Kanagawa is one of those people who don't slow down as they get older. In fact, he speeds things up. Two years ago, he urged managers of the company's silicon wafer business to move faster on a project to invest hundreds of millions of dollars in the construction of a plant producing 12-inch silicon wafers, the first company to do so. Shin-Etsu's decision to go ahead with the project raised eyebrows because it wasn't clear at the time that the semiconductor industry was indeed moving toward chip manufacturing on the larger wafers.

The fast-forwarded project paid off. Competitors could offer wafers no larger than 8 inches, and Shin-Etsu became the only company with the larger sized ones. Chip manufacturers, some of which built 12-inch facilities earlier than expected, bought Shin-Etsu's wafers as fast the company could produce them, allowing Shin-Etsu to enjoy a monopoly position for more than a year.

"I had a hunch that if we are ahead of our competition by several months--the earlier the better--then we win," Kanagawa says. "And it has turned out that way." He adds that Shin-Etsu's financial muscle enables it to make faster investment decisions than its competitors. Shin-Etsu ended the fiscal year to March 31 with more than $2 billion in cash.

Kanagawa has been at the helm of Shin-Etsu for 12 years. By any common standard, he has done a phenomenal job. In terms of the stock market, Shin-Etsu is the world's fifth most valuable chemical company, behind Bayer and just ahead of Air Liquide.

The company's net profit, including income from subsidiaries, has been increasing for at least 10 years. It now stands at 8.8% of sales, as good as any well-regarded U.S. chemical company and far surpassing other major Japanese chemical makers. And as profit quadrupled over the past decade, staffing grew only 42%, demonstrating a significant improvement in productivity at Shin-Etsu and its subsidiaries.

THE COMPANY'S business falls into three main categories. It is the world's largest producer of polyvinyl chloride. It is a leading producer of silicon products and enjoys the dominant market share in certain areas such as the 12-inch wafers. Shin-Etsu also has a motley crew of various products that, depending on market conditions, can be significant sources of profit.

For example, the company's optical fiber preforms, made of synthetic quartz, enjoyed high profit margins until recently amid a worldwide rush to connect homes and offices with faster data lines. And Shin-Etsu captured one-third of the market for KrF semiconductor photoresists when it entered the business in 1998.

Kanagawa is widely described as a hands-on boss. When talking, Kanagawa typically uses the words "I" and "Shin-Etsu" as synonyms. In fact, in the company's annual reports, he appears to take personal responsibility for what happened to the company, good or bad, over the previous year.

"I try to check only the key points [of various projects], as much as my time and energy permit," he says. "If someone does business completely against my philosophy or my principles or day-to-day operations techniques, and then fails, I have to take responsibility."

Kanagawa's success in managing Shin-Etsu illustrates that there is a big difference between knowing and doing. He doesn't mind sharing his management principles and business views with journalists or business analysts. Unlike many Japanese CEOs who are rarely seen in public, Kanagawa appears several times a year at question-and-answer sessions with financial analysts. And he says that he never turns down an interview request with a journalist.

Shin-Etsu's success under Kanagawa draws comparisons with other successful companies, General Electric, for example. Jack Welch, GE's legendary former CEO, is "a genius," Kanagawa insists. But Shin-Etsu was already very successful before Kanagawa ever met Welch.

KANAGAWA DEVELOPED his own management principles and style when he was heading Shintech, Shin-Etsu's PVC subsidiary in the U.S., from 1978 to now. He says he learned how to manage by managing and is not one to learn from books.

One of his principles is that a company is always limited in the number of things it can do. Limits on the amount of capital that a company can use and on the number of "capable" individuals within its ranks act as a powerful incentive to avoid business overdiversification. "These are the two major reasons why I tried to concentrate on just three or four businesses," Kanagawa says. When a company diversifies, he adds, it must do so gradually, with managers closely monitoring progress one project at a time.

Although Shin-Etsu took a large and calculated risk when it decided to invest in 12-inch wafers, Kanagawa is in many ways risk-averse. He says he is particularly keen to avoid wasting his company's assets by taking unmanageable risks. But he will spend money to increase, even incrementally, the reliability of its supply to customers.

Shin-Etsu, he says, does not invest in countries where the political situation is unstable or the legal system is immature. This explains why the company has not made any significant attempt to expand in China, despite Japan's geographical proximity.

But Shin-Etsu goes to extremes to ensure that its customers get the products that they have ordered. One example is the company's complex in Freeport, Texas, where it built three PVC plants capable of running independently of each other.

Kanagawa says the production process used by the plants in Texas is "completely reliable," adding that there hasn't been an accident in 30 years. An outsider might question why a company would build three nearly identical plants next to each other instead of one big one. Kanagawa explains that "I must be prepared for the unexpected; as president, this is my duty to my customers."

Shin-Etsu's financial management is similarly conservative. On a consolidated basis, Shin-Etsu's financing is roughly two-thirds equity and one-third debt. The financial structure of leading U.S. companies such as Dow Chemical and DuPont, hardly examples of financial recklessness, is more or less the opposite--their equity represents 25 to 30% of financing, and the rest is debt.

Kanagawa considers it a virtue to rely on equity as much as possible. So Shin-Etsu's debt load is likely to decrease further. For him, the financial structure of U.S.-based Shintech is exemplary. "That company is my brainchild, so this is the model for Shin-Etsu," he says. Shintech carries a debt load of only 12%, meaning that Shin-Etsu's own cash finances 88% of the U.S. business.

THE GLOBAL environmental movement poses a threat to PVC producers, and this is something that Kanagawa treats seriously. "Some of the demands of environmental groups should be carefully considered," he says.

On the other hand, he believes that Shintech fell victim to domestic political concerns in 1997 when the U.S. Environmental Protection Agency made the unprecedented decision to overturn a Louisiana permit allowing Shintech to build a new PVC plant. "It was politics, nothing but politics," he says. "The state of Louisiana, the local government, gave us full support. They issued the permits."

At the time, Shintech was planning to build, in St. James Parish, a complex to produce chlorine, caustic soda, ethylene dichloride, and vinyl chloride. At a later stage, Shintech might have built an ethylene cracker as well. But instead, Shintech sidestepped the environmental activists and decided to build its new PVC facility in Addis, La., where it is purchasing vinyl chloride from Dow. Kanagawa calls the alliance remarkable, and as good as a happy marriage.

"In the U.S., the current situation is better than if we were integrated because our relationship with Dow is perfect," he says. He won't disclose anything about the nature of the supply partnership, citing a confidentiality agreement, but he notes that it has allowed Shin-Etsu to obtain a stable supply of vinyl chloride without building the facilities to produce it.

Shin-Etsu claims to have the world's best PVC technology, a process that it stopped licensing in the 1980s, by which time it already had 13 licensees worldwide. According to Moses Koh, who is a chlor-alkali and vinyls consultant at Chemical Market Associates in Singapore, Shin-Etsu was the first company to design a process for producing PVC in extremely large reactors of 150 m³.

The PVC produced in those large reactors is a commodity particularly suitable for the production of pipes. Koh says Shin-Etsu is favored by U.S. PVC pipe manufacturers because they can produce more pipes per ton of material. The pipes produced with Shin-Etsu's PVC also tend to be defect-free, he adds.

In the U.S., Shin-Etsu plants in Texas and Louisiana have a combined capacity of more than 2 million metric tons per year. The Louisiana plant, which houses the world's largest reactors, came on-line in late 2000, a time of depressed market conditions in the U.S.

Remarkably, even though it sells mostly commodity grades, Shintech has had no problem finding customers for its PVC, and its new plants have been running full out. In the latest fiscal year, Shin-Etsu's global PVC business managed to increase its operating income by 16% compared with the year before, despite a 4% drop in sales.

Kanagawa mostly credits Shin-Etsu's superior technology and knowledge of the PVC business for its ability to excel in the difficult environment. He observes that Rovin, a European venture that Shin-Etsu bought from Shell Chemicals and Akzo Nobel in December 1999, has been profitable since Shin-Etsu acquired it.

THE UNIT, renamed Shin-Etsu PVC BV, runs a plant in Pernis, the Netherlands, and has a processing agreement in Porvoo, Finland, for a combined capacity of 400,000 metric tons per year. The facilities in the Netherlands employ the Shin-Etsu process for PVC and a BFGoodrich vinyl chloride process that Shin-Etsu uses in its facilities in Japan. "We had enough experience to improve this existing company; that is the major reason why I made the decision to acquire it," Kanagawa says.

Shin-Etsu is losing money on its PVC business in Japan, Kanagawa acknowledges. With a 550,000-metric-ton plant in Kashima, the company is the country's leading producer of the polymer. Kanagawa decided in recent months to personally manage the business in order to turn it around.

It won't be the first time for him. He relates that he was put in charge of Shin-Etsu's PVC business in Japan 20 years back. "Within a couple of years, I moved this terrible business from red to black," Kanagawa recalls. But he declines to reveal what measures he has in mind this time, fearful that competitors might preempt his moves. "They are suffering as well," he says.

Unlike PVC or silicon, optical fiber preforms were until recently not a core product of the company. But in 2000 and 2001, they accounted for a disproportionate portion of its profit. In 2001, for example, operating income in Shin-Etsu's synthetic quartz business, which houses the preforms unit, was almost as much as in silicon, even though sales of silicon were three times as large.

About 70% of Shin-Etsu's synthetic quartz business that year consisted of optical fiber preforms, which are used to make optical fiber. Shin-Etsu is one of the world's largest producers of quartz, made from metallic silicon.

But in the past year, Kanagawa says, the market for optical fiber has "not gone down--it has crashed." He notes that optical fiber was selling for $100 per km in the summer of 2001; it now sells for $15 per km. "It was a classic bubble," he says.

Kanagawa is philosophical about the crash. For three or four years until the summer of 2001, Shin-Etsu enjoyed "remarkable results" from sales of preforms. "We should be satisfied," he says. Furthermore, he says that long-term contracts signed during the boom are helping Shin-Etsu to cope with the burst of the bubble better than its competitors.

IN THE ELECTRONIC materials business, Shin-Etsu is moving beyond its first mover's advantage and expanding production of 12-inch silicon wafers. Capacity at the firm's Shirakawa plant in Japan will soon be expanded from the current 75,000 wafers per month to 100,000.

The company expects eventually to produce 300,000 wafers per month as the 12-inch standard becomes more widespread. Although producing semiconductors on 12-inch wafers has many advantages for chip manufacturers, the technical challenges associated with the shift from eight-inch wafers are numerous.

The key decisions at Shin-Etsu are normally submitted to Kanagawa for approval and instructions. As such, much of the company's performance since 1990 has been tied to him personally, and the value of Shin-Etsu's shares is at least partly dependent on his presence at the top.

Masami Sawato, a Japanese chemical industry analyst at HSBC Securities in Tokyo, says the price of Shin-Etsu shares is supported by the "Kanagawa premium." The company's stock price would drop if Kanagawa were to retire, but Sawato can't determine by how much. "There exists no financial tool to calculate his premium," he says.

Kanagawa says he has no intention of stepping down, even though, at 76, he is more than 10 years past the mandatory retirement age at most large Japanese companies. He seems in remarkable shape, looking healthier than many people 20 years younger. He says he walks and jogs every weekend and that work keeps him healthy. His English is fluent, and he still visits the U.S. four times per year.

In recent years, Kanagawa says that he has been delegating responsibilities to "capable" people within the company. And at this stage, he says, at least 10 of them could fill his shoes, a number he wants to increase to 20.

At meetings, he says, he analyzes real situations that the company has faced, explains why they were critical situations, and tells how they should be solved if those problems happen again. Although he refers to some managers in the company as his "disciples," he adds that it is their job to train themselves.

For the time being, Kanagawa remains in charge, and there is no one urging him to step down. He proclaims that "the shareholder is my boss; I have no boss otherwise." Kanagawa once said he intends to remain at the helm of Shin-Etsu until he reaches 100. In view of what he has done for the company so far, that may well be what shareholders want him to do.

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CONTRARIAN

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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Copyright © 2002 American Chemical Society