Nippon Paint : Q&A Summary

A1Wee Siew Kim
On NIPSEA China, the sustainability of TUC's market share and growth. Actually, we believe that we should be able to continue to capture market share. For one, it is underpinned by our belief that there is still a lot of headroom for growth.

If you look at the TUC sector, NIPSEA China share is about 27%. Our two closest competitors are in the high single digits. If you look at it, there's still almost half the market for the three of us to get it. Also, that, we believe that there has been a volume contraction in the recent year. As such, when the economy does pick up, there will be new growth.

We had spent two years building the outreach in Tier 3-6 cities by putting the teams in place and also developing a whole new product that is actually more acceptable to Tier 3-6 cities. Also, more importantly, because of the brand strength, we are able, in the Tier 3-6 cities, to also reach out to regional partners.

When I say regional partners, I talk about it in two dimensions.

One is in order for us to have a more complete offering to the market, we actually believe that we have to couple our traditional paint and coatings product offering with a dry mix mortar and putty offering to be a more complete supplier to the market. When we decided to do that, maybe eight, nine years ago, we were actually new to that segment of the product offering. We went on a very asset-heavy approach because we have to learn the business. Asset-heavy meaning we start to build a factory, and we start to learn how to produce it.

By producing it, by reaching out to the market, on a selective market basis and regional basis, we begin to understand what the market needs. Over time, we got comfortable and knowledgeable about that part of the business. When we get to a certain level of confidence and competence, we start to now use our brand power, reach out to many of the regional putty and mortar producers. There are many of these smaller producers in China. Convince them that come, be a partner of NIPSEA China, use our brand, use our technology advantage. Maybe even sometimes, use our buying power advantage and together, we can create the business.

We bring the brand, we bring the technology, we bring some outreach, but a lot of our partners bring some regional presence, maybe even a factory, and some also bring local relationships. Together, we grow the business and without having to invest in the hard assets on the ground, especially in some far-flung regions of China, we began to morph into a more asset-light approach to this entire piece of the business. That is the dry mix and mortar.

Then, when we sort of got a little bit confident that this model does work, we began to also look at the paints and coatings side, because even in China, there are many smaller regional players who also play on a regional basis in the paints and coatings space. Again, we bring to them the technology, brand, some distribution, and coupled with the local strengths they have, we actually also manage to enlarge our presence.

This partnership is only possible because we actually bring a brand to the table that people value. As such, all this took time to put in place, but it's beginning to pay off, and I think that actually results in the performance of this year in 2023. We do believe that the signs are quite positive. That there is a lot of headroom, there is a lot of momentum in this strategy, and we should be able to continue to sort of reap the rewards in time to come.

In answer to the question, I think the sustainability of the market share gain is realistic.

On top of that, I think the other thing that began to pay off for us is, for the third year now, we are also pushing a very aggressive color strategy. We believe that in order to stimulate the market, especially when the new build volume is low, we have to stimulate the repainting market. One way to stimulate the repainting market is actually to bring up the awareness that color is a very important aspect of the entire aesthetics of a home.

With less resale activity on the market, generally repainting will drop. We believe that by stimulating the market, we are beginning to convince people that even if you stay in a house that looks a little aged, you can actually have a whole new environment and feel by adding colors by repainting. We stimulate that market and if you do pay attention to some of the advertisements that we do, you will actually be aware that we have been very active in promoting what we call Magic Paint.

Magic Paint is a texture paint, and it is beyond the traditional texture paint because it is more easily applicable. We are able to train painters and applicators in large numbers that can apply it. Beyond the previous texture interior offerings of many of our competitors and ourselves, this texture offering is now able to be applied on all walls as opposed to in the past, very limited application on feature walls.

As such, we're stimulating the market with colors. On the back of advertisement, Magic Paint and the technology advancement of the application of the Magic Paint, we also couple it with the rollout of computerized color matching (CCM) machines because we believe that once we stimulate the market, if we succeed, we must be able to allow our customers easy access to all the colors and the paints.

As a result, we have a very aggressive rollout of CCM machines into the market, so much so that today, we must have about 18,000-plus CCM machines in the market, which is probably about 40%-plus of the in-stock base of CCM machines in China. We continue to roll out maybe at a pace of maybe 10,000 CCM machines a year going forward. We believe we'll continue to have headroom for this strategy.

We believe that that is also viable because if we compare to another market, like India, the China in-stock base of CCM machines is only 20% of India's in-stock base. That gave us some confidence that this strategy still has some headroom for growth. As such, overall, we believe that our strategies in TUC still have a lot of life in it and we continue to grow on it.

Now, the next question is whether the rest of NIPSEA brings best practices to China. Actually, I've always believed that China is a very fast-moving market, especially in the TUC area. In fact, the rest of NIPSEA Group actually gets more ideas from NIPSEA China than NIPSEA China gets from the rest of the group. I'm just saying on a net basis, NIPSEA China teaches the rest of the NIPSEA Group market and brings new products to the NIPSEA Group market. And as such, I would think that it is a two-way traffic, but the traffic is actually more biased one way. NIPSEA China is exporting a lot of innovations to the rest of NIPSEA Group.

There was another comment about margins in Japan Group.

As you could see from the third quarter results, our margins in Japan Group are creeping back up and in 2023, we are probably in the 9% range. Of course, the usual question asked is that, can it get back to the heydays of the 16%, 17% of, say, the 2017 or 2018 timeframe?

I say that, of course, we are pushing our people there, and it is on the back of a lot of productivity improvements that we're putting into the workforce. You made a comment to say that the best practices of NIPSEA Group. I look at it as more from a standpoint of sharing ideas and allowing our Japanese colleagues to pick and choose what they think works for them in Japan Group. The big breakthrough, I think, is the freeing up of the mindset to say that there can be different ways of doing things in Japan Group that will work.

In the past, there was this belief that there is a Japan way of doing things. Now that we have closer collaboration between our partner companies, between our colleagues outside of Japan Group and our Japanese colleagues, this intermingling allows people to see different ideas at work, and be able to pick and choose and adapt.

I would say that there are practices being adopted in Japan Group, but more importantly, it's the whole new mindset change which we actually term JLFG, with J for Japan, LFG for Lean for Growth. There is now a growth mindset in spite of a market that traditionally people believe do not grow and there's also this lean mindset to say that we want to get value. We want to eliminate waste. But it does not mean that we cut costs to the bones, but it actually means that we invest in the right area.

If you look at investment, you could tell that we are investing in facilities. We've brought up the new Okayama plants. We are now building the new Shinagawa R&D Center.

All in all, our Japanese colleagues are saying that there is reality in Lean for Growth. We continue to invest where we believe that there is value, and we continue to cut where we think there is fat. The two actually go hand in hand.

Actually, what I feel is that with the momentum we are getting and with a new mindset, we believe that we definitely can improve on the current margin performance. As such, I'm definitely hopeful, and I'm also hopeful because we are also entering into new areas.

Like recently, we pooled together all the different offerings into the EV (Electric Vehicle) areas from the different partner operating businesses in Japan Group, pooled them into one concerted unit that actually prosecutes the market as one, offering our customers the best of what each of the operating divisions or companies in Japan Group can offer as one single point of approach. We believe the emerging areas will also give us the opportunity to leverage upon the strong base that we already have in Japan Group.