TonenGeneral Sekiyu K.K.
Address:
New Pier Takeshiba South Tower, 16-1, 1 chome
Kaigan, Minato-ku
Tokyo 105 8572
Japan
Telephone: (81) 3-5403-3111
Fax: (81) 3-5425-9018
http://www.tonengeneral.co.jp
Statistics:
Public Company (Majority Owned by Exxon Mobil Corporation)
Incorporated: 1939 as Towa Nenryo Kogyo Co. Ltd. (Tonen); 1947 as General Bussan Kaisha, Ltd. (General Sekiyu)
Employees: 2,956
Sales: $15.72 billion (2001)
Stock Exchanges: Tokyo
NAIC: 324110 Petroleum Refineries; 422720 Petroleum and Petroleum Products Wholesalers (Except Bulk Stations and Terminals)
Company Perspectives:
TonenGeneral Sekiyu K.K., as one of the world's premier oil refining and marketing companies, is committed to the future of Japan by providing a stable supply of safe, high-quality energy products. By making full use of the worldwide network of the ExxonMobil Group, our goal is to respond swiftly to customer requirements, and to make a positive contribution to the needs of customers, employees, shareholders, local communities, and society as a whole.
Key Dates:
1920: The Mitsui zaibatsu (large trading company, the forerunner to General Sekiyu) becomes the exclusive supplier of petroleum in the Far East for U.S.-based General Petroleum Corporation.
1932: General Petroleum Company is purchased by Standard Oil of New York.
1933: Standard Oil of New York and Standard Oil of New Jersey merge to create Standard Vacuum Oil Company (Stan-Vac); Mitsui becomes a distributor for the company.
1939: Towa Nenryo Kogyo Co. Ltd. (later to be renamed Tonen Corporation) is formed as a partnership of ten Japanese oil-related companies.
1941: Normal-pressure distillers begin operating in Tonen's Wakayama refinery.
1945: With the postwar fall-off in sales, Tonen dismisses three-quarters of its employees.
1947: Under Allied occupation, the Mitsui zaibatsu is broken up; members of its petroleum department form their own company: General Bussan Kaisha, Ltd.
1948: Standard-Vacuum Oil Company, of the United States, acquires 51 percent of Tonen.
1952: General Bussan Kaisha is listed on the Tokyo stock exchange.
1954: The fluid catalytic cracking method is introduced at Tonen's Wakayama refinery.
1961: Tonen establishes a research and development center.
1962: Standard-Vacuum Oil is split into two companies; Stan-Vac's shares of Tonen are split between Standard Oil of New York, which ultimately becomes Mobil Oil, and Jersey Standard Oil, which ultimately becomes Exxon, while General Sekiyu remains affiliated with Jersey Standard Oil (Exxon).
1967: General Bussan changes its name to General Sekiyu.
1971: General Sekiyu expands into refining.
1978: Exxon purchases 49 percent of General Sekiyu.
1984: General Sekiyu consolidates some of its activities with Exxon-owned subsidiary Esso Standard Sekiyu.
1989: Towa Nenryo Kogyo Co. changes its name to Tonen Corporation.
1996: Japan begins to deregulate its oil industry.
1997: Exxon increases its holding in General Sekiyu to 50.1 percent.
1999: Exxon and Mobil merge, forming Exxon Mobil Corporation (ExxonMobil); the new company holds majority ownership in both Tonen and General Sekiyu.
2000: General Sekiyu and Tonen Corporation merge, forming TonenGeneral Sekiyu.
Company History:
TonenGeneral Sekiyu K.K. is one of Japan's largest oil refining and marketing companies. The company is the result of a 2000 merger of Tonen Corporation and General Sekiyu, both of which were majority-owned subsidiaries of U.S. oil giant Exxon Mobil Corporation (ExxonMobil). ExxonMobil holds a 50.2 percent stake in TonenGeneral Sekiyu.
With four refineries, TonenGeneral Sekiyu has a combined refining capacity of more than 650,000 barrels per day, approximately 15 percent of the country's total capacity. The refineries produce a range of products, including kerosene, gas oil, heavy fuel oil, lubricants, naphtha, liquefied petroleum gas, natural gas, and gasoline. The company markets its gasoline through the ExxonMobil Marketing Group and holds approximately a 19 percent share of the Japanese gasoline market. TonenGeneral's subsidiary Tonen Chemical Corporation also manufactures and distributes petrochemical products.
General Sekiyu's Early History
Although Tonen Corporation was incorporated almost ten years before General Sekiyu came into being, General Sekiyu's roots extend much further back than its date of incorporation. General Sekiyu had its beginning in the Mitsui zaibatsu, a very large general trading company, which became involved in the distribution of petroleum products as early as the 1880s, when it began to sell kerosene. Although it was later forced out of that business by foreign competitors, the company re-entered the oil business in the years following World War I. Since Japan has very little natural petroleum, this re-entry meant dealing with a foreign supplier. In 1920 Mitsui became the exclusive distributor in the Far East for the refined petroleum products of General Petroleum Corporation, a U.S. company. Mitsui quickly set up facilities to market and store oil and, by selling high-quality oil from California at competitive prices, was able to challenge successfully the dominance of Dutch oil interests in Japan.
In 1932, however, Mitsui's U.S. supplier was purchased by Standard Oil of New York, and it became difficult to maintain the company's distribution arrangements. In 1933 Standard Oil of New York and Standard Oil of New Jersey combined their operations in the Far East to create Standard-Vacuum, known as Stan-Vac. Along with Rising Sun, a Dutch company, Stan-Vac held 60 percent of Japan's domestic oil market throughout the early 1930s. Having failed to work out an agreement to enter the refining business with Stan-Vac, Mitsui negotiated a contract to distribute the company's products.
In 1934 the Japanese government passed the Petroleum Industry Law, bringing the oil industry under government control as part of the preparations for the expected war. Petroleum, used to power Japanese warships, was seen as a vital strategic resource. The law required all foreign oil companies to maintain a six-month supply of oil beyond the usual inventories. When Stan-Vac balked at this requirement, Mitsui compromised with its foreign partners by building tanks that would hold a three-month supply, while the U.S. firm took care of the other half of the requirement.
Tonen's Early History
In July 1939, just a few years after the Petroleum Industry Law was passed and with the country still gearing up for war, the Ministry of Defense and the fuel Department of the Ministry of Commerce and Industry formed a partnership of ten Japanese oil-related companies. The partnership--consisting of Nippon Sekiyu, Kokura Sekiyu, Chosen Sekiyu, Aikoku Sekiyu, Sayama Sekiyu, Mitsubishi Sha Holdings, Mitsubishi Shoji Trading, Aratsu Sekiyu, Maruzen Sekiyu, and Mitsubishi Mining Co.--was called Towa Nenryo Kogyo Co. Ltd., a name later changed to Tonen Corporation. The new company had capital of ¥50 million and 59 employees. Keizaburo Hashimoto, president of the Nippon Sekiyu Co. Ltd., was appointed chairman of the board, and Fusazo Kokura, president of Kokura Sekiyu Co. Ltd., became president. The larger corporate investors dispatched managerial officers to the company.
At the start of the refinery operation, sales and the procurement of crude oil and finance were supported and ensured by the Japanese Ministry of Defense. The choice of an industrial site and the question of which technologies to adopt for the refinery operations, however, were major concerns. As the result of cooperative discussions among shareholders, a research and development center was located at the Shimizu plant site in the Shizuoka prefecture, and the refinery facilities were located in the Wakayama plant site in the Wakayama Prefecture.
In September 1939, the production and distribution of oil products in Japan fell under the influence of the national policy promoted by the fuel department of the Ministry of Commerce and Industry. All Japanese oil companies' independent business activities were severely restricted. The effects of the national policy were limited, however, in the case of Towa Nenryo (Tonen), which was heavily engaged in munitions production.
Wartime and Postwar Restructuring
In 1941, normal-pressure distillers began to operate in Tonen's Wakayama refinery and successfully produced engine starter volatile oil, airplane fuels, automobile gasoline, mineral turpentine, solvent, kerosene, light oils, and heavy oil. From 1941 to 1945, the Wakayama refinery processed 842,000 kiloliters of crude oil, 53 percent for munitions and 47 percent for civilian use. In 1943, a crude oil heating distillery was built at the Wakayama refinery and processed 86,000 kiloliters of crude oil before the end of World War II--77 percent for munitions and 23 percent for civilian use.
On Tonen's Shimizu site, research and development activities started as a result of the serious shortage of natural resources caused by the war. The major projects at the research and development center were the substitution for petroleum products of other materials, such as high-octane gasoline developed from artificial oil and lubricants made from raw natural rubber; and the processing of heavy tar oil produced in Southeast Asia and volatile oil, made from pine-tree gum. The construction of the Shimizu refinery was hindered by the shortage of materials under wartime conditions and was not realized on a large scale until 1950.
After the war ended, Tonen experienced a considerable fall in sales when the need for airplane fuel for munitions use ceased abruptly. Three-quarters of Tonen's 2,600 employees were dismissed in 1945. The major board members, including chairman and president, were banned from public duties by the Supreme Commander for the Allied Powers (SCAP) because of their involvement in Japan's war effort, and they were obliged to resign from the company. Nobuhei Nakahara became president. SCAP prohibited crude oil imports to Japan and banned refinery operations on the Pacific coast site. Tonen almost ceased to operate until 1947.
The late 1940s were a pivotal time for the various divisions of the Mitsui zaibatsu, including the one that was eventually to become General Sekiyu, as well. On July 3, 1947, the supreme commander of the allied powers then ruling Japan ordered the breakup of the Mitsui and other zaibatsu, which it perceived as having an undesirable feudalistic and totalitarian influence on the country. In the wake of this order, managers of the different divisions of Mitsui Bussan Kaisha, the main trading arm of the company, took responsibility for the welfare of their employees, and set up their own new enterprises, based on their former business functions. Accordingly, members of the old petroleum department set up an independent company to market and distribute oil. The company was named General Bussan Kaisha, Ltd., and was capitalized at only ¥180,000. In setting up business, the new firm relied on the strong relationship with Stan-Vac that it had inherited from its parent, Mitsui.
In 1949 General Bussan Kaisha took over the Osaka General Bussan, which had originated from the fuel department of the Osaka branch of Mitsui Bussan Kaisha, Ltd., and thus consolidated all the petroleum operations of the former zaibatsu under one name and management. The company continued to distribute petroleum under government direction.
In the early postwar years, Japan's oil industry struggled to recover from the devastation wrought by Allied bombardment of the home islands. Almost all of the petroleum industry's infrastructure, including its refineries and tanks, had been reduced to rubble. Distribution of oil was firmly under the control of the occupying government, and the main task at hand for the industry was to rebuild.
In December 1948, Tonen, like General, started a relationship with the Standard-Vacuum Oil Company (Stan-Vac). To start up its refinery business again, Tonen needed a crude oil supply, distribution outlets, and technical and financial support for production facilities, and a business relationship with Stan-Vac was thought to be indispensable. To acquire the highest production technology from Standard Oil Development Company (SOD), later renamed Exxon Research and Engineering Company, Tonen transferred 51 percent of its ownership to Stan-Vac. In July 1949, oil refining on the Pacific coast site was again permitted by SCAP, and Tonen started operations in 1950. This relationship with Stan-Vac meant that Stan-Vac had partnerships with both Tonen and General--a commonality that would ultimately lead to the merging of the two companies.
1950s: End of Allied Occupation, Expansion for Both Companies
In 1952 the Allied occupation of Japan ended, and rationing of petroleum was abolished. The demand for oil to fuel the nation's postwar industrial boom began to increase. In November 1952, General strengthened its ties with Stan-Vac when a new contract between the two companies was negotiated, authorizing the Japanese company to distribute Stan-Vac's refined petroleum products. This access to a stable supply of petroleum products allowed the company to expand rapidly.
Tonen also was focused on expansion, pursuing two basic strategies. First, the expansion of production facilities had to take place as quickly as possible to enable the company to take advantage of domestic market opportunities. As the strategic importance of its Pacific coast location increased, the Shimizu refinery's production capacity had to increase very quickly. Second, using advanced technology licensed from SOD, the quality of products and the efficiency of refinery processes had to be improved. As the motorization of Japan was expected to take place in the near future, the development of high-octane gasoline and high-quality lubricants was necessary. The establishment of production methods was of great importance to Tonen.
In November 1954, fluid catalytic cracking (FCC), a refinery method using catalysts to make fuel oil, was introduced in the Wakayama refinery, processing 4,700 barrels per day. In 1953, Tonen's refining capacity reached 28,500 barrels per day. The Wakayama refinery processed 21,000 barrels per day of crude oil, and the Shimizu refinery processed 7,500 barrels per day, at that time the largest refinery operations in Japan.
General also was seeing the fruits of its labors. In 1953, the company was listed on the Tokyo stock exchange for the first time. By 1954 in addition to its main office in Tokyo, General had opened branch offices in 13 other cities around Japan and owned petroleum storage tanks in 23 separate locations. The company sold its products to other dealers, as well as directly to factories and government agencies. It had obtained the contract to supply Stan-Vac bunker oil to foreign ships in Japanese ports, and to Japanese ships in foreign ports. Just seven years after its founding, General's capitalization had increased to ¥300 million, with shares held by nearly 2,000 stockholders.
Expansion projects continued after this period. In 1955, Tonen completed a new 36,000-barrel-per-day refinery, and still another 10,200-barrel-per-day FCC refinery was built in 1956. In 1957, after the completion of alkylation equipment, production volume of airplane fuels reached 90,000 barrels per year, almost equal to the annual airplane fuel consumption of the country. Tonen almost monopolized the airplane fuel market in Japan.
From 1949 to 1957, Tonen's investment in production capacity expansion amounted to ¥12.2 billion. The company made seven issues of stock to finance its expansion. Consequently, the company's equity grew 84 times in this period, from ¥37.5 million in 1950 to ¥3.15 billion in 1955.
In 1958, Tonen established two joint ventures: General Sekiyu K.K., capitalized at ¥1 billion and owned on a 50-50 basis with General Bussan Kaisha, Ltd., which became General Sekiyu Seisei Co. Ltd. in 1967; and Nichimo Sekiyu Co. Ltd., equally owned with Nippon Gyomo Sengu Co. Ltd. By entering into joint ventures, Tonen was able to operate at higher capacity and thus benefit from economies of scale. To finance its expansion the company made seven new stock issues between 1956 and 1962, when it was capitalized at ¥8.9 billion, having grown almost three times over this period.
1960s: Vertical Integration for Tonen, Split-Up of Stan-Vac
Tonen's aim in the 1960s was vertical integration into oil-related fields, including transportation of crude oil, new product development, diversification into petrochemicals, and alliance with other industrial enterprises. These changes were achieved in several stages. Tonen founded Toa Tanker Co. Ltd., with a capital of ¥1 billion. Minao Furihata, vice-president of Towa Nenryo, became Toa Tanker's president and in 1961 the company's name was changed to Tonen Tanker Co. Ltd. In the 1960s, transportation costs represented a relatively large proportion of the total cost of crude oil. To bring down crude oil prices, the reduction of transportation costs was essential.
Under the policy for promoting Japan's petrochemical industry, enacted by the Ministry of International Trade and Industry, Tonen diversified into petrochemicals. In 1960, Tonen founded Tonen Sekiyukagaku (Petrochemical) Co. Ltd, with capital of ¥4 billion. Tonen President Enpei Nakahara was also president of this new company. Steam-cracking and oxyalcohol plants were built in the Kawasaki refinery, and production of ethylene, propylene, and butane began.
In 1961, Tonen decided that its technological dependence on Stan-Vac had gone too far, and that independence in research and development activities had to be regained. That year, the company acquired a 25-acre site and spent ¥800 million on establishing a research and development center.
In 1962 the Japanese government passed the Petroleum Industry Law, giving the Ministry of International Trade and Industry a large degree of power over the oil industry. The government could now control prices for oil products and refinery capacities. These moves made it more difficult for foreign interests to establish oil refineries in the country, but made it possible for more Japanese independent refiners to enter the industry. The eventual result was a heavily crowded petroleum industry.
That same year, significant changes were taking place at Stan-Vac, General's partner and Tonen's parent company. Stan-Vac was ordered to be dissolved as a result of an antitrust case brought by the U.S. government against the U.S. oil industry. The company was split in two, and the resulting companies were integrated, respectively, with Mobil Oil Corporation and Esso Standard Eastern. From this point on, General maintained a relationship with just one of its former partners, Standard Oil Company of New Jersey, which would become known as Exxon. Tonen's arrangement with the former Stan-Vac was more complex; Stan-Vac's stake in Tonen was split into two stakes, with Mobil Oil and Esso each owning 25 percent of the Japanese company. Both companies supplied crude oil to Tonen and distributed its products under their own brand names and through different marketing channels. Competition between Mobil and Esso in the Japanese market proved to be a spur to Tonen's growth.
In the second half of the 1960s, Japan completed its shift from reliance on coal to reliance on oil to fuel its rapidly growing economy. Oil was cheap and plentiful, owing to the discovery in the late 1950s and early 1960s of large reserves in the Middle East. In 1967, General Bussan changed its name to General Sekiyu.
Meanwhile, Tonen continued to expand. At the Wakayama refinery, the first stage of the expansion project in the Ogake area was completed in 1965, and the second expansion project in the area was completed in 1968. This made the refinery the newest and the largest in Japan. The first stage of the expansion project at the Kawasaki Refinery was completed in 1970. Equity participation in Kygnus Sekiyu K.K. in 1972 boosted the Kawasaki refinery's economy of scale. By 1969, Tonen's total assets reached ¥73.2 billion, and the company was capitalized at ¥14.3 billion.
1970s: General Sekiyu's Expansion into Refining Followed by an Oil Crisis
In 1971 General was able for the first time to expand its activities beyond marketing and distribution to include petroleum refining. In conjunction with the Allied return of the island of Okinawa--captured during World War II--to Japanese control, General arranged, under the tutelage of Japan's Ministry of International Trade and Industry, to form a joint venture with its perennial partner, Esso, and with another Japanese company, Sumitomo Chemical Company. The joint venture provided for Esso to construct a refinery on Okinawa with a capacity of 80,000 barrels a day, which would be completed in January 1972. Under the agreement, when the island reverted to Japanese control on May 15, 1972, the refinery would become the joint property of Esso, which took 50 percent of the shares, and General and Sumitomo, each of which gained 25 percent ownership in return for providing $12.5 million of financing. This arrangement was in accordance with Japanese law, which stipulated that Japanese interests hold at least half of any company operating in Japan. In addition, the agreement for the new operation contained restrictions on the amount of oil that would be shipped to Japan. The joint venture was named Nansei Sekiyu.
General's long-awaited entry into the oil-refining business came at a fortuitous point in Japan's industrial development. By 1973 more than three-quarters of the country's energy needs were met by oil. Almost all of that oil was imported from the Middle East. Prices for oil products were kept low through plentiful supply and heavy competition between the large number of oil refiners and distributors.
In 1973, however, Japan and its business and government leaders received a rude shock when the Arab oil embargo resulted in a sharp rise in oil prices. The doubt cast by this event on the security and stability of a national economy based so heavily on a necessarily imported commodity had far-reaching effects on the Japanese oil industry. In December 1973, reacting to large profits reaped by the oil industry from the higher prices of the oil crisis, the government stepped in to fix prices for refined oil products. This move was prompted in part by public anger over a General Sekiyu memo that had come to light and that advocated "grabbing this one chance in a thousand" to make huge profits on the oil crisis. General's public relations suffered further when it was revealed that the company had instructed service station owners to restrict sales of gasoline to selected customers.
In February 1974 the Japanese government formally charged General Sekiyu and other oil companies with joining together to form an illegal pricing cartel for the purpose of increasing their profits during the previous year. After a ten-year court battle, the companies' convictions and fines were upheld in 1984 by the Japanese supreme court, and company executives were given suspended prison terms.
Throughout the mid-1970s, Japan's oil refining industry found itself in choppy waters, and neither Tonen nor General Sekiyu was an exception. General Sekiyu registered pretax deficits in the first half of 1975, while Tonen reduced excess production capacity, cut its costs, and stopped new employment to adjust to the slower economic growth. As the decade unfolded, Tonen and General Sekiyu looked for ways to offset the effects of the oil crisis.
Recognizing that the Japanese oil industry had already matured, Tonen set about developing new fields of business. Tonen Technology K.K., established in 1971 as a crude oil reserve company, diversified into computer sciences. In 1977, Tonen Energy International Corporation was established, with its headquarters in New York and a branch in London, to obtain finance for the crude oil transactions of the company.
Meanwhile, General Sekiyu focused on partnerships to bolster its sagging earnings. In 1977, the company joined with six other Japanese companies to form an oil-stockpiling venture. The new company was to construct a 25-tank storage facility for petroleum products. This venture allowed General Sekiyu and the other participants to fulfill their government-imposed obligation to maintain a three-month petroleum reserve.
Then, in September 1978 General announced that Exxon, its longtime U.S. partner and supplier of crude oil, would purchase 49 percent of General by buying up $34 million worth of new shares to be issued by the company. In addition, General took over Exxon's 50 percent share in the Nansei Sekiyu refinery on Okinawa, bringing its ownership to 75 percent and increasing its oil refining capacity. Other joint ventures between Exxon and General Sekiyu--the General Gas Company, an importer of liquefied petroleum gas, and the General Sekiyu Refining Company--became wholly owned subsidiaries of General Sekiyu. Under the agreement, General Sekiyu would gain the same access to raw materials and technological expertise as Exxon's wholly owned subsidiaries, while remaining an independently managed Japanese company. The new mergers allowed General to streamline its operations and eliminate duplication of effort with its subsidiaries.
The move improved the standing of Exxon and its subsidiaries within the Japanese oil market, giving the group, which also included the wholly U.S.-owned Esso Standard Sekiyu and Toa Nenryo Kogyo, a 10 percent share. Exxon's stock purchase was approved by Japan's governmental Foreign Investment Council and completed by late May 1979. By March 1980 General's profits had recovered from a slump in the previous year caused by high costs for raw materials and heavy sales of low-priced products, to post extremely high profits, a result of higher prices for its products.
1980s: General Sekiyu's Struggles and Tonen's Focus on Technology
The roller coaster ride of the crowded Japanese petroleum industry continued into the beginning of the 1980s, however. In 1981, the price for Arabian light oil amounted to $34 per barrel, and the total annual deficit of the Japanese oil industry amounted to almost ¥350 billion. General Sekiyu posted a loss in March 1981; its fortunes only worsened as the year progressed, as domestic demand for petroleum products declined under Japan's program to diversify its sources of energy away from almost total dependence on oil. By 1982, General's share of the petroleum market had slipped to 3.9 percent. In the following year, the company reduced its refinery capacity by 10 percent to 13 percent, in keeping with earlier government recommendations.
In January 1984, General complied with governmental restructuring of the petroleum industry by consolidating some of its marketing activities with Esso Standard Sekiyu, the wholly owned subsidiary of Exxon. The two companies together held slightly more than 9 percent of the Japanese petroleum market in 1984, with General alone holding 3.98 percent. Despite these steps, General reported a drastic fall in revenues for the fiscal year ending in March 1985, as net income fell 97 percent as a result of lower prices for oil products.
By late 1987, General's share of the fuel oil market had slipped to 3.8 percent and the price of the company's shares had dropped as well. This decline was attributed to a shift in the demand for refined petroleum products, away from gasoline, which was General's strength, toward heavier products.
Tonen had a more successful decade. The company's efforts in the early 1980s focused on the rationalization of production. Through the successful development of energy-saving technologies, the company achieved a savings of almost 220,000 kiloliters--¥10 billion annually compared with the 1973 level. As a result of improvements in its production process and management system, Tonen's business situation gradually improved. From 1984 through the end of the decade, the company's financial statements showed a profit each year. The long-term orientation of management policies resulted in the improvement of Tonen's equity ratio to 60 percent in 1989, among the highest in the Japanese oil industry.
Tonen aimed to develop an intelligent refinery by employing the most advanced information technology and operation backup systems. In terms of new product development, Tonen chose to focus on new energy sources, new materials, life sciences, and information technology. Tonen's major development in the field of new energy was an efficient, low-cost amorphous silicon for electricity, and a clean combustion system--supersonic fuel injection--used in the F3000 racing car. In the field of new materials, Tonen developed and patented a high-quality pitch-based carbon fiber with a host of applications in airplane bodies, automobile frames, and mechanical parts. In the field of life sciences, Tonen established a reputation as a pioneer in genetic engineering and cell technology, including a leukemia vaccine, which enabled a double-digit increase in the general potency of a wide variety of vaccines. In the field of information technology Tonen benefited from years of experience in computerized operational control and plant maintenance systems. For this purpose, Tonen System Plaza Inc. was established in 1985.
1990s: Deregulation and Consolidation
The 1990s have been a more troubled time for Tonen. In addition to a February 1994 fire at the Kawasaki refinery that cut into the company's 1994 earnings, its safety record was further tarnished by a May 1995 gas leak at the same refinery. Most important, however, behind-the-scenes clashes between Tonen's management and its Exxon and Mobil major shareholders came to light in the early 1990s, which raised doubts about Tonen's future.
According to an article in Tokyo Business Today, the roots of the conflict were found in Tonen's diversification efforts and conservative management philosophy. Tonen had entered a period of slow growth in the 1980s because of the mature nature of the refinery business. Under President Nobuyuki Nakahara, the company began to build up larger cash reserves to save for future investments in new growth areas. But Nakahara began to be stymied in his efforts to diversify by Exxon and Mobil, as these shareholders pressured him for higher dividend payouts, which in turn started to draw down Tonen's cash reserves. According to some analysts, the oil giants, in addition to wanting a higher return on their investment, wished to keep Tonen from diversifying into areas where it would compete with them.
From 1988 to the mid-1990s, Tonen had in fact invested little in its existing facilities or in developing new ones, with its late 1994 decision to add an H-Oil hydroconversion unit to its Kawasaki refinery--the first such unit in Japan--being one of the exceptions. Meanwhile, Tonen's dividend payout ratio, historically in the 30 to 40 percent range, exceeded 90 percent from 1988 to 1991, then surpassed 100 percent starting in 1992. Nakahara reportedly fought over the increased dividends, but to no avail, and was eventually pressured to resign early in 1994.
Nakahara's successor--Tamehiko Tamahori, who had been president of Tonen Tanker K.K.--developed a new corporate strategy to become a "World-Class Refiner." Therein he outlined four challenges for the company: attaining global cost-competitiveness through reengineering, employing world-class technology such as the H-Oil unit, offering "full cooperation" with Exxon and Mobil, and pursuing growth opportunities after "carefully evaluating the business risks." It appeared then to some analysts that Tamahori intended to be even more cautious about diversification and would work more closely with Exxon and Mobil than his predecessor.
Japan began to deregulate the oil industry in the mid-1990s, which posed additional dilemmas for both Tonen and General Sekiyu. With increased competition, and the resulting depression of prices, both companies found that they needed to cut costs to remain viable. By early 1997, Tonen, General Sekiyu, and another Exxon affiliate, Esso Sekiyu K.K., began exploring ways to merge their downstream operations. General Sekiyu and Esso Sekiyu were not unaccustomed to working together; in 1984, they had joined together to streamline their delivery operations.
Despite the hurdles associated with deregulation, the Japanese energy market remained appealing to Exxon Corporation. In August 1997, Exxon increased its holding in General Sekiyu to a majority stake of 50.1 percent. With Exxon firmly at the helm of both General Sekiyu and Esso Sekyiu, the streamlining of operations began in earnest. The next two years saw General Sekiyu's and Esso Sekiyu's activities become increasingly entwined. Customer service functions were merged in 1998, and in 1999 the two companies joined their finance, administration, marketing, and distribution operations. Despite its efforts to trim costs, General Sekiyu's finances took a turn for the worse; the company posted a loss of almost ¥5 billion in 1998--and a loss of ¥19.4 billion in 1999.
In December 1998, U.S. energy giants Exxon Corp. and Mobil Corp. announced that they planned to merge, with Exxon buying out Mobil. When the merger was complete on November 30, 1999, the newly formed ExxonMobil had four Japanese affiliates: Esso Sekiyu and Mobil Sekiyu, both of which were wholly owned, and Tonen and General Sekiyu, in each of which ExxonMobil held approximately 50 percent. This change was perhaps more significant for Tonen than for General. While General had been majority owned by Exxon prior to the merger, neither Exxon nor Mobil had held a majority share in Tonen. It was only by pooling their holdings--each of 25 percent--that the two companies gained control of Tonen.
ExxonMobil wasted little time in implementing cost-cutting measures in its Japanese operations. With an aim of reducing redundancies--something Exxon had initiated some years earlier with General Sekiyu and Esso Sekiyu--the company announced in January 2000 that its subsidiaries would enter into a three-year shared services agreement in the areas of distribution, supply, refining, and logistics. At the same time, ExxonMobil announced the formation of a new Japanese company--ExxonMobil Business Service Yugen Kaisha--which would handle accounting, financing, procurement, public relations, and information systems for all four of ExxonMobil's Japanese subsidiaries. The restructuring of services allowed General Sekiyu and Tonen to reduce their combined workforce, eliminating some ¥4.5 billion in payroll costs.
More drastic reorganization was in the offing, however, for General Sekiyu and Tonen. In late February 2000, the two companies announced their plans for a full-fledged merger, to take place in July. The companies' joint press release of February 22, 2000 explained the move: "The decision has been made to merge GSK and Tonen in order to further increase the operational and administrative efficiencies of the two companies, increase overall competitiveness, and fully realize their potential profitability for all shareholders."
Under the terms of the merger, which was completed as scheduled, Tonen was absorbed into General Sekiyu, and the company was renamed TonenGeneral Sekiyu K.K. General Sekiyu's president, Masayoshi Okai, became chairman of the board for the newly merged entity, and Tonen's president, Tamehiko Tamahori, assumed the office of president. The new company, with its pooled refining capacity, was Japan's largest refiner.
Tamahori's reign as president of TonenGeneral Sekiyu was not long-lived. In March 2001, he retired and was replaced by Gary Pruessing, a Wisconsin native and a 25-year veteran of Exxon. Prior to heading up TonenGeneral, Pruessing had served as a vice-president of ExxonMobil Refining and Supply Company.
Looking Forward
By early 2003, it was yet unclear what the long-term effects of the merger between General Seikiyu and Tonen would be. The company was still in the process of consolidating its operations and looking for ever better ways to reduce operating expenses. Although many efficiencies had already been realized, they had been offset, in large part, by costs associated with restructuring. But according to TonenGeneral President Gary Pruessing, the eventual cost savings from the merger were likely to be even better than originally expected. In an August 2001 letter to shareholders, he wrote that although annual cost reductions had been projected initially at ¥7.4 billion, starting in 2001, the revised estimate was closer to ¥20 billion.
Principal Subsidiaries: Nansei Sekiyu K.K. (87.5%); TonenGeneral Kaiun Y.K (90%); Tonen Technology K.K.; Tonen Sogo Service Company Ltd.; Chuo Sekiyu Hanbai K.K.; Tonen Chemical Corporation; Kygnus Sekiyu K.K. (50%); Shimizu LNG K.K. (35%).
Principal Competitors: Nippon Mitsubishi Oil Corporation; Japan Energy Corporation; Idemitsu Kosan Co., Ltd.; Cosmo Oil Company, Limited; Showa Shell Sekiyu, K.K.
Further Reading:
- Asai, Hideki, "Gaiatsu in the Boardroom: U.S. Oil Companies Run Tonen As They Like," Tokyo Business Today, May 1994, pp. 22-24.
- The Course of Tonen's History, Tokyo: Tonen Corporation, 1980.
- "ExxonMobil's Japanese Affiliates to Merge," Oil & Gas Journal, March 13, 2000, p. 27.
- Hardy, Quentin, "Tonen President's Resignation Reflects Culture Clash Between Japan, U.S. Firms," Asian Wall Street Journal Weekly, January 24, 1994, p. 3.
- Park, Christopher, "Uncertain Start to Japan's Deregulation: Refiners Look to Diversify," Platt's Oilgram News, April 2, 1996, p. 1.
- Sterngold, James, "Lesson in Shareholder Power for Japanese Refiner," New York Times, January 17, 1994, p. C2.
- Thirty Years of Tonen: From 1939 to 1969, Vols. 1-2, Tokyo: Tonen Corporation, 1971.
Source: International Directory of Company Histories, Vol. 54. St. James Press, 2003.
