Driving Forward

Financial Times

Jun. 23, 2015

A major deal in the United States exemplifies the new style of leadership at an increasingly diversified Mitsui & Co.

In March 2015, Mitsui & Co. paid U.S.$750 million to acquire a 20% share of Penske Truck Leasing, a U.S.-based full-service truck leasing, rental, and logistics business. For Tatsuo Yasunaga, Mitsui & Co.'s new president and CEO, the deal made impeccable strategic sense.

Each company had something the other needed. Penske will benefit from the unbeatable supply chain know-how that Mitsui subsidiary Transfreight North America—folded into Penske Truck Leasing as part of the transaction—has developed over a quarter century of making "just-in-time" deliveries to the North American factories of Japan's auto manufacturers. Mitsui, meanwhile, gets to invest in Penske which has a customer base of U.S. manufacturers—and massive scale as one of the largest truck rental and leasing providers in North America, with 3,000 sales outlets and more than 700 service facilities.

Combining these complementary strengths is sure to yield results. "We can generate higher earnings through cost efficiencies and through developing sophisticated integrated logistics solutions," Yasunaga declares. "And together we can expand faster outside the U.S., into Canada, Mexico, and other markets including Australia."

The timing of the deal was propitious too. New U.S. emissions and fuel-efficiency standards mean that truck fleets have to be newer and are subject to a stricter maintenance regime, which is driving up the total cost of ownership and making outsourcing increasingly attractive.

Yasunaga handled the Penske negotiations himself and is in no doubt why the deal went through. First, basic trust was already in place thanks to Mitsui's 15-year history of running U.S. and West European car dealerships with Penske. Second, Yasunaga has a close, personal relationship with Roger Penske, founder of the Penske Corporation.

Top-down, hands-on

Now, as the youngest CEO—he is 54—in Mitsui's history, Yasunaga is looking to bring his more personal approach to bear on running the company. "I want to build direct relationships with partners and customers, CEO to CEO," he explains. "The world is a volatile place, so we need to be able to respond quickly. I want to drive the company from the top down and bring the best out of Mitsui."

For evidence of that volatility, look no further than commodity prices. Price declines in such staples as iron ore and oil had an impact on Mitsui's results for the year ended March 31, 2015, reducing net income 12.5%, to ¥306.5 billion (U.S.$2.6 billion). But in line with a policy of stable, continuous returns for shareholders, the company will maintain the dividend payout for the year just ended and for the current year at ¥64, giving a generous yield of almost 4%.

Of Mitsui's projected ¥2.6 trillion cash inflow during the three years of the medium-term management plan (April 2014 to March 2017), recurring free cash flow of ¥1.1 trillion—the surplus after investment in existing businesses and projects getting under way in the pipeline—will be set aside for new growth businesses and for shareholder returns. Yasunaga points out that other financial indicators testify to Mitsui's underlying robustness. "Last year, our EBITDA was ¥788.3 billion; core operating cash flow was surplus ¥661.6 billion; and we earned ¥340 billion from divestitures. Our fundamental power to generate cash is very much intact."

Capital-intensive businesses like metal and minerals, oil and gas, and infrastructure, will remain the mainstays of Mitsui's business, and the company will continue to invest with a medium- to long-term perspective regardless of short-term price gyrations. "Nonetheless, we have to accept that we need to do more in the non-resource area," Yasunaga states. "My mission as CEO is to strengthen and develop counterbalancing businesses."

Yasunaga with Roger Penske, an auto-racing legend, and the Chairman and CEO of Penske Corporation.
A PTL rental truck.

Incremental Diversification

The drive to diversify gained momentum in May 2014, when Mitsui reconfigured its strategy around seven key strategic domains.

The Penske deal, for example, is about broadening Mitsui's transport-related Mobility domain. Mitsui already has a North American rail freight car leasing business, Mitsui Rail Capital (MRC), with over 8,300 freight cars. After an injection of third-party capital, MRC is expanding to serve surging shale oil and gas-related demand. "Together, our rail freight car and truck lease businesses give us a large integrated logistics platform," explains Yasunaga. "We're well positioned to benefit from a growing U.S. economy."

This strategy of staking out positions the whole length of the value chain through enhanced collaboration between business units is equally applicable in resources. Yasunaga cites the company's efforts in the Hydrocarbon Chain domain. Extracting shale gas and oil from the ground in Texas or Pennsylvania is only a first step; Mitsui is also building an LNG export terminal in Louisiana, a gas pipeline from Arizona to Mexico, and a methanol plant in Texas. "When all these downstream projects are up and running, we can generate stable earnings regardless of ups and downs in the basic resource price," he explains.

In areas such as resources, infrastructure, and transportation, where Mitsui has a large existing footprint, deals tend to come to the company. In addition, April 2015 saw the establishment of a new Corporate Development Business Unit tasked with identifying further promising strategic opportunities worldwide. "We need to promote change in our business model and become more proactive," Yasunaga comments.

In 2014, the firm unveiled a corporate slogan, "360° business innovation," that expresses Mitsui's commitment to generating new businesses by linking information, ideas, customers, partners, and business units in creative ways. The Penske investment is just the latest chapter in this never-ending story of dynamic evolution. "I look forward," Yasunaga concludes, "to taking Mitsui to the next level."

Partners in Growth:
Mitsui & Co. and Mozambique

A Universal Model

In the early 1990s, Yasunaga spent two years at the World Bank in Washington, D.C. pondering the question of how best to nurture growth in developing economies. "Australia is obviously a developed country, but I felt," he says, "that the model we created there was something we could recreate in the developing world."

Mozambique is one good example of this. After investing in one of the world's largest offshore gas fields there as part of an Anadarko Petroleum-led consortium in 2010, Mitsui built on its experience to sign a contract to participate in Vale's Moatize coal mine and Nacala railway and port project in December 2014. Mitsui's agreed upfront investment and loan payments will amount to U.S.$763 million.

Ongoing since 2004, the project is enormous. It involves upgrading almost 700 km of rail track and laying 230 km of new track to carry coal from the town of Tete to Nacala on the coast, constructing a deepwater terminal for coal, and upgrading the existing general cargo terminal.

The project is a three-way win for Vale, for Mitsui and for host country Mozambique. Vale, which is investing billions of dollars in the mine and related infrastructure, will benefit from Mitsui's proven infrastructure and logistics expertise, and long coal-industry experience.

By investing in the Moatize mine, Mitsui is able to diversify its coal production away from mature mines in the developed world. The Moatize mine contains 690 million tons of marketable coal—30 years' worth—in a thick seam close to the surface, fully half of which is the high-quality coking coal used in steelmaking.

Finally, coal represents a good way for Mozambique to rapidly boost its fiscal stability. Long term, the economic growth generated by the Nacala railway should benefit the 50% of the country's population that lives along the so-called Nacala Corridor. Eventually, as its general-cargo capacity rises, the project's world-class transport infrastructure could contribute to Mozambique's emergence as an import-export hub for sub-Saharan Africa.

Meanwhile, the liquefaction plant for the offshore gas field is planned to become operational in 2019. Possible businesses along the gas value chain, such as pipelines, power plants, and fertilizer factories, that are being looked into, could deliver broad-based economic benefits, and Mitsui is even exploring opportunities in non-gas-related fields, including in cargo transport and agriculture.

"Just as we did in Australia," says Yasunaga, "we're asking ourselves what new businesses we can create to contribute to Mozambique as a country."

The 912km Nacala railway
The Moatize mine