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Interview with
President Ashida
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Resilient and
Buoyant
Q: We saw both record high=
s and
record low=
s in
fiscal 2008. At
the start of the
past fiscal
year, did
you anticipate this dramatic shift?=
A: It
may sound like I am speaking with the benefit of hindsight, but actually I =
felt
change was in the wind even before the Lehman shock This feel=
ing
wasn't based on a precise theoretical analysis of market trends from the
supply-demand equation for ships and the like. It was much simpler than
that-freight rates were abnormally high. My years of experience and instinct
told me that this situation couldn't last and I started to believe that it =
was
risky to run the company on the assumption that such high freight rates wou=
ld
continue. I began expressing these views to members of the Executive Commit=
tee
around the beginning of the second quarter of fiscal 2008. However, bullish
views still dominated.
I continued to have
concerns, and at a later Executive Committee meeting I directed that 15
Capesize vessels of the approximately30 operating on spot contracts be swit=
ched
to medium-term agreements of between 3 and 5 years This is because these
vessels have a relatively large impact on our earnings. This switchover was
effected smoothly because the rate for medium-term agreements was far lower
than the spot rate at the time. Spot rates subsequently plunged.
Had we stuck with spot
contracts, approximatelyY15.0 billion in earnings would have been wiped out=
in
the second half of fiscal 2008. This turned out to be a very good decision.=
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Q: In
recent years, MOL has produced outstanding results and management has won
plaudits. However, that coincided with a period in which the market did not=
hing
but rise.
How did management respond when the shipping market slipped into an
unprecedented reverse in the second half of fiscal 2008?
A: The shipping market ebbs and flows as a matter of course.
That means a company runs considerable risk of suffering major losses during
the inevitable market correction if it only pursues expansionist plans when
market conditions are buoyant The marine transportation market has enjoyed
several years of expansion, but my management style has always factored in =
the
risk of a market pullback and we have always impressed upon employees to be
ready to pull back as well. In fiscal 2008, we were able to quickly
implement our contingency plans. After the Lehman shock, we reduced our fle=
et
by approximately 70 ships through to March 2009 and we plan to downsize by
another 40 or so ships in fiscal 2009.
Implementing such a
retrenchment strategy quickly is one part of a successful contingency plan.
However, downsizing a fleet results in lower revenues, and in some cases,
one-off expenses or losses may also be incurred. We were able to execute our
pull-back because we have also focused on strengthening our financial base
while increasing our fleet. For example, our gearing ratio (interest-bearing
debt/shareholders' equity) is an indicator of this financial soundness. As =
of
March 31, 2009, MOLs gearing ratio was 113%, a marked improvement from 400%=
at
the end of March 2002. Without both quick execution and a sound financial
position, it was almost impossible to weather the harsh conditions experien=
ced
in fiscal 2008. Some companies found this out the hard way; nearly 10 shipp=
ing
companies have gone bankrupt around the world since the market turned downw=
ard.
It is easy to talk abo=
ut
downsizing one's fleet by around 70 ships, but in practice it is extremely =
challenging
to follow through with this in terms of operations and earnings in a short
space of time. Strong leadership is required. I responded to the situation =
much
like a captain of a ship in the middle of a storm by ordering that we lower=
the
sails and batten down the hatches. I can't say that I did this with 100%
conviction, but, although somewhat hesitant, I felt that the most important
thing to do at the time was to act to ensure we weathered the storm.
Q: Given that the market waxes and wanes, there is bound t=
o be
a recovery. What conditions do you believe will lead to the recovery? Do you think the market will retur=
n to
its former growth trajectory?
A: A recovery in market condit=
ions
for bulkships is conceivable. Containerships, though, face a more complicat=
ed
recovery scenario. We are, therefore, looking at the two sectors quite
differently. In dry bulkers, charter rates for Capesize ships fell from a p=
eak
of US$230,000 last year to US$l,O00 at a rapid rate of knots, but have since
rebounded to around US$30,000 (in early May 2009), which does provide some
comfort that things are improving.
=
=
This
precipitous drop was due to a sharp downturn in demand for shipping of iron
ore, as steel- makers in Europe, the U.S. and Japan slashed production. In =
contrast,
strong demand for iron ore persists in China, partly because of the
government's aggressive domestic economic stimulus measures. Crude steel
production in China is slightly up on 2008, while iron ore imports were
reportedly 30% higher year on year in the six months from January to June 2=
009.
China has been slow to build its domestic transportation infrastructure. In
addition to this, the country's mines have been stopping production one aft=
er
another due to the drop in the price of iron ore since the fall of 2008. The
upshot of this is that China is more reliant than ever on imported iron ore=
. If
this trend continues, market rates will surely improve for Capesize bulkers,
whose main cargo is iron ore. On top of that, when crude steel production i=
n industrialized
countries recovers, it is quite conceivable that Capesize bulker
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Q: Demand has fallen by more than 20% in the
containership business. Some reports say that the supply of ships is increa=
sing
at an annual rate of 10%, so isn't it highly likely that MOL won't see a
recovery for the next four to five years?
A: That's what we're assuming. All companies in this
industry sector are literally in the same boat unable to implement
effective steps, they are all continuing to suffer losses. But MOL is better
placed to weather this market storm than most, given that our containership
operations are only mid-tier in size globally. There used to be a line of
thinking that bigger was better, but not now. In the current market, the bi=
gger
the company, the harder it is, and companies that specialize in containersh=
ips
have no other revenue sources. The situation is so serious that I
wouldn’t be surprised to see some companies find the going too tough =
and
fall by the wayside at some point down the line. Were that to happen, the
industry would be thrown into upheaval, after which the Industry would be m=
ore
orderly than it is now.
MOLs plan is to ride out
this storm, limiting our losses in containerships as far as possible. With =
our
broad marine transport business, of which containerships is only part, and a
comparatively strong balance sheet, MOL has the underlying strength to wait=
it
out for opportunities that may arise when a new order is formed in the
containership sector.
Q: How has your strategy of striking a good balance between highly stable profits and market-sensitive profits served you amid the
tumultuous conditions in the marine transport market?
A: We define highly stable profits as earnings that have a low level of
volatility because they are mostly derived from medium-and long-term shippi=
ng
contracts. Market-sensitive profits, on the other hand, are those that are
affected by various market factors. Highly stable profits, as defined in th=
is
way, accounted for 36% of our ordinary income in fiscal 2007, when we posted
record earnings. In fiscal 2008, this share rose to 59%. With ordinary inco=
me
down by 32%, it was natural for the share of highly stable profits to incre=
ase.
In absolute monetary terms, highly stable profits increased from Y108.0 bil=
lion
to Y120.0 billion in fiscal 2008. As
I said earlier, this is because we concluded medium-to long-term
contracts when market conditions were buoyant in the dry bulker market.
For fiscal 2009, our
initial plan called for highly stable profits of around Y1 20.0 billion, bu=
t we
now expect a slightly lower figure. One reason for this is that we expect t=
he yen
to be stronger than in the previous fiscal year on average. Another reason =
is a
large drop in revenues and earnings of an unprecedented nature in the car
carrier business due to the global economic recession. This business had be=
en a
source of stable earnings because of the comparatively high barriers to ent=
ry.
For the time being, this
situation is unavoidable given the abnormal market conditions, as highlight=
ed
by General Motors' bankruptcy filing. Even so, we have a higher level of st=
able
profits than other shipping companies around the world, and it is these pro=
fits
that enable us to generate a certain level of earnings despite the extremely
difficult operating environment.
This is a real strength=
of
MOL We plan to continue developing an efficient business portfolio that
maximizes highly stable profits, while generating as much profit as possible from short-term contracts.
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Q: Your fiscal =
2009
forecast factors in cost savings of Y40.0 Billion. How realistic is it
that you w=
ill be
able to cut costs to that extent?
We are making steady progress with actions to cut costs by Y40.0 bil=
lion
in fiscal 2009 in all areas. Areas targeted include running costs, repair
expenses and subsidiary expenses. Costs have fallen to nearly the level the=
y were
in 2006, before market rates rose steeply. We are therefore looking closely=
at
all costs that have risen substantially from the past in our efforts to cut
costs. I'm fully confident that we will achieve cost savings of Y36.0 billi=
on
through these initiatives, but expect to see even more savings. Our goal now
for fiscal 2009 is to cut costs by Y57.0 billion. Cost-cutting efforts are
typically the most effective in containership operations, where we plan reductions of Y27.0
billion of the Y57.0 billion target
Q:
Have you revised your fleet expansion plan given the dramatic change in the
business
landscape?
A: As
I said before, our long-term fleet expansion plan has not changed. Our init=
ial
plan under MOL ADVANCE was for a fleet=
of
1.200vessels by the end of Mar& 201 3. We still hope to achieve that
number, but probably about two years later than we planned.
You may quest=
ion
why we are still looking to expand our fleet in this harsh environment Well,
I'm convinced that the marine transportation market will continue growing o=
ver
the medium and long terms. We are temporarily reducing our fleet size, but I
don't want this to be interpreted that the market has stopped growing.
One must reme=
mber
that the world economy has many more dimensions to it these days. Eastern
European countries have become interwoven in the global market economy over=
the
two decades since the fall of the Berlin Wall in 1989.And then there is the
emergence of economies in countries like China. These sorts of factors have
driven dramatic growth in the marine transport industry. We continue to base
our management of MOL on this paradigm change.
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Q: You are forecasting profits to remain at a lower level t=
han the
past for the next few years, yet you are increasing borrowings at the same =
time. How should people measure MOL’s shareholder value =
in
this context?
A: Interest-bearing debt at March =
31,
2009 stood at Y702.6 billion, up from Y601.2 billion a year ago.
Of the
approximate Y1OO.O billion increase, Y30.0 billion was to increase cash on =
hand
so we were prepared to weather uncertain financial conditions. The remaining
Y70.0 billion was appropriated for ordinary capital expenditures. Because n=
et
income was so high through fiscal 2007,capital rose at a faster pace than d=
ebt,
resulting in a lower gearing ratio. At the end of March 2009, however, the
gearing ratio had crept up to 1 13%, from 89% a year ago, reflecting increa=
sed
borrowings and a Y55.6 billion decrease in shareholders' equity to Y623.7
billion. The decrease in shareholders' equity was due to a Y142.8 billion
change in accumulated gains (losses) from valuation and translation
adjustments.
=
=
The main
reason for the change in "accumulated gains (losses) from valuation and
translation adjustments" was foreign currency translation adjustments.=
MOL
has many overseas consolidated subsidiaries with December 31 fiscal year-en=
ds.
Foreign currency translations mostly used a yen- US$ rate of YS1 at December
31, 2008, leading to the apparent large decline in capital. However, the
exchange rate had returned to Y98 at March 31, 2009. Had this rate been used
instead, share- holders' equity would have been around Y670.0 billion and t=
he
gearing ratio 105%. There was thus no substantial change in shareholder val=
ue
as calculated from the balance sheet
=
=
In these
times of global economic upheaval, in addition to the strength of our balan=
ce
sheet, I think people should look at how much MOL’s qualitative value=
has
increased. This is our latent capability as a company Whereas the balance s=
heet
allows for measurement on accounting and quantitative terms, qualitative va=
lue
is a measure of our resilience in tough economic circumstances and our abil=
ity
to rise when the inevitable market recovery comes. In other words, qualitat=
ive
value should be measured as the extent to which we are more competitive and
have delivered higher profits than other companies in a difficult business
environment, as well as how ready we will be to catch the next wave of grow=
th.
I'd like shareholders to keep asking me whether we are prepared for that wa=
ve
and when it will arrive.
Q:
The shipping industry has been battered by rough economic conditions since
last year.
What role ha corporate governance played in helping MOL to
navigate these rough conditions?
A:=
In
calmer times, corporate governance's value lies in ensuring exhaustive deba=
te.
However, in turbulent conditions, how corporate governance functions is more
important than discussions and information sharing. During fiscal 2008, act=
ions
rather than debate proved telling as we switched into crisis response mode.=
=
Since I
took over as president, I have held frequent face-to-face meetings with
personnel from the manager rank up. We call these meetings “Can Do
Meetings" and they have provided a valuable forum for me to directly
communicate management policy and thinking to front-line employees in my own
words. I'd like to think that it was thanks to these meetings that MOL was =
able
to act much faster and better than peer companies during fiscal 2008.
=
=
The
presence of three independent outside directors was extremely meaningful as
well in this crisis mode. I received valuable advice from these directors f=
rom
an objective, third-party standpoint, as well as from shareholders and other
investors about whether I was carrying out my daily duties as CEO properly I
believe that our corporate governance, centered on these directors, functio=
ned
effectively before and during the crisis.
Q:
Mr. Ashida=
, you
seem to have a knack for coming up with concise slogans to simplify the ess=
ence
of your approach to management at any given=
time.
Expressions like 'Diversify Risk With Diverse Ships" and "Be Prep=
ared
to Reverse
Rudder (Pull Back)” are certainly memorable.
Do you have a slogan for your approach to management tod=
ay?
A:
"Cultivate more skilled employees: The challenge we face today in this
market lacking vitality is like growing wine grapes in poor soil-difficult,=
but
when done well the final product achieves an unparalleled flavour. I rememb=
er
reading a famous expression attributed to Panasonic founder Konosuke Matsus=
hita
along the lines that good times are good, but bad times are even better. In
this sense, there couldn't be a
MOL enjoyed seven stra=
ight
years of revenue and earnings growth. But not once during those prosperous
economic times did our younger employees experience what it was like to do
business under difficult conditions. All they know is good times. They lear=
ned
how to take customer orders well, because that was key during the strong ma=
rket
conditions. They learned how to catch the waves, to be good surfers.
But what those prosper=
ous
years did not teach them was a more fundamental skill: how to swim well. Fr=
om
now on, their individual wisdom and ability to execute will be tested. They=
'll
have to become better swimmers as well, using their skills and capabilities=
to
get to shore. I believe that they'll learn more from their experiences today
than before, and that MOL will be in even better shape in the future as a result.
I hope that o=
ur
younger employees stand up and rise to the challenge to overcome this diffi=
cult
business environment I'm certainly committed to making this happen.
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