SUMITOMO METAL INDUSTRIES,LTD. History

Company History:

Sumitomo Metal Industries, Ltd. (SMI) has about 130 subsidiaries and affiliates in Japan and elsewhere, according to its annual report, which names 50: 14 in steel processing; 7 in nonferrous metals and miscellaneous; 6 in raw materials, fuels, and electric power; 3 in trading companies and transport; and 20 overseas, including 11 in the United States.

Sumitomo Metal Industries has its roots in the foundation of the Sumitomo group in copper mining in the late 16th century. Its origins as a modern company date from 1897, when Sumitomo Copper works was opened in Osaka, and as a steelmaker from 1901, when Sumitomo Steel works began operation.

Both openings represented a privatization of Japanese industry, established by the government after the Sino-Japanese War of 1894-1895. The copper works were acquired from the Japan Copper Manufacturing Company, the steel works with the purchase of Japan Steel Manufacturing Company.

It was a slow start, however. The newborn steel industry was unable to compete internationally because its plants were small and inefficient, and it grew very little. This situation changed with World war I, when demand grew strong at home and abroad because of large steel orders for military use by the Allied powers and the temporary withdrawal of European steelmakers from the Japanese market. From 1914 Japan supplied the Allies with iron and steel while itself engaged in limited naval military action. Japanese industry, including Sumitomo Steel works, profited economically from World War I.

After the war, heavy industry suffered a recession, and demand fell. The lull was temporary, however. The government entered into extensive railway and public-works construction, and steel production quadrupled in the 1920s. Wartime investment in plant and equipment paid off. The relatively undeveloped Japan moved toward industrial independence, and heavy industries were established.

Growth came in part from catastrophe. During the 1923 earthquake, 44% of Tokyo was burned to the ground, as was 26% of Yokohama. Substantial rebuilding followed, and the next two years were a boom period for the Japanese steel industry, which nonetheless was unable to meet domestic needs. Japanese iron and steel production in 1927 met about 60% of consumption. The industry was gaining on the problem, however, and the gains showed in a steady transformation of the Japanese economy. Heavy industry accounted for only 26% of the value of overall Japanese output in 1925, but 37% of its value five years later, when its share of output was still rising.

The 1930s were a time of continued expansion and diversification because of growth of the metal, machinery, and chemical industries. Heavy industry continued to outpace light industry. The number of metals factories more than doubled, and the number of workers quadrupled. During the 1930s the yen value of production grew by 800%. Japan became practically self-sufficient in production of rolling stock and in steel and steel products in general. The production-to-consumption ratio reached 103% for steel and 115% for steel products. Contributing to this increased ratio were the abandonment by the Japanese government of the gold standard with attendant freeing of money for investment, technical improvements, increased government spending on armaments, exploitation of the Manchurian resources newly acquired after the Japanese invasion of Manchuria, and development of Manchukuo, the Japanese puppet state in Manchuria, as a center of heavy industry.

In 1935, the Sumitomo copper and steel works were merged to form Sumitomo Metal Industries, Ltd. Meanwhile, Japan, accustomed since 1914 to unusually high profits, had embarked on a course of economic imperialism with a view to keeping such profits flowing. Even so, only in 1936 did the military demand for steel become an important factor in keeping profits flowing. Until then the major steel users had been the construction industry and heavy industries such as shipbuilding, machinery, and the steel industry itself.

A program of government subsidy funded this growth, for example, the Subsidy Facility for Improvement of Ships of 1932-1937. By this arrangement boats over 25 years old were scrapped, and subsidies were granted for replacement of up to half the number of ships scrapped. Heavy industry in general profited from such subsidization. Development of new products made of metals such as aluminum and magnesium contributed to growth in profits. During the early 1930s, heavy industries, including the chemical industry, showed profits for first time without concentration on military demand.

By 1937 the military was expanding its requirements. A five-year industry plan in March 1937 called for annual steel production of 6.5 million tons of steel by 1941, up from 5 million. Since the army wanted ten million tons produced, the option was given to export three million tons if there should be peace rather than war.

Japan went to war, first with China beginning in July 1937, and later with the Allies. Capital and labor were diverted to war industries. Government regulation of the economy increased, accompanied by continuous conflict between industry leaders and militarist-bureaucratic factions over who should control the new economic structure.

The National Mobilization Law of March 1938 gave the government great authority over labor and working conditions, production, consumption and exchange of goods, control of property including confiscation, and business and industry in general. In 1941 this authority was expanded to cover virtually all aspects of business. Manufacturers, banks, and investment institutions were required to seek government permission for plant development and loans; thus savings were forced into investment in heavy industry. By the end of 1940 steel production was almost seven million tons. Industry was seen increasingly as auxiliary to the military. Private profits were eliminated or severely curtailed. Industrialists were pitted against bureaucrats. The national debt, having tripled in five years, equaled national income.

In December 1940 a compromise was reached. Private enterprise was to be the basis of the new structure. There would be closer cooperation among the state, conservative elements in the armed forces, and representatives of the great financial interests that opposed the military extremists as well as their ultraconservative business counterparts.

Sumitomo's director general, Masatsune Ogura, was made minister without portfolio in April 1941, charged with the task of overall economic coordination. An industry-oriented general replaced a bureaucrat as head of the state planning board, and an admiral with close ties to shipbuilding interests became minister of commerce and industry.

Ogura had army ties, and Sumitomo industries, including Sumitomo Metal Industries, was in both light and heavy industry, whose interests did not always coincide. Thus he was well qualified to bring the armed forces closer to business and finance, and to bring light industry closer to heavy industry.

The changes resulted in a partnership between business and the military, a military-industrial complex. War was looming, and Japan wanted to be ready. In July 1941, a few months after Sumitomo's Ogura took on these responsibilities, the United States froze Japanese assets in the United States. So did the British throughout their empire, and the Dutch in the East Indies. The Sumitomo group contributed to the war effort through its mining, manufacturing, steelmaking, banking, and other enterprises and grew considerably during the war, from 40 firms to 135 and from ¥574 million in paid-in capital to ¥1.92 billion.

After the war, Sumitomo Metal Industries changed its name to Fuso Metal Industries, reverting to the name Sumitomo when the Allied occupation ended in 1952. The group, or zaibatsu, had been dissolved in February 1948, but was reconstituted in the 1950s as a keiretsu, a confederation of interrelated companies, with the role of the family greatly diminished.

By 1951 manufacturing was back to prewar levels, after a change in Allied policy, from punishment to encouragement, with a view to balancing Far Eastern power, especially in the wake of the fall of Nationalist China and the Korean War. During the Korean War, U.S. purchases in Japan helped Japanese industry develop and grow. The iron and steel industry was a leading factor. It had been a major source of Japan's military strength in World War II and was at first to be dismantled under the Allied occupation, except for what was needed to meet domestic needs. With the new policy it too was encouraged.

Sumitomo Metal Industries shared in the 1950s growth, in 1953 acquiring Kokura Steel Manufacturing Company, Ltd., and entering into a long-term modernization program that included installing large blast furnaces and building new mills in coastal areas. In 1959 it divested its nonferrous metal processing unit, establishing it as a separate company, Sumitomo Light Metal Industries, Ltd.

In 1962 Japan became the world's fourth largest steel producer, outstripping France and the United Kingdom. Japan was producing nearly 30 million tons of steel a year, about four times its pre-1950 total and was second to the United States in continuous hot strip mill capacity. Larger blast furnaces were being built, and oxygen converters were being installed to reduce dependence on scrap-iron imports. Japan became the first country to use oxygen converters on a large scale, after they were used for the first time anywhere, in Austria in 1953.

New plants were built along the seacoast with furnaces of 1,200-ton to 2,000-ton capacity. The coastal location made it easier to receive raw materials and to ship manufactured products. The new plants accommodated the newer, larger ships built to haul raw materials more cheaply.

SMI kept pace with these national developments. Among Japanese steel producers, it was tied in third place with Nippon Kokan and Kawasaki, each with 11.5% of total production. Yawata Iron & Steel led with 18.5%; Fuji Iron & Steel had 17%. By 1976 SMI had built new processing plants and established a technical research institute. Its capacity for producing blister steel, low-carbon, semi-finished material formed by heating bar iron in contact with carbon in a cementing furnace, was 22.7 million tons a year.

By 1982 SMI's steel tubes and pipes, almost half its output, were considered among the world's best. The company was able to supply 30% of world demand for wheels for rolling stock. It had three affiliated companies in the United States and one each in Thailand and Saudi Arabia, plus offices in the United States, Brazil, Venezuela, West Germany, Australia, the United Kingdom, Iran, and Singapore.

Sales that year were ¥1.5 trillion, the third highest in Japan after Nippon Steel and Nippon Kokan. Beside tubes and pipes, SMI production was 31% steel plates, 7% steel wire, and the rest rolling stock, castings, forgings and other products.

In the mid-1980s, major Japanese steel producers, Sumitomo Metal, Nippon Steel, NKK, Kobe Steel, and Kawasaki Steel, were hurt by the rising yen. They closed six furnaces, sending 47,000 workers to other businesses or early retirement. As a result of the cuts, these companies once again became the world's most efficient steelmakers.

SMI's main lines were iron and steel in various semifabricated and fabricated forms, engineering services, titanium, electronics, chemicals, and energy. The company had more than 80 subsidiaries and affiliated companies and participated in several overseas joint ventures. In addition to Osaka and Tokyo, it had offices in 23 other Japanese cities, as well as offices in New York, Los Angeles, Chicago, Houston, Düsseldorf, Vienna, London, Sydney, Singapore, Mexico City, and Beijing.

In 1988 the Sumitomo group was one of six major keiretsu, with Mitsui, Mitsubishi, Sanwa, Fuyo, and Dai-Ichi Kangyo. Sumitomo Metal Industries is a leader of the Sumitomo group. SMI steel works were located in Osaka and four other cities, including two in Wakayama; laboratories were in Hyogo and Ibaraki.

In early 1990 the five largest Japanese steelmakers, faced with weak domestic demand, rising financing costs, and strong competition from mini-mills at home, and South Korean and Taiwanese steel producers abroad, cut more jobs. The five--SMI, Nippon Steel, NKK, Kobe Steel, and Kawasaki Steel--had invested heavily in automation and in the manufacture of higher-margin products such as stainless and coated steels. These investments were promising, but a less promising diversification was the move into microchip production and other nonsteel businesses. While SMI had invested least in these new fields, nine SMI affiliates had begun building semiconductor-manufacturing equipment.

The rising cost of raw material created a problem. Iron ore prices had risen 16%, and the cost of coking coal was up by 5%. Mini-mills, by contrast, were circumventing this problem by making steel out of scrap iron in small electric-arc furnaces. Scrap was available at bargain prices because new car sales had risen and old cars were scrapped proportionately.

One nonsteel diversification, SMI's investment in a U.S. computer firm, Lam Research, seemed more promising. By 1990 SMI owned a half million shares in Lam, which marketed and serviced Sumitomo's integrated-circuit technology in North America and Europe, while Sumitomo did the same for Lam's equipment in Japan.

Principal Subsidiaries: Nippon Pipe Manufacturing Co.,Ltd.; Sumitomo Special Metals Co., Ltd.; Sumikin Chemical Co., Ltd.; Sumitomo Metal USACorp. (U.S.A.).

Further Reading:

• Moulton, Harold G., with Junichi Ko, Japan, an Economic and Financial Appraisa, Washington, D.C., The Brookings Institution, 1931.
• Mitchell, Kate L., Japan's Industrial Strength, New York, Alfred A. Knopf, 1942.
• Hall, Robert B., Jr., Japan, Industrial Power of Asia, Princeton, D. Van Nostrand Co., 1963.
• Guillain, Robert, The Japanese Challenge, Philadelphia, Lippincott, 1970.
• Nakamura, Takafusa, Economic Growth in Prewar Japan, New Haven, Yale University Press, 1971.
• Gibney, Frank, Miracle by Design: the Real Reasons Behind Japan's Economic Success, New York, Times Books, 1982.
• Prestowitz, Clyde V., Jr., Trading Places: How We Allowed Japan To Take the Lead, New York, Basic Books, 1988.
• "Japan's steelmakers: Virtue is its own reward," The Economist, April 28, 1990.
  A Brief History of Sumitomo, Tokyo, Sumitomo Corporation, 1990.

Source: International Directory of Company Histories, Vol. 4. St. James Press, 1991.