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Keith Rabin

Keith Rabin

KWR International

Keith W. Rabin serves as President at KWR International, Inc., a consulting firm specializing in the delivery of Asia-focused trade, business and investment development, research…

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Japanese Energy Solutions: ITOCHU's US Investment in EnerDel and Global Battery Development Strategy

Interview with Hiroaki Murase by Keith W. Rabin

ITOCHU: The Evolving Business Model of a Japanese Trading Company

Up to the first decades after WW II, Japan's major trading companies handled the bulk of the nation's imports and exports, and in a literal sense trading was their major function. More recently, they have emphasized investment, owning or taking share in various businesses around the world, and using their market knowledge and distribution and customer networks to build value chains. While still very diversified in terms of industries, they also are focusing more on growth sectors and growth markets. ITOCHU, for example, remains very active in traditionally strong fields, such as food, textiles and conventional (i.e., fossil and nuclear) energy, but is putting particular emphasis on such fields as new and alternative energy, water, and healthcare and high-growth markets such as China.

To advance new alternative energy technologies and business solutions global Japanese trading company ITOCHU Corporation has been active on a number of fronts, including development of advanced batteries for electric vehicles and other applications. This includes an investment in, and close cooperation with EnerDel, a promising US manufacturer of commercial-scale automotive-grade lithium-ion battery systems. To better understand ITOCHU's strategy, and to provide a case study illustrating potential modes of cooperation between Japanese and US corporations in the alternative energy sector, KWR President Keith W. Rabin speaks with Hiroaki Murase, a key manager in the Aerospace & Industrial Systems Division, Battery System Section of ITOCHU Corporation in Tokyo.

Thank you, Murase-san for speaking with us today. Can you tell us a bit about your background and efforts in advanced battery development?

I joined ITOCHU's industrial machinery department in 1994, and after 2-3 years sold an Lithium Ion Battery (LIB) Electrode coating machine to a US battery manufacturer. At the time, I had little knowledge and studied LIB technology, its business potential, the industry value chain and products used throughout the development process. ITOCHU then started to emphasize this area and I began selling all kinds of LIB production equipment. For example, in 1998, we sold an entire production line to a venture company in California. We also dealt with companies in Europe and Asia. Sourcing competitive production equipment and selling it to LIB manufacturers is still our "base" business. One of our customers was Ener1, the parent company of EnerDel, and we sold them equipment in 2001. I visited and believed they had unique technology, so we brought in our technical team and found they had something very valuable. It fit in well with our strategy, and we made a small investment in July 2003. In April 2004, I was seconded to Ener1 as a Business Development VP. When we made the investment, there was no subsidiary company under Ener1. However, at end of 2004, Ener1 formed a joint venture with Delphi's LIB group, which would become EnerDel. (Initially Ener1 owned 80.5% and Delphi 19.5%; in 2008 Ener1 bought out Delphi's share and currently owns 100%.) Six months after the JV was formed, it was decided to restructure the company. We made a new business plan with a new strategy that called for a production site not in China or Mexico, but in the US. We also brought in new people from all over the world. Some of them were former customers from California and Europe. That was in July 2005. These people helped to turn around the business. I returned to Japan at the end of 2007, as they were ready to advance to the next level by themselves. After my return, I started focusing on the Energy Storage business using EnerDel's LIB, which has become one of the many areas we are seeking to develop, mainly in Japan. ITOCHU also increased its investment in Ener1 last December by an additional $20 million, and we now have a stake of around 5%.

In an age of concern over resource scarcity and climate change, there is growing interest in alternative energy. How important is alternative energy as a focus for the firm?

We have a traditional energy business, which is a major focus, and that area has been a major contributor to our profits. In fossil fuels, for example, in addition to trading we are also involved in development projects on several continents. Similarly, in nuclear energy, we are not only a top trader of uranium, but also participate on the resource development side. Nevertheless, over the next 5-10 years, we plan to significantly enhance alternative energy and the "green" side of our business. Last April, for example, we announced an intention to focus on energy storage in particular. This includes batteries, solar and water-related businesses as areas of potential growth. But our Battery Department has been in existence for some time. ITOCHU is a large company that is highly diversified in the energy field. We are also initiating activities in other areas such as Geothermal and Biofuels, including sugar-cane based ethanol in Brazil and biomass in North America. Development of the Smart Grid is also a priority.

Recently there have been several announcements concerning EnerDel and use of its products in smart grid applications, electric buses and electric-car sharing and now a new electric car plant in the US. Can you tell us about this effort and your plans for the future? Perhaps you can also comment on the involvement of other ITOCHU clients and family companies, for example Mazda and FamilyMart?

Our primary goal is to enhance the strategic energy storage value chain around battery development. Jointly with ITOCHU's Chemical Department we are starting Cathode materials projects in the US and China. We are working with those materials to better engineer and produce a viable power train and charging station and to better use the auto battery for a range of applications. This will help to reduce costs and to enhance the usability of lithium-ion batteries in a larger market.

That is the reason we are doing a demonstration project in the city of Tsukuba, Japan, the site of Tsukuba Science City. Here is a video concerning the Green Crossover Town Project. In addition to a major university, there are more than 200 research facilities in Tsukuba, with thousands of Ph.D.s, so this is a receptive area for new technologies. In China, the US and even Europe, we are also working with Japanese and foreign companies to develop supply chains with EnerDel as a core in energy storage areas. This includes solar and other downstream applications. Our objective is to cover the whole battery life cycle, including recycling. We are just starting, but believe this is the future of this business.

In the Green Crossover Town Project in Tsukuba, we have integrated FamilyMart into the value chain as an interface with consumers. We also have a strong relationship with Mazda and own gas stations, and the city itself is working closely with us to demonstrate and evaluate how best to utilize this next generation of clean energy. That involves close cooperation with Think, the Norwegian electric vehicle company, in which Ener1 holds a 31% ownership stake. They are able to supply not only EVs but also Drive-Train components, such as Motor and Control Units. Earlier this year, Think announced plans to establish a US assembly plant in Indiana near EnerDel.

What other efforts in alternative energy is ITOCHU involved in other than lithium batteries? I also noted EnerDel received a Smart Grid stimulus grant in August 2009 to increase its production capacity. How important is government involvement in your work, not only to finance investments but also the support organizations such as NEDO in Japan or the DOE in the US can provide to facilitate research and development, or to initiate alternative energy-friendly tax, regulatory and incentive structures?

An integrated approach within a range of areas as well as government involvement is very important. For example, there is a smart grid team in our headquarters that is working on a smart grid development project in New Mexico that the state has initiated with NEDO. EnerDel also has joined Indiana-based Energy Systems Network (ESN), which consists of Duke Energy, Cummins Delphi, IBM, Simon Properties, Purdue University and other concerns dedicated to advancing hybrid and plug-in vehicles and other energy innovations to consumers. This is a very interesting organization and there is a lot of opportunity there. Over time it can serve as a gateway to help us connect with a broader network in the US.

While much of the technology and innovation that underlies alternative energy development is still taking place in the US, Japan and Western Europe, much of the need for these technologies is dictated by fundamentals in emerging economies. Some of these economies are also moving up the value chain in terms of R&D, production and distribution. How do these trends affect your efforts in the alternative energy sector?

The key difference in our approach is products and point of view. First we need to decide where to set up battery production. The potential for electric vehicle (EV) penetration in 2020 is amazing. So we have to think back from there as to how to service and finance our activities at that time. China has established an ambitious target for EVs. According to Deutsche Bank, in 2020 annual EV demand in the US will be about 700,000 vehicles out of about 15-16 million total vehicles. In China it will run about ten percent, or 1.7 million out of 19 million total at the same time. Part of the reason for this is the Chinese government leadership really wants to enter this sector, and they don't want to go into complicated hybrid technology but rather to jump right into EVs directly. So we have to seriously think about our Chinese strategy. We are doing this now both at EnerDel and ITOCHU.

Historically, the primary motivation of trading companies has been to gain stable access of production to meet the needs of certain markets or clients, rather than to seek control over assets and companies. Is your preference also to be a minority investor?

We do not have many people who can run companies, so our position is quite consistent in terms of our activity with manufacturing companies. We make minority investments and then work with the company to create more competitive value chains. This enhances our own business interests as well as theirs. They can then manage their businesses and we can help them grow and expand and to strengthen our own business as well.

The troubled state of global markets is making it very difficult to access venture capital and private equity financing at a time when the world needs not only new sources of energy but new engines of global growth. We have seen interest in our work among Japanese and junior exploration firms in the natural resource sector and wonder if firms with viable alternative energy projects should give more consideration to the possibility of strategic investments from Japanese trading companies?

It depends on each case and it is important to note while we do make these investments, we are not a venture capital or private equity firm. Our investments are, therefore, not based so much on the potential for capital gains but rather ventures that enhance our competitiveness in areas that fit into our overall strategy and corporate focus.

We see many business plans and technologies from all over the world but they need to fit into our overall strategy if we are to give them serious consideration.

For example, I just received an inquiry from a German company who noted they have a unique material technology to make LIB, but it is still at Lab scale. I replied we generally do not invest in early stage companies. That said, if they have something valuable to offer, and we found it very unique and that it would add value to our competency in energy storage and advanced battery development, we would consider making an investment.

When a company like ITOCHU makes an investment in a firm like EnerDel, what are the most important considerations? What are you looking for in terms of management? Is there a preference for start-ups, JVs with mature firms, spin-off's or greenfield operations?

I cannot speak for all ITOCHU as it varies case by case, but we have a clear strategy, and if a company fits into our needs in terms of products and services, we are interested. Of course, we have to look at management and financials but that is secondary. If we cannot identify the synergies and story, there is little we can contribute even though the technology may be viable. In general, we are looking for ways to make a clear contribution over the relatively short term. If we cannot add value we look for an exit, so we take a lot of time to make sure it is a good fit. Size is not that important, as generally if companies are large and have a strong balance sheet they will not approach us. So in most cases we look at small-to-mid-sized firms. It is also okay to have negative P/L, but they do need to be able to deliver a viable product or service that differentiates them from competitors and creates value in the relatively near term.

A lot of our work consists of helping governments and associations and companies in their efforts to attract investment. For example we recently completed a comprehensive effort to help the Buffalo Niagara Region of New York evaluate their potential in alternative energy manufacturing. How does a company like ITOCHU view the site location process? Does location matter when considering an investment?

Location generally does not matter, and while incentives are a plus, they are quite secondary to the core mission. So, for example, when we are building a chemical plant and will become a business owner, we first move to identify viable locations. Then we look for incentives to facilitate this activity. In the case of Indiana, we are trying to bring in Japanese suppliers to strengthen our business there and EnerDel's position in energy storage and the EV industry, but if Michigan has a better package we might consider that. At the same time we do have a strong partnership with Indiana already, which we value highly.

What should US and foreign companies keep in mind as they seek investment capital and try to develop business relationships with Japanese firms?

ITOCHU is moving to become a global company even though we are a Japanese registered company. So, in my case, I was the only Japanese person at EnerDel when I was there, and I learned a lot from that experience. In this way, ITOCHU is trying to let the younger generation experience that type of environment. As our Chairman emphasizes, Japan is a small market with an aging population and as a result we need to seek opportunities and expand around the world. But it is important for companies who wish to partner or do business with us to do their homework. Even among Japanese trading companies there are major differences in their focus. They really appreciate attention to detail.

One additional factor is an emphasis on consensus. That is quite unique in my experience and differentiates us from American and European firms. Japanese companies need consensus to proceed. It is not enough to convince one senior decision maker. You need to convince the whole team. That takes more effort and time, but it pays off in the end as it brings more stability into the process. There is also generally a greater chance of success, as it promotes motivation throughout the organization.

I hope I was able to answer your questions and to give your readers more insight into our efforts to develop new alternative energy applications such as advanced batteries and how we are working with foreign companies. Thank you.

This interview is part of an ongoing series highlighting Asia-related business, trade and investment opportunities and issues.


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