Kao Corporation

1887–1890

Kao Corporation, often called the Procter & Gamble of Japan, is one of Japan's leaders in personal care products, cosmetics, laundry and cleaning products, hygiene products, and bath additives. Kao also manufactures and markets fatty chemicals, edible oils, and specialty chemicals, and is one of the world's leading suppliers of information technology products and services. The company has operations in 26 countries in Asia, North America, Europe, and elsewhere.

Early History

Founded in 1887 as Kao (face) Soap Company, Ltd. by the Nagase family, the company introduced its first soap product in 1890, selling it with the motto "A Clean Nation Prospers." That same year Kao adopted its crescent-moon logo, which was similar to Procter & Gamble Co.'s logo registered eight years earlier; thus began a longtime rivalry. By the end of the 1920s, Kao had developed coconut alcohol-based synthetic detergents, and after World War II, began manufacturing heavy-duty detergents.

From early on, Kao employed at least 25 percent of its workers in research, particularly in the field of surface technology. Early research in the properties of oils and fats, the basic elements in soap, allowed Kao to expand its product line quickly to include finishing products, polishing agents, waxes, insecticides, antiseptics, fungicides, and deodorants.

Kao's early success was made possible not only by its dedication to R&D but also by its unique network of proprietary wholesalers. In the early 1960s the company persuaded its wholesalers to establish jointly owned companies, called hansha, which would exclusively distribute Kao products. This system greatly simplified the usually complicated way that products moved from manufacturers to consumers in Japan, and provided Kao with competitive advantages, such as getting products onto store shelves faster and maintaining lighter inventories.

Early History Founded in 1887 as Kao (face) Soap Company, Ltd.

1971–1990

In 1971 Yoshio Maruta became president of Kao and continued the company's emphasis on R&D. Maruta, holder of a doctorate in chemical engineering and 16 patents, invented a process for producing aircraft lubricant from vegetable oil during World War II, when Japanese supplies of petroleum were low. An aggressive and charismatic leader, Maruta often was criticized for his domineering style that left little room for open discussion. He had a fierce respect for consumers, however. As one of his assistants told Forbes, July 25, 1988, "You can cheat housewives once, but not twice."

Series of Successful Product Launches in the 1980s

In the 1980s Kao's intense research operations paid off handsomely. In 1983 the company's Merries brand of disposable diapers far outsold Procter & Gamble's in Japan, because Kao had developed a highly absorbent polymer that reduced diaper rash. The following year Kao entered the cosmetics market for the first time with its Sofina line of cosmetics, and rapidly advanced to the number two position in the Japanese cosmetic market, trailing only Shiseido Co.

Kao's research in surface technology led the company into the electronics-software field as well. A research project on face powders resulted in the discovery of a dispersing system that was ideal for the management of magnetic particles spread over floppy discs, and Kao in 1985 established a U.S. subsidiary called Kao Infosystems Company to manufacture such discs. With the acquisition of West Coast Telecom in Portland, Oregon; Sentinel Technologies in Hyannis, Massachusetts; and the completion of a $60 million plant in Plymouth, Massachusetts, Kao Infosystems became in 1990 the largest North American maker of 3.5-inch floppy discs, although it was also consistently unprofitable. The company later branched out into CD-ROMs, hard disks, and digital audiotapes.

One of Kao's most successful introductions ever--Attack concentrated laundry detergent--came in 1987. Before Attack made its debut, Kao researchers collected dirt samples from around the world for four years in order to discover the bacteria that produces alkaline cellulose, an enzyme that cleans cotton. The researchers then spent two years synthesizing the enzyme through genetic engineering. The resultant detergent was four times as concentrated as cleaners that were then being sold--it was in fact the first concentrated laundry soap in Japan. Only six months after introduction, Attack commanded almost 50 percent of the Japanese detergent market. In spite of a price that was much higher than the competition, consumers appreciated the product's convenience--it was lighter to carry home and took up less space in the cabinet--and that it was better for the environment.

1965–1994

In 1990 Fumikatsu Tokiwa, who joined the company in 1965 in the research-and-development library, succeeded Yoshio Maruta as president. Around this time, Kao was the Japanese market leader in eight of its ten main product categories. It held more than half of the market in five categories: laundry detergents, fabric softeners, bleaches, skin cleansers, and household cleaners.

Aggressively Expanded Overseas in the Late 1980s and Early 1990s

Beginning in the early 1970s, when Procter & Gamble entered the Japanese market, Kao faced increasing competition at home from foreign companies. One of the company's responses to the encroachment of P&G, Unilever NV, and others into its home market was to turn the tables on the foreigners by aggressively expanding overseas itself. Kao began making serious moves into the U.S., European, and non-Japanese Asian markets in the late 1980s. The company's timing seemed particularly fortuitous when the Japanese bubble economy of the 1980s gave way to the prolonged recession of the early 1990s. Nonetheless, Kao's overseas ventures met with only mixed results.

In 1988 Kao acquired the Andrew Jergens Company, headquartered in Cincinnati, Ohio, and placed it within its main U.S. subsidiary, Kao Corporation of America. High Point Chemical Corporation, a specialty chemical company based in North Carolina that was acquired in 1987, supplied the raw materials for the Jergens toiletry and skin-care products. A move into Germany was made in 1989 when Kao purchased a 75 percent interest in Goldwell GmbH, a manufacturer and marketer of hair-care and beauty products through professional hairdressers around the world.

These acquisitions greatly increased the amount of revenues Kao generated outside Japan (to about 20 percent by the mid-1990s), but the company encountered difficulty building upon the acquired firms' previous successes. Jergens, for instance, in 1989 introduced a line of bath tablets called ActiBath in an attempt to adapt for the U.S. market a Kao product extremely popular in Japan. ActiBath flopped in large part because Americans take fewer baths than the Japanese and take their baths less seriously. In addition to the challenge of understanding a new culture, Kao also faced fierce competition in the U.S. market from the already entrenched Procter & Gamble and Unilever. This competition was quite evident in the 1994 launch of Jergens Refreshing Body Shampoo, a line of liquid bath soaps. On the surface a product with more promise than ActiBath, the Body Shampoo--soon after its launch--had to contend with two rival products: Unilever's Caress Moisturizing Body Wash and P&G's Oil of Olay liquid soap. Overall, Kao's American and European operations were money-losing ventures into the mid-1990s.

1979–1997

Kao's forays elsewhere in Asia were more successful--and were as a whole profitable. By the early 1990s the company was holding its own alongside P&G and Unilever in Hong Kong, Malaysia, the Philippines, Singapore, Taiwan, and Thailand. As the decade progressed, Kao took an increasing interest in the newly opening markets of China and Vietnam. Overall revenue generated from the region increased at a 15 percent yearly clip from the early to mid-1990s. Nevertheless, Unilever and Procter & Gamble's deeper (R&D and marketing) pockets tended to place Kao at a decided disadvantage even this close to home. P&G, for instance, spent four times as much as Kao did on R&D in the mid-1990s, and was quickly able to capture 50 percent of the shampoo market in China and Taiwan. Meanwhile, Kao's market shares in these Asian countries ranged from 10 to 20 percent.

While the company's household products units defended their home turf from foreign invaders and attempted to gain beachheads overseas as vehicles for future growth, the information technology business continued to struggle thanks to fierce competition. By 1996 Kao Infosystems was still losing money. In response, a restructuring was initiated that year which initially involved the integration of operations in France and Germany into the subsidiary's facility in Ireland. In a second phase, facilities in the United States and Canada were to be restructured.

In June 1997 Takuya Goto moved into the Kao presidency, taking over for Fumikatsu Tokiwa who became chairman. Goto came from Kao's chemicals side--perhaps indicating that Kao's board wanted some fresh ideas from senior management. Goto, a chemical engineer, joined the company in November 1979 as a manager of a plant in Thailand. After moving up Kao's chemicals management ladder, Goto became general manager of the chemical business division and purchasing division in July 1994.

With its fiscal year 1996 results, Kao Corporation posted its 16th straight year of increased revenues and increased pretax profits. Heading into the new century, the company remained a dominant force in household products in Japan, but had to contend with the increasing price-consciousness of Japanese consumers, a portentous development for such high-priced products as Attack. Kao was likely to continue to improve its position outside its home market, but would probably concentrate more of its limited resources on Asia than Europe and North America. The company also faced the challenge of turning around its information technology business, although a divestment of this troublesome unit appeared possible as well.