Japanese Enterprises - R&D Strength Backup, Step up the Pace

Japan is world's 4th largest pesticide market, which is also an important market for Japanese agrochemical companies. However due to the changing market at home and abroad over recent years, Japanese companies have to walk out of the 'comfortable' domestic market and speed up the movement toward international market, as being backed up by their strong capacity on invention of new molecules, which is admired by many counterparts. This article discusses why Japanese companies can prevail over others in respect of pesticide R&D and how they are going to deal with the present challenges. 
 

Market profile and major players
 

Japan suffers scarcity of resources, where there is limited cultivated land. Due to its varied topography and adequate rainfall, there are large varieties of crops accompanied with high frequency of pest damages, resulting in high demand for pesticide both in respect of the amount and the varieties. Japanese crops mainly include paddy rice, vegetable, fruit (citrus, apple, peach and pear), potato, soybean, wheat and barley, of which paddy rice acts as Japan’s most important crop at95% self-supply rate, vegetable at 70%, fruit at 38%, wheat and soybean are at a much lower rate relying heavily on importation. Pesticide sales are found in line with planted crop varieties, where paddy rice is the largest pesticide outlet, followed by vegetable and fruit.
 

Japan’s pesticide market value ranks No.4 in the world, only next to Brazil, US and China. According to the latest data of Japan Crop Protection Association, Japanese pesticide market value was approximately JPY337.4 billion (2.7 billion USD) in 2015 fiscal year ended September 30, 2015.
 

Over the dozens of years since the beginning of the agrochemical industry, Japanese companies have experienced either corporate restructuring or mergers within local industry players. Right before and after the new century, there was globally an upsurge in merger and acquisition in the pesticide industry, when Japanese companies speeded up their overseas mergers, which laid a good foundation for Japanese companies to go global.
 

Major pesticide companies in Japan currently include Sumitomo Chemical, Arysta LifeScience, Nihon Nohyaku, Ishihara Sangyo Kaisha, Nippon Soda, Mitsui Chemicals Agro, Kumiai Chemical, Nissan Chemical and Hokko Chemical. Sumitomo Chemical’s annual sales of agrochemical business were around 2 billion USD in fiscal year 2014, ranking No. 1 in Japan and No. 10 in the ranking list of global agrochemical companies. Most of the companies mentioned above ranked in the list of top 30companies.
 

How could they build up strong pesticide innovation capacity?
 

It is a common view that Japanese agrochemical companies have a strong new pesticide creation capacity. Information reveals that of the 35 agrochemicals in the industry’s near-term pipeline, some 19 are coming out of Japan, accounting for 54%of the total.
 

How could Japanese agrochemical companies build up such a strong pesticide innovation capacity? Its national policy support and guidance are the most important reasons. First of all, development via science and technology is always Japan’s national strategy. The investment each year into science and technology amounts to 3% of Japan’s GDP, having reached$144 billion in 2014, ranking No.2 world-wide only next to the US. Secondly, as a follow up to the national strategy, Japan has made great input into chemical industry, it is no wonder that its chemical innovation capacity can stand up high in the world. Furthermore, Japanese government provides tax incentives and subsidies to encourage enterprises to carry out technical research and development.
 

The large amount of input into R&D activities directly drives positive innovation activities by enterprises, which become very active in fundraising for R&D. According to statistics, Japanese enterprises have self-financed funds which account for 70%of the total R&D funds, ranking No.1 worldwide, serving as a financing safeguard for creation of novel pesticide. Furthermore, the change of Japanese domestic pesticide market is another driving factor for Japanese companies to give input into R&D activities. Huge market capacity and strong demand, high prices of farm products and farmer’s income, strong purchasing power, results in a good market for high-price, high quality and performance product. These market features would promote agrochemical companies to continuously explore novel pesticide technical and formulations, thus to form a market with a positive cycle – market demand promotes R&D; R&D fulfills the market needs.
  

Japanese companies work closely with universities and research institutions, which play an indispensible role in new molecules invention, to reduce cost of research. As regards to novel pesticide creation, researchers would avoid searching through all information the compound of new action mode, but could do it via replacement of the active group of existing active ingredient to synthesize similar compound, then to use the directional selection method to develop new product, which gives a higher probability of success. Of course Japanese technical innovation was not this strong at the very beginning of the1970’s, but also experienced a long course starting from import of world technology, imitation up to independent creation.
 

Speeding up exploring overseas market with new approaches
 

For a long time, Japanese agrochemical companies have been not very positive toward overseas market as the Japanese local market is big enough. Products are mainly produced to fulfill domestic market demand, only 20% products being exported. Yohichi Kohyama, the Chairman of Nihon Nohyaku said, “Japanese companies have been slow to develop overseas operations because we enjoyed the comfort of the domestic market for too long.” However, today with the decrease of local market demand which ends up in more competitions, lots of Japanese companies have started to attach importance to international market which is treated as key factors presently to drive the sales growth. Japanese companies are selecting different approaches or partners of cooperation toward targeted market according to their respective product features to gradually make their global deployment.
 

As is well known, a pesticide product takes long steps to get launched, starting from the discovery of compound, going through lab test, pre-production test, field trial, efficacy and toxicity test, product registration, market promotion. These steps take a lot of cost. Most of Japanese companies are somewhat restricted by their business scale, financing channel, distribution network, marketing and registration capability, so they could hardly complete procedures required for global sales of their end-use product.
 

For the reasons above, when some enterprises developed new compound, they would just do lab test and then transfer to others so as to save the follow-up cost of development. Multinationals are usually the buyers of a new compound. Besides transfer of new compound, Japanese companies sometimes might enter into an exchange agreement with multinationals, meaning that they use the follow up development, mixture and distribution rights of new compound to exchange the distribution rights of end-use product in Japanese market.
 

Some Japanese companies may prefer to cooperate closely with multinationals, using their well-established sales channel to sell their products. They include their products, are usually high value-added specialty products, to the portfolio of multinationals which pursuing “integrated crop protection solution” over recent years. These differentiated products from Japanese company with less competition are complementary to the product line of multinationals and can be good resources shared by each other, bringing about mutual benefit.
 

Additionally, Japanese companies are actively looking for opportunities of setting up overseas subsidiaries or cooperating with other Japanese companies to set up marketing channels abroad. Over recent years, the overseas presence of Japanese companies and collaborations with other companies are getting more and more popular.
 

In general, Japanese local market will be still the most important market to Japanese companies for a long time. The high-income and environment-conscious farmers have a strong demand and high degree of acceptance for novel product, which is a momentum for Japanese companies to continue their innovation. However with the decreasing of domestic market, fluctuant global industry circumstance change and pursuit for higher profitability, more Japanese companies have speeded up their move toward overseas market. In the years ahead, besides cooperation with multinationals, Japanese companies are anticipated to continually rely on their R&D ability and to endeavor to enhance overseas registration capability to establish their own marketing channels.

Appendix: Recent Events of Japanese Companies



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Acknowledgement