Shin-Etsu CEO Says: Let Them Go To China

At a time when China is being described as the world's most attractive investment destination, Chihiro Kanagawa, president and chief executive officer of Japan's Shin-Etsu Chemical, offers a contrary opinion.

Country risk is not a risk that the management of a private company should take on behalf of its shareholders, he believes. And although China had a communist revolution, it has not experienced a "social revolution" as France did in the 18th century or Japan early in the past century, he says.

Kanagawa believes that, without a civic revolution leading to the respect of individual rights, China lacks "the really fundamental characteristic of the modern capitalistic world, based on the individual, and the dignity of the individual."

A study by management consulting company A. T. Kearney in September ranked China as the world's most attractive investment destination for multinational companies; indeed, Kanagawa acknowledges that competitors such as Formosa Plastics are investing there. But he simply shrugs it off.

"Let them go," he comments. He notes that Shin-Etsu is especially unlikely to invest in polyvinyl chloride in China because the polymer is too closely tied to crude oil and ethylene, the prices of which seem to be largely determined by government organizations in China.

It could well turn out to be a mistake not to invest in China now. "I fully agree that the country will grow," Kanagawa says. "But my concern is maybe five to 10 years ahead." He explains that it is not proper for him to make a major investment in China if Shin-Etsu's future profitability comes to depend on the country's stability.

But Kanagawa adds that he remains open-minded about China. "I have no interest in major investments in China at this moment, but I may change later," he says. In fact, in June, Shin-Etsu announced the formation of a silicone manufacturing joint venture in the coastal province of Zhejiang capitalized at a modest $3 million.

The joint venture is likely an experiment. The bottom line for Kanagawa is that China presents a country risk, and that this is the kind of risk Shin-Etsu cannot take. "Some very fundamental problem may occur, and then there is no way to escape," he says. "I do not have a mandate to put my company in a ruined situation."

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