General Sekiyu K.K.

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General Sekiyu K.K.

8-6, Nishi-Shinbashi 2-chome
Minato-ku, Tokyo 105
Japan
(03) 3595-8300
Fax: (03) 3508-0668

Public Company
Incorporated: 1947 as General Bussan Kaisha, Ltd.
Employees: 1,320
Sales: ¥486.32 billion (US$3.58 billion)
Stock Exchange: Tokyo

General Sekiyu K.K. (General) is a Japanese oil refiner and distributor affiliated with the companies of the former Mitsui zaibatsu, and the U.S. oil company Exxon, heir to Standard Oil of New Jersey. Founded in the wake of World War II as successor to the petroleum department of its former parent company Mitsui, the company has both prospered and suffered in the volatile Japanese petroleum industry in the postwar years.

The Mitsui zaibatsu, a very large general trading company with a long history, became involved in the distribution of petroleum products as early as the 1880s, when it began to sell kerosene. Although it was later forced out of that business by foreign competitors, the company re-entered the oil business in the years following World War I. Since Japan has very little natural petroleum, this re-entry meant dealing with a foreign supplier. In 1920 Mitsui became the exclusive distributor for the refined petroleum products of General Petroleum Corporation, a U.S. company, in the Far East. Mitsui quickly set up facilities to market and store oil and, by selling high-quality oil from California at competitive prices, was able to challenge successfully the dominance of Dutch oil interests in Japan.

In 1932, however, Mitsui’s U.S. supplier was purchased by Standard Oil of New York, and it became difficult to maintain the company’s distribution arrangements. In 1933 Standard Oil of New York and Standard Oil of New Jersey combined their operations in the Far East to create Standard-Vacuum, known as Stanvac. Along with Rising Sun, a Dutch company, Stanvac held 60% of Japan’s domestic oil market throughout the early 1930s. Having failed to work out an agreement to enter the refining business with Stanvac, Mitsui negotiated a contract to distribute the company’s products.

In 1934 the Japanese government passed the Petroleum Industry Law, bringing the oil industry under government control as part of the preparations for the expected war. Petroleum, used to power Japanese warships, was seen as a vital strategic resource. The law required all foreign oil companies to maintain a six-month supply of oil beyond the usual inventories. When Stanvac balked at this requirement, Mitsui compromised with its foreign partners by building tanks that would hold a three-month supply, while the U.S. firm took care of the other half of the requirement.

In 1943 with Japan in the midst of full-scale war, the government intervened in the oil industry again, putting all activity under one control company, and Mitsui lost its petroleum business. Two years later, the country’s unconditional surrender to the Allied forces brought an end to World War II, and the postwar reconstruction of the ruined country began.

On July 3, 1947, the Supreme Commander of the Allied Powers then ruling Japan ordered the breakup of the Mitsui and other zaibatsu, which it perceived as having an undesirable feudalistic and totalitarian influence on the country. In the wake of this order, managers of the different divisions of Mitsui Bussan Kaisha, the main trading arm of the company, took responsibility for the welfare of their employees, and set up their own new enterprises, based on their former business functions. Accordingly, members of the old petroleum department set up an independent company to market and distribute oil. The company was named General Bussan Kaisha, Ltd., and was capitalized at only ¥180,000. In setting up business, the new firm relied on the strong relationship with Stanvac that it had inherited from its parent, Mitsui.

In the early postwar years, Japan’s oil industry struggled to recover from the devastation wrought by Allied bombardment of the home islands. Almost all of the petroleum industry’s infrastructure, including its refineries and tanks, had been reduced to rubble. Distribution of oil was firmly under the control of the occupying government, and the main task at hand for the industry was to rebuild.

In 1949 General Bussan Kaisha took over the Osaka General Bussan, which had originated from the fuel department of the Osaka branch of Mitsui Bussan Kaisha, Ltd., and thus consolidated all the petroleum operations of the former zaibatsu under one name and management. The company continued to distribute petroleum under government direction.

In 1952 the Allied occupation of Japan ended, and rationing of petroleum was abolished. The demand for oil to fuel the nation’s postwar industrial boom began to increase. In November 1952, General strengthened its ties with Stanvac when a new contract between the two companies was negotiated, authorizing the Japanese company to distribute Stanvac’s refined petroleum products. This access to a stable supply of petroleum products allowed the company to expand rapidly.

In 1953 General was listed on the Tokyo stock exchange for the first time. By 1954 in addition to its main office in Tokyo, General had opened branch offices in 13 other cities around Japan, and owned petroleum storage tanks in 23 separate locations. The company sold its products to other dealers, as well as directly to factories and government agencies. It had obtained the contract to supply Stanvac bunker oil to foreign ships in Japanese ports, and to Japanese ships in foreign ports. Just seven years after its founding, General’s capitalization had increased to ¥300 million, with shares held by nearly 2,000 stockholders.

By the late 1950s, the zaibatsu dissolved by the Allied occupation had largely re-formed as a keiretsu. General Bussan, utilizing its inherited industrial contacts, was doing well, and there was no move to rejoin the other Mitsui enterprises, but the company did continue to maintain loose associations with the Mitsui group. Mitsui & Co. held about 10% of General’s stock in the late 1970s, and other Mitsui divisions also held large blocks of shares.

In the early 1960s, General’s U.S. partner, Stanvac, was ordered to be dissolved as a result of an antitrust case brought by the U.S. government against the U.S. oil industry. From this point on, General maintained a relationship with just one of its former partners, Standard Oil Company of New Jersey, which would become known as Exxon.

In 1962 the Japanese government passed the Petroleum Industry Law, giving the Ministry of International Trade and Industry a large degree of power over the oil industry. The government could now control prices for oil products and refinery capacities. These moves made it more difficult for foreign interests to establish oil refineries in the country, but made it possible for more Japanese independent refiners to enter the industry. The eventual result was a heavily crowded petroleum industry.

In the second half of the 1960s, Japan completed its shift from reliance on coal to reliance on oil to fuel its rapidly-growing economy. Oil was cheap and plentiful, owing to the discovery in the late 1950s and early 1960s of large reserves in the Middle East. In 1967 General Bussan changed its name to General Sekiyu.

In 1971 General was able for the first time to expand its activities beyond marketing and distribution to include petroleum refining. In conjunction with the Allied return of the island of Okinawa—captured during World War II—to Japanese control, General arranged, under the tutelage of Japan’s Ministry of International Trade and Industry, to form a joint venture with its perennial partner, Esso, and with another Japanese company, Sumitomo Chemical Company. The joint venture provided for Esso to construct a refinery on Okinawa with a capacity of 80,000 barrels a day, which would be completed in January 1972. Under the agreement, when the island reverted to Japanese control on May 15, 1972, the refinery would become the joint property of Esso, which took 50% of the shares, and General, and Sumitomo, each of which gained 25% ownership in return for providing US$12.5 million of financing. This arrangement was in accordance with Japanese law, which stipulated that Japanese interests hold at least half of any company operating in Japan. In addition, the agreement for the new operation contained restrictions on the amount of oil that would be shipped to Japan. The joint venture was named Nansei Sekiyu.

General’s long-awaited entry into the oil-refining business came at a fortuitous point in Japan’s industrial development. By 1973 more than three-quarters of the country’s energy needs were met by oil. Almost all of that oil was imported from the Middle East. Prices for oil products were kept low through plentiful supply and heavy competition between the large number of oil refiners and distributors.

In 1973, however, Japan and its business and government leaders received a rude shock when the Arab oil embargo resulted in a sharp rise in oil prices. The doubt cast by this event on the security and stability of a national economy based so heavily on a necessarily imported commodity had far-reaching effects on the Japanese oil industry. In December 1973 reacting to large profits reaped by the oil industry from the higher prices of the oil crisis, the government stepped in to fix prices for refined oil products. This move was prompted in part by public anger over a General Sekiyu memo which had come to light and which advocated “grabbing this one chance in a thousand” to make huge profits on the oil crisis. General’s public relations suffered further when it was revealed that the company had instructed service station owners to restrict sales of gasoline to selected customers.

In February 1974 the Japanese government formally charged General Sekiyu and other oil companies with joining together to form an illegal pricing cartel for the purpose of increasing their profits during the previous year. After a ten-year court battle, the companies’ convictions and fines were upheld in 1984 by the Japanese supreme court, and company executives were given suspended prison terms.

Throughout the mid-1970s, Japan’s oil refining industry found itself in choppy waters, and General Sekiyu was no exception. Companies were squeezed on the one hand by rising prices for crude oil, and on the other hand by government-mandated price standards for its refined products, particularly those sold to major industrial users, such as steel and petrochemical producers. The company registered pre-tax deficits in the first half of 1975.

In 1977 General Sekiyu joined with six other Japanese companies to form an oil-stockpiling venture. The new company was to construct a 25-tank storage facility for petroleum products. This venture allowed General Sekiyu and the other participants to fulfill their government-imposed obligation to maintain a three-month petroleum reserve.

General’s greatest asset during this time was its marketing prowess. The company controlled 4.5% of the crowded Japanese petroleum market. By mid-1978, steep drops in the price of oil products, combined with rising costs to refiners, were again bringing down profits in the petroleum industry. A new oil tax, implemented on June 1, 1978, further depressed General’s earnings.

In September 1978 General announced that Exxon, its longtime U.S. partner and supplier of crude oil, would purchase 49% of General by buying up US$34 million’s worth of new shares to be issued by the company. In addition, General took over Exxon’s 50% share in the Nansei Sekiyu refinery on Okinawa, bringing its ownership to 75% and increasing its oil refining capacity. Other joint ventures between Exxon and General Sekiyu—the General Gas Company, an importer of liquefied petroleum gas, and the General Sekiyu Refining Company—became wholly owned subsidiaries of General Sekiyu. Under the agreement, General Sekiyu would gain the same access to raw materials and technological expertise as Exxon’s wholly owned subsidiaries, while remaining an independently-managed Japanese company. The new mergers allowed General to streamline it operations and eliminate duplication of effort with its subsidiaries.

The move improved the standing of Exxon and its subsidiaries within the Japanese oil market, giving the group, which also included the wholly U.S.-owned Esso Standard Sekiyu and Toa Nenryo Kogyo, a 10% share. Exxon’s stock purchase was approved by Japan’s governmental Foreign Investment Council and completed by late May 1979.

By March 1980 General’s profits had recovered from a slump in the previous year caused by high costs for raw materials and heavy sales of low-priced products, to post extremely high profits, a result of higher prices for its products. The roller-coaster ride of the crowded Japanese petroleum industry continued in the next year, however, as the company posted a loss in March 1981. The company’s fortunes continued to worsen as the year progressed, as domestic demand for petroleum products declined under Japan’s program to diversify its sources of energy away from almost total dependence on oil.

Difficulties continued throughout the early 1980s. By 1982, General’s share of the petroleum market had slipped to 3.9%. In the following year, the company reduced its refinery capacity by 10% to 13%, in keeping with earlier government recommendations.

In January 1984, the company complied with governmental restructuring of the petroleum industry by consolidating some of its marketing activities with Esso Standard Sekiyu, the wholly owned subsidiary of Exxon. The two companies together held slightly over 9% of the Japanese petroleum market in 1984, with General alone holding 3.98%. Despite these steps, General reported a drastic fall in revenues for the fiscal year ending in March 1985, as net income fell 97% as a result of lower prices for oil products.

By late 1987, General’s share of the fuel oil market had slipped to 3.8% and the price of the company’s shares had dropped as well. This decline was attributed to a shift in the demand for refined petroleum products, away from gasoline, which was General’s strength, toward heavier products.

As General entered the 1990s, its ties with Exxon and Esso Sekiyu remained strong, stretching from the supply of crude oil to joint marketing efforts. The company was looking to diversify through its subsidiaries into such fields as petrochemicals, engineering, and real estate. With the price of crude oil remaining steady, and a government-mandated price rise to take effect in February 1990, the company was anticipating resumption of profitable operations.

Throughout its history, General Sekiyu had found itself jockeying for position within the strategically sensitive and crowded Japanese petroleum market. Ready supplies of petroleum, from sources such as General’s partnership with Standard Oil, helped to fuel Japan’s phenomenal postwar industrial growth, and the company had both benefited and suffered from world events and its key place in the Japanese economy in the wake of that process. How General Sekiyu will navigate the challenges of its changing market in the years to come remains to be seen.