Origins in the Late 1800s

The history of the Onoda Cement Companya major predecessor in the Taiheiyo groupbegins during
Japan's Meiji era, from 1867 to 1912. During this era, the Japanese social structure changed from feudal
to Western forms through government-sponsored industrial expansion. One of the first steps taken by
the Meiji government to modernize was the construction of port and harbor facilities. The first cement
in Japan, imported from France in 1870, was used in the construction of piers in the port of Yokosuka. As
the demand for infrastructure increased, so did the demand for cement and other imported goods. In an
effort to reduce the outflow of gold and silver due to increased imports, the Meiji government began a
domestic industrial development program.

Except in military industries and strategic communications systems, private concerns carried out this
industrial development program. In certain industries, however, the Meiji government sponsored and
constructed pilot plants. One of these industries was cement. The construction bureau of the Ministry of
Finance built Japan's first cement plant at Fukagawa, Tokyo, in 1873. Portland cement was
manufactured there two years later, in 1875, the same year cement production began in the United
States.

One of the crucial features of the Meiji era, the disbanding of the samurai warrior class in 1869, helped
provide the financial basis for Onoda Cement Company. After their dismissal from government service,
the samurai received pensions from the government that amounted to a percentage of their original
salary and varied in value. After about seven years, the pensions became too expensive and were
replaced with interest-bearing, nonconvertible bonds. The samurais' incomes fell to a fraction of their
original levels, and only a few of them had enough commercial experience to go to work to replace their
lost incomes. At the same time, inflation due to weakened paper currency and increased government
expenditures reduced the real value of their fixed holdings. Inflation later became a principal reason for
the government's decision to sell its various pilot plants.

In May 1881, at Onoda-Mura, Yamaguchi Prefecture, Junpachi Kasai founded Onoda Cement, the first
privately owned cement company in Japan. A year later, Onoda Cement purchased the government's
pilot plant at Onoda. Kasai, himself an ex-samurai warrior, led a group of samurai who pooled their
pensions to capitalize the company. Kasai became one of Japan's leading industrialists and part of a
group of business leaders who helped reinforce Japan's national integrity. Through their industrial
successes, these businesspeople resisted the expansion of Western interests into Japan during a period
of global colonization. During the presidency of Kasai's son, Shinzo Kasai, between 1900 and 1930,
Onoda became the largest cement firm in Japan.

Transportation was crucial to profitability in the cement industry because cement was traditionally a
high-bulk, low-value good. Manufacturers maximized revenues by placing plants near either the final
market or a water transportation facility, since water transport was the cheapest mode of bulk carriage.
Prior to World War II, Onoda solely produced cement; it did not have its own sales and distribution
network. Mitsui Bussan, a large zaibatsu, or conglomerate, was Onoda's sales and distribution agent in
both foreign and domestic markets. The relationship did not compromise Onoda's independence. Onoda
was not a subsidiary of Mitsui Bussan but rather a client of its trading services. From its founding Onoda
had been proud of maintaining its corporate independence.
The firm expanded extensively before World War II, especially into China and the Japanese colony of
Korea, the closest areas for increasing market size. By the beginning of the war, over 60 percent of the
firm's assets, roughly 19 plants, were in Korea and China.

Overcoming Problems in the 1920s and 1930s

In 1924, the cement federation, Rengokai, a cartel organization, was formed to control output. The
cartel set uniform curtailment rates that required cement manufacturers to limit production to 60
percent of capacity. Uniform production curtailment rates favored established firms over newer firms.
Established firms retained older equipment, normally scrapped in a competitive environment, simply for
the purpose of counting it as production capacity. Older firms could curtail production to 60 percent of
capacity by using 100 percent of their new equipment and none of their older equipment. Newer firms
with a higher percentage of newer equipment found that the 60 percent cap cut into the machinery
they could use in a competitive market, putting them at a disadvantage.

The cement federation agreements covered Japan proper, the colonies, Manchukuo, and the South Seas
Mandatory territories. Tensions within the cartel, intensified by the Great Depression, prompted the
formation of sales associations to fix exclusive sales territories with sales quotas and standard prices. In
1932, Onoda's Dairen factory seceded from the cartel over a dispute about Manchurian quotas. In
December 1933, the cartel responded to this challenge by setting up a mechanism by which to divide
markets, the Cement Exporters Association.

In 1934, Onoda and the Oita Company withdrew from the cartel on the grounds that the industry's
leader, the Asano Group, gained an unfair advantage from the uniform curtailment rates because it had
predominantly older equipment. When the cartel lost its control, it appealed to the government for
intervention. In December 1934, the Minister of Commerce and Industry enforced Article 2 of Japan's
Major Industries Control Law, for the first time ever, on the cement industry. The government's
intervention forced the "outsiders" to comply with the cartel's curtailment rates but actually did very
little to control competition since the law applied only to production in Japan proper.

To get around this constraint, Onoda built plants in Korea, Kwantung, and Manchukuo and supplied the
home market from these sources. This move was easy to accomplish because Onoda and the other
"outsiders" operated mainly in western Honshu, Kyushu, and Korea. The national and municipal
governments became some of Onoda's biggest customers, since the company now could undercut cartel
prices. The cartel responded to these Onoda successes by having the Asano, Mitsubishi, and Yasuda
zaibatsu set up their own colonial companies. It also secured the 1936 revision of the Major Industries
Control Law, which extended the government's control into the colonies as well. The government's
solution to the conflict was to have agents of the Rengokai and Onoda meet every three months to set
prices and production limits. This arrangement lasted until the eve of World War II, at which time Onoda
operated 27 plants with an annual production of 3.5 million tons.

Postwar Growth

As a result of World War II, Onoda lost 60 percent of its assets, or a total of 19 plants, including its
foreign holdings in China and all of its then domestic holdings in Korea. The plants left to Onoda after
World War II included Ofunato, Fujiwara, Tahara, Hikone, Atetsu, Onoda, Yahata, Tsunemi, and Oita.
Together with the loss of plants, Onoda lost its distribution arrangement with Mitsui Bussan when that
zaibatsu was broken up by the occupation government. The new arrangement called for Onoda to
operate its own domestic sales and distribution network while employing Mitsui as its foreign sales and
distribution agent.

After the war, Onoda president Toyoroku Ando rebuilt the business to re-emerge as the industry's
leader in Japan. Ando was a 1921 graduate of Tokyo University and a lifelong employee of Onoda. He
spent his first 25 years with the company in Korea, where he rose to manage the Pyongyang factory in
1944. Ando became president in 1945 and improved the efficiency of Onoda's production, distribution,
and transportation systems. Under his direction, the company began extensive diversification plans.
Onoda produces or conducts research into specialized types of Portland cement, ceramics, electronics,
ionics, biotechnologies, fluorochemicals, and computer systems.

Onoda began to expand outside Japan in the 1960s with a joint venture with two partners, Mitsui
Bussan and Hong Leong Corporation. This joint venture, Singapore Cement, was a bulk importer of
Onoda's "Dragon Brand" cement. In 1974, Onoda set up P.T. Semen Nusantara in Indonesia to operate a
cement plant at Cilacap, in central Java. Later, Onoda expanded into several markets, including Hong
Kong, Australia, Hawaii, Malaysia, and regions of the Pacific Rim. In the late 1980s, Onoda began to
expand into both the Chinese and U.S. markets.

Onoda's entry into the United States began with a joint venture with Lone Star Industries of Greenwich,
Connecticut, in 1988. The $60 million operation, Lone Star Northwest, conducts business in three states:
Washington, Oregon, and Alaska. The venture imports cement and manufactures concrete and
aggregatescrushed stones used in making cement and in highway construction.

Company Perspectives:

Our mission is to contribute to social infrastructure development by providing solutions that are
environmentally efficient, enhance our competitive position, and bring value to our stakeholders.

Onoda's second entry into the U.S. market that year was the purchase of the CalMat Company's cement
division, California Portland Cement Company, for $310 million. CalMat was a Los Angeles-area firm
dealing in sand, gravel, asphalt, concrete, and land development. The purchase included 13 ready-mix
concrete plants, three cement plants, and a cement-importing terminal, and it made Onoda the largest
cement producer in California. In 1989, Onoda invested in China in a joint venture with Mitsui Bussan
and two Chinese firms, Huaneng Raw Material Corporation and Dalian Cement Factory. This venture,
Dalian Huaneng-Onoda Cement Company, planned to construct a $150 million plant at the port of
Dalian, Liaoning Province. The plant would be capable of producing 1.4 million tons of high-quality
cement for export.

By now, the company's principal innovations included the reinforced suspension preheater (RSP), an
advanced cement-manufacturing process developed in 1964 that substantially reduced the amount of
energy used in the manufacture of cement. The RSP system was used in more than 20 countries and was
recognized as an industry standard. The O-sepa separator was an air separation system sold worldwide.
The system, developed in the late 1970s, saved electric energy and improved particle-size distribution. A
third product, Bristar, was an efficient, nonexplosive demolition agent used in urban areas to minimize
the traditional side effects of explosives: flying debris, noise, vibration, gas, and dust. Another
innovation was Chemicolime, developed in the late 1960s. This quicklime technology, which stabilized
wet soils, was used by the U.S. military in Vietnam to strengthen jungle and marshland roads. Its
contemporary uses involved construction projects near coastal regions.

During the late 1980s, Onoda operated Japanese plants in Ofunato, Fujiwara, and Tsukumi and had 104
subsidiaries, all in Japan, except Onoda U.S.A., Inc. and Onoda California, Inc. The company had five
product divisions. The cement-products division was the largest and accounted for about one-third of
net sales. The building-materials division produced materials that complement concrete construction.
The limestone and relatedproducts division produced limestone, gypsum, slag, and specialized sands.
The civil and architectural engineering division helped to construct cement plants in other nations and
developed applications of soil stabilizers and concrete reconditioners. The final division, the "others"
division, dealt in chemicals, electronics, and land management.

Changes in the 1990s and Beyond

By the early 1990s, Japan's cement industry was plagued with problems. Onoda faced intense
competition while struggling against a downturn in government works projects and overcapacity. To top
it off, the country's economy was faltering. Many of Japan's leading companies were forced into merger
activity, an uncommon occurrence in the Japanese business world. Sure enough, Onoda, positioned as
one of Japan's largest cement manufacturers, and Chichibu Cement Co. Ltd., Japan's sixth-largest
cement concern, joined forces in October 1994. The merger created Chichibu Onoda Cement Corp.,
Japan's largest cement manufacturer with a 24 percent share of the market.

Changes continued into the late 1990s as the company once again found itself in the midst of a major
deal. Chichibu Onoda solidified its leading position in the industry by teaming up with Nihon Cement Co.
Ltd. in 1998. Taiheiyo Cement Corp. was born out of the union and controlled over 40 percent of the
domestic cement market. Even with its enviable position, Taiheiyo faced tough times due to continued
weak demand. As part of a restructuring effort, the firm initiated a round of job cuts, reduced
production capacity, and took other cost-cutting measures with a plan of saving 37 billion per year
through 2001.

As Taiheiyo entered the new century, the company looked to international expansion as a means of
shoring up profits. The firm acquired a 28 percent stake in South Korea-based Ssangyong Cement Co.
Ltd. and a majority interest in Grand Cement Co. of the Philippines in 2000, making it the fifthlargest
cement concern in the world based on output capacity. Despite these positive steps, Taiheiyo and its
domestic counterparts continued to deal with falling demand, among other obstacles. In April 2000, The
Nikkei Weekly reported that "Japan's cement industry seems immune to economic recovery. The
problem can be traced to the sector's distribution structure, which negates the benefits of manufacturer
cost-cutting by fostering intense competition among suppliers of ready-mix concrete. Complex conflicts
of interest have made it extremely difficult for cement manufacturers to address the issue."

Nevertheless, Taiheiyo began to reform its distribution and logistics practices during this time period. It
raised cement prices, stopped paying sales commissions, and began utilizing a uniform pricing structure
in hopes of bolstering its financial position. In 2002, the company launched a new three-year program
aimed at reducing debt. It sold off various real estate and securities assets and slashed capital spending.

Key Dates:

1881:
Junpachi Kasai establishes Onoda Cement.

1924:

Rengokai, a cement federation, is formed to control output.

1945:

By now, Onoda has lost 60 percent of its assets as a result of the war.

1974:

P.T. Semen Nusantara is set up in Indonesia to operate a cement plant.

1988:

The company enters the U.S. market.

1994:

Onoda merges with Chichibu Cement Co. Ltd.

1998:

Chichibu Onoda joins forces with Nihon Cement Co. Ltd. to form Taiheiyo Cement Corp.

2000:

Taiheiyo acquires a 28 percent stake in South Korea-based Ssangyong Cement Co. Ltd. and a majority
interest in Grand Cement Co. of the Philippines.

During 2003, the operating environment in the cement industry remained challenging, especially for
Taiheiyo. Demand in the government sectorwhich had accounted for nearly 60 percent of domestic
cement demand in the pastcontinued to dwindle, forcing the company to look down different
avenues for growth. One such area was recycling waste, which the company participated in through its
zero-emission promotion business. The company secured a profit in fiscal 2003 and remained optimistic
about its future. Despite a lackluster outlook for Japan's cement industry, Taiheiyo appeared to be on
track for future growth through diversification.