Chihiro Kanagawa, for many years a top executive at Shin-Etsu Chemical, passed away at the age of 96.

I had been aware of him for some time and was familiar with his books, as he was a prominent manager who led the company to the top market capitalization among Japanese chemical manufacturers. Thumbing through books one day, I found two books titled “In Crisis, Managers Must Fight!” and “Ever Present Battlefield” toward the back of the shelf. It’s been a while since I’ve read them, but for a manager who has accomplished amazing things, there was nothing that inspired me to underline or highlight it. In other words, there was no information that to me was eye-opening, just general stuff that managers commonly write about in their books. Examples include the line, “Always be passionate and devoted to your work, and thoroughly repeat ordinary things without letting up,” which is not exactly breaking news. He did not proffer a noble philosophy like the late Kazuo Inamori, the renowned entrepreneur, nor did he put a great deal of effort into educating the younger generation. In this sense, he may be a modest man, but his achievements are no less impressive than those of Mr. Inamori.

Today, Shin-Etsu Chemical holds the world’s top market share in silicon wafers, a key material in polyvinyl chloride and semiconductors. Apparently, these are marketable products whose prices are highly vulnerable to changes in economic conditions. Given this, how is it that the company has grown to become one of the world’s leading chemical manufacturers? I offer a rough, totally hypothetical synopsis, though it is based on quite a bit of thought.

In order for a company that manufactures products greatly affected by market conditions to survive, it is important to 1) continue to improve cost competitiveness through comprehensive streamlining, and 2) boldly take risks by undertaking R&D and making capital investments even when the economy is in recession and demand is on the decline. While 1) is a necessary element for any company to win and stay in business, in the market for such products, perhaps 2) is also a very important but a bit difficult for a corporation to execute. In the case of marketable products, a recession and a decrease in demand will bring prices down. Naturally, profits will fall as well, and most companies will tend to say, “Let’s just hang in there and see how the situation develops.” There was no atmosphere that really inspired discussions concerning new investments, and where there was, such talks were shelved. The idea was to stand pat until the economy improves. However, waiting for the next favorable set of conditions won’t lead to growth in market share, because competitors will move in kind. On the other hand, what if we boldly invest despite the economy heading into a trough of declining demand? Risk is naturally greater, but a system can be quickly established to ensure a large, stable supply of products rather quickly as the economy subsequently picks up steam. Investments made during an economic downturn would also lower costs, which would in turn allow the company to wrest market share away from other companies through stable supply and price advantage. Due to the cyclical nature of the economy, companies like Shin-Etsu Chemical that act in such a manner will continue to capture market share, become price competitive, and so on. This is how truly outstanding companies are created.

Take, for example, semiconductors, a typical marketable product: Until the 1980s and early 1990s, Japanese companies such as Hitachi, Toshiba, NEC, and Fujitsu boasted dominant market shares. Today, however, the leading semiconductor manufacturer is Korean firm Samsung, with Japanese firms conspicuously absent from the top. The semiconductor industry has a habit of repeating the peak-and-trough cycle once every four years or so, and this is referred to as the silicon cycle. While South Korean and U.S. companies—which have been boldly undertaking R&D and capital investment with an eye toward the next era amid the economic trough—reigned supreme, the fall of Japanese companies from the upper echelon was likely due to their inability to do so for a variety of reasons (on which I will not elaborate here). If semiconductor manufacturers had leaders like Mr. Kanagawa, at least one Japanese company might well have survived.

Currently, Taiwanese company TSMC is the world’s top foundry in terms of market capitalization in the semiconductor industry as a whole. Like Shin-Etsu with Mr. Kanagawa, under the excellent leadership of founder Morris Chang, TSMC has made appropriate investments during the peaks and troughs of the silicon cycle (this may, of course, be only one of the factors of success). Samsung’s Lee Kun-hee probably shared this. An owner (or a manager with exceptional leadership ability who can act as an owner) who is able to see a bit further into the future than those around them will boldly take risks. It is assumed that the current structure of the industry was created after long experience with economic ebb and flow.

This is why the presence of Japanese companies today has been weakened. Last year, however, we learned through the news of the birth of a new domestic semiconductor manufacturer called Rapidus. Tetsuro Higashi, who long served as the chairman, president and CEO of Tokyo Electron, a major semiconductor manufacturing equipment company, has assembled a team at Rapidus to tackle the challenge of producing cutting-edge semiconductors. While this is likely driven by semiconductor security-like national agendas, the challenge accepted by these people, who know this industry inside and out, is one of the most exciting I have seen in some time. And, though success or failure will not be determined in the near future, it is hard to say that Japanese companies will not return to prominence in the next three decades or so. I hope that, as Mr. Kanagawa did with Shin-Etsu Chemical, they can really take the world by storm.

Hirotaka Shimizu
Chairman and CEO
Kamakura Shinsho, Ltd.