This article first appeared in The Edge Malaysia Weekly on October 31, 2022 - November 6, 2022

JAPANESE pulp and paper giant Oji Holdings Corp is not slowing down on its expansion despite weaker demand for paper packaging as recession fears and inflationary pressures weigh on economic activities globally, coupled with intensifying competition.

President and group CEO Hiroyuki Isono says the recent weakness in demand is likely to be a short-term headwind and the prospects for paper packaging remain bright, especially with rising environmental consciousness.

“Forest resources [which are used for paper packaging] are renewable, and we see a trend moving from plastic packaging to paper packaging. Those are some of the advantages we have right now,” he tells The Edge in a recent interview.

Although demand weakness weighs on product prices, Isono says the main challenge faced by Oji is elevated energy and logistics costs, which the management is already mitigating via cost-saving measures by increasing efficiency in production.

“This has put huge pressure on Oji’s business earnings. We have been deploying our operational expertise to our operations in various countries and are increasing efficiency to respond to cost pressures.

“However, the recent price hike is not at a level that can be absorbed by our efforts alone. Therefore, we have been communicating with our customers to obtain their understanding of the situation,” he says, adding that Oji is transferring some of these cost pressures to customers in Japan, Europe and the US.

The company’s operating profit decreased 44.5% to ¥15.6 billion (RM505 million) for the first quarter ended June 30, 2022 (1QFY2023), from ¥28.1 billion a year ago, owing to the significant impact of higher raw material and fuel prices in spite of the product price revision and increase in sales volume.

Net sales rose 16.5% to ¥399.2 billion in 1QFY2023, from ¥342.7 billion in 1QFY2022.

“Our goal for 2030 is to increase net sales by ¥1 trillion to ¥2.5 trillion or more through the development of new products and new materials, mainly on environmentally friendly products; acceleration of M&A (mergers and acquisitions) overseas; and strategic investments in new plants,” says Isono.

For FY2022, Oji’s net sales grew 8.2% to ¥1.47 trillion from ¥1.36 trillion, while operating profit rose 42% to ¥120.12 billion from ¥84.79 billion.

As a company originating from Japan, where the population is declining hence limiting room for growth, Isono says Oji has been banking on global expansion — especially in Southeast Asia and India — since over a decade ago in order to grow its business.

He says the company’s strategy of investing worldwide has also been timely, amid rising geopolitical risks from the Taiwan Strait and ongoing Russia-Ukraine war.

“Oji has been launching new factories one after another in Southeast Asia and India, and we are aiming for automation by introducing the latest equipment and systems, which will enhance production efficiency with optimised labour,” he continues.

Apart from Southeast Asia and India, Isono says Oji is also looking at growing its presence in the Oceania region.

“The Australian market, the population is still growing there, so the market is very attractive. We do have operations there, [so] if there is a chance, we would like to expand our business in Australia also,” he says.

Oji’s venture into Malaysia started when it bought a 75% stake in GS Paperboard & Packaging Sdn Bhd (GSPP) from private equity firm CVC Asia Pacific Ltd in April 2010. The consideration was not disclosed.

Japanese trading giant Marubeni Corp joined hands with Oji back then to buy the remaining 25% stake in GSPP. Marubeni exited the venture in 2018 and GSPP is now wholly owned by Oji.

Oji, which is already the largest paper and packaging manufacturer in Malaysia, has also invested RM1.3 billion in building a new facility (PM3) for manufacturing containerboard, which will bump up the group’s annual capacity from 300,000 tons to 750,000 tons.

Since 2010, Oji has invested over US$1 billion (RM4.7 billion) in Malaysia with 18 business locations within the country.

“With the launch of PM3, we can further develop Oji’s Malaysian operations into an integrated operation of paper and packaging, further strengthening our business position to compete in the marketplace,” he says.

Isono says the China government’s policy of banning the import of wastepaper has triggered big capital investment by Chinese paper manufacturers in Malaysia in recent years, intensifying competition.

“In other words, together with many business opportunities, we are also facing intense competition from home and abroad. Under these circumstances, we have to compete not only with existing domestic competitors but also with new Chinese companies.

“The launch of GSPP’s third paper machine is one of our solutions to welcome the business opportunities and overcome the challenges. We intend to compete with the strength of our integrated operation of paper and packaging with our superiority in terms of quality and service,” he explains.

Isono says there is also room for further improvement in the group’s operational efficiency in Malaysia, as some of its factories here were built in the 1990s. “Some factories require renewal investment because of their ageing equipment. At the same time, we need to invest in automation to optimise manpower.”

At the end of this year, Oji’s Malaysian production executives will visit the group’s corrugated carton box factories in Japan, as part of an effort to optimise its workforce in the country and the rest of this region, he adds.

“Our standard number of employees in the latest, single corrugated factory in Japan is approximately 80. The average number of workers in our Southeast Asian factories is around 300 in a single factory, and therefore we believe there is much room for manpower optimisation.

“We actually have rich experience in solving labour shortage problems over the years in Japan. Today, we are investing and will further invest in automation to optimise manpower in our factories to overcome the labour shortage challenges.”

Globally, Isono says Oji is targeting to reduce 70% of the group’s greenhouse gas (GHG) emissions by 2030 compared with 2018, and aims to be net zero carbon by 2050.

He adds that the group plans to offset half of its GHG emissions by increasing net carbon dioxide (CO2) absorption through its tree plantation operations.

“Currently, we own 575,000ha of forests worldwide. Of this, the overseas plantation area is 258,000ha and the goal is to expand this to 400,000ha,” he continues.

The rest of the GHG emissions will be reduced through the gasification and suspension of domestic coal boilers, coupled with expanding the use of renewable electricity and energy conservation.

“Apart from recycling forests through afforestation and sound forest management, we also recycle the water required in the manufacturing process, and we collect and recycle the paper we have released to the world as products,” says Isono.

“We are building a sustainable business model. We aim to realise a sustainable society by promoting the above three types of recycling activities.”

Based on data from the Companies Commission of Malaysia (SSM), GSPP’s profit after tax (PAT) more than doubled to RM280.7 million last year, from RM111.22 million in 2020, while revenue grew 26.5% to RM1.14 billion from RM902.98 million over the same period.

GSPP had total assets of RM2.25 billion as at end-2021 versus total liabilities of RM487.92 million, translating into a net worth of RM1.765 billion, data from SSM shows.

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