch pad for expanding its household products business
throughout the rest of Asia.
"The Japanese market cannot be expected to grow dramatically from now on," says Sachiko Hanaoka, an analyst at Daiwa Institute of Research, Tokyo. "On the other hand, markets in Asia, mainly in Southeast Asian countries, will grow more and more. Kao has been active in the Japanese market, where consumers are highly quality-conscious, and it can also be active in Asian countries," she adds.
"If a company launches in the European or U.S. markets, it has to introduce the products of better quality or at lower prices. Since the Asian market is not so competitive for now and is growing, Kao aimed at it," Hanaoka explains.
That opportunity is not lost on Kao's competitors, which are rapidly turning China into the playing field for a global showdown. Japanese rival Lion Corp. has entered the Chinese market selling dentifrice and detergents, and reportedly has plans to market cosmetics and shampoo there as well.
U.S. manufacturer Johnson & Johnson has been selling its line of baby care products -- lotions, powders and oils -- in Chinese department stores.
"Production and sales in China is assumed to be one of the measures to compete with Procter & Gamble Co. in the Far East market," says Yoshihisa Kitao, an analyst at Yano Research Institute, Tokyo. Cincinnati-based P&G is the world's largest manufacturer of soaps and cosmetics, according to a July report by the Associated Press.
China's markets may be less competitive than Europe or the United States, but Kao is facing strong entries from P&G, J&J and other foreign brand marketers there. From Japan, there are Shiseido, Rose, Naris and others. Reports identify Unilever, and S.C. Johnson & Son among other Western household and personal care manufacturers now doing business in China.
In its mature home market, Kao succeeded in sustaining sales and profit increases for the 14th consecutive year during fiscal 1993, despite a recessionary economy that hurt many other Japanese consumer products companies.
For the year, Kao reported net profits increased 4.4% to $245 million, while sales rose 2.8% to $6.4 billion. Kao attributes its sales health to the fact that the company deals in products used in everyday lives. Says Kao President Tokiwa, "Throughout its history, Kao has sought to contribute to the comfort and individual needs of consumers, and help them enjoy fuller lives."
Household and personal care products account for 87.5% of its total sales. Kao also controls "around 17% of the global market" for computer diskettes, which make up much of the remaining sales, according to Igashima of Kao.
While 1993 consolidated (worldwide) net sales increased only 0.3% to $7.7 billion, up 0.3% from a year earlier, consolidated net income jumped 8.7% to $221 million. "This was mainly due to rationalization efforts throughout the entire company, which contributed to lower costs," according to the firm.
"In the North American and European markets, we are laying the groundwork for new activities while reinforcing existing operations in those regions," Tokiwa adds.
Another example of the company's international strategy is Andrew Jergens Co.'s new products. Jergens, an American personal products company that Kao acquired eight years ago, introduced Refreshing Body Shampoo, a liquid body soap, in 1993. After Kao bought Jergens, "the firm developed Jergens' constitution into a muscular one," says Igashima.
"Kao rationalized the factories in Cincinnati, Ohio, and established the facility for research and development. In order to develop new products, Kao and Jergens have to collaborate with each other, since many things such as climate, skin, hair and customs are different between Japan and the United States," says Igashima. "The liquid soap market in the states is not fully developed, but we are happy to launch this new market with our products of high quality," he adds. All Jergens products for American consumption are manufactured in the United States.
"It is too early to judge if the liquid soap will succeed, because it has been only half a year since Jergens introduced it to the market. But we find that lots of customers repurchase Jergen's liquid soap. Other products will be introduced as well in the future," says Igashima.
As it vies to become an international giant in household products and other chemical merchandise, market observers wonder how Kao's management will perform on the global stage.
According to Kitao of Yano, Kao is being challenged by Japan's economic difficulties, stiffening local and global competition, the increase of private brands, and now its launch into Asia. He contends, however, that Kao will be able to translate its management methods into ones that also can function in the global business circumstances.
Shuji Kondoh, president of JMA Consultants, a Tokyo research and consulting company, agrees. "Kao leads the new way of Japanese management. It thinks highly of human resources, but also makes progress on information systems and intellectual productivities, including creative works. It will definitely work overseas as well as in Japan," he says.
"What Kao has but others don't is 'kakushin' power," Kondoh says. Kakushin, which translates roughly as "re-engineering," has three components, he says.
"One is product innovation. Kao always makes efforts to offer the best and unique products to consumers, and to do so, they have been doing their best on product development and improvement on various techniques," Kondoh says.
"The second one is process innovation, in which the company rationalizes the whole process, from sourcing to retailing, for the consumer's satisfaction. Kao tries to find the most effective process from the global point of view," he notes.
"The third point is mind innovation. Kao gives the employees the circumstance where they encourage themselves to think that each of them is professional."
