Case 13 Sazo Idemitsu: From “Oil Merchant of the Continent” to “Hero of Native Oil Companies”

Abstract

This chapter introduces Sazo Idemitsu, who established Idemitsu Kosan as the number one native oil company in Japan, and its overseas expansion and growth.

The Miracle of the Nissho-Maru

Sazo Idemitsu was another businessman who boldly ventured out of Japan before World War II, but whose business was badly damaged by Japan’s defeat.¹ The defeat was a turning point as he drastically transformed his business from “oil merchant of the continent” to “hero of native [Japanese] oil companies.”

In 1953 (Showa 28), only eight years after the defeat that had reduced all major Japanese cities to ashes, Idemitsu Kosan, led by Sazo Idemitsu, drew international attention by sending its ship Nissho-Maru II to Iran to purchase a large quantity of oil for transport to Japan. Iran was then involved in a dispute with Britain over the nationalization of the Anglo-Iranian Oil Company, and the “Nissho-Maru Incident” caught the world’s attention as it undercut the boycott of Iranian oil by the world’s oil majors. The “Brief History of Idemitsu” published by Idemitsu Kosan in 1964, describes the events:

This was a daring move to directly link Iran, the world’s leading oil producer, with Japan, a major oil consumer. As a result, the price of domestic oil products fell by tens of billions of yen a year, providing a tremendous benefit to consumers. The British Anglo-Iranian Oil company (AIOC) filed a lawsuit requesting a provisional injunction for the seizure of oil products shipped by Nissho-Maru to Japan, but the Tokyo District Court and the Tokyo High Court refused it, ending in Idemitsu’s triumph. His resolve not to yield to British coercion gave confidence and courage to the general public whose spirit was low as a result of Japan’s defeat in the war (p. 46).

For the Japanese people, devastated by the war, Idemitsu’s “Nissho-Maru Incident” was truly a miraculous event as a triumphant, head-on confrontation with the United Kingdom, a core country of the Allied Powers. The miracle of Nissho-Maru, catapulted Sazo Idemitsu to prominence as a highly popular business leader in postwar Japan. It also served as a catalyst for the Japanese economy’s recovery, namely, the rapid economic growth that began in the mid-1950s.

Idemitsu’s Overseas Expansion

Challenging powerful entities was a way of life for Idemitsu throughout his life, beginning even before World War II.

Born in 1885 (Meiji 18) in Akama Village, Munakata County (present-day Akama, Munakata City), Fukuoka Prefecture, Sazo Idemitsu was taught by Renkichi Uchiike at Kobe Higher Commercial School (Kobe Kosho, present-day Kobe University,), which Sazo entered in 1905. Uchiike told him about the social nature of commerce, meaning “speculative merchants would become unnecessary in the future, and that only merchants who would serve as distributors between producers and consumers, fulfilling their social responsibility, would survive.²” Idemitsu was deeply moved by this lesson, and later came to make it his business philosophy to place the highest priority on consumers’ interests by advocating ideas such as “from producer to consumer,” “large-area retailing establishing directly run stores over a wide area, eliminating the middlemen,” and “consumer-orientation.”

In 1911, two years after graduating from Kobe Kosho, Idemitsu established his own company, Idemitsu Shokai, selling petroleum products. Idemitsu Shokai was financed by Jutaro Hida, a wealthy Awaji resident with whom Idemitsu became acquainted during his time at Kobe Kosho.

Idemitsu Shokai, established just before World War I, subsequently focused on Japanese-controlled East Asia and surrounding areas, implementing Idemitsu’s policy of “large-area retailing.” Idemitsu Shokai, founded in June 1911, was integrated into an affiliate company, Idemitsu Kosan, established in March 1940 (Showa 15), ceasing to exist in November 1947. During this period, Idemitsu continuously served as the leader of Idemitsu Shokai. The 37 years of Idemitsu Shokai’s history can be divided into the following periods in terms of their overseas business evolution:

• 1. From 1911, when Idemitsu Shokai was founded, through the opening of its Dalian office in 1916, to 1918 (Taisho 7) when Idemitsu Shokai established a foothold in “Manchuria” (northeastern China. The term “Manchuria” is employed here as the name used by Idemitsu Shokai at that time.)

• 2. 1919 to 1930 (Taisho 8 to Showa 5), when the company expanded into northern China, Siberia, Korea, and Taiwan.

• 3. 1931 to 1936, when the emphasis was placed on foreign regions. The focus of overseas operations shifted to Manchuria as well as the rest of China.

• 4. 1937–1941, when the company focused on overseas operations, increasing its activities in China outside of Manchuria.

• 5. 1942 to August 15, 1945, when existing overseas operations faced hardship during World War II, but expanded into the South.

• 6. August 15, 1945 to 1947, after losing all overseas operations and assets due to Japan’s defeat, until the company was integrated into Idemitsu Kosan.

The developments of Idemitsu Shokai and Sazo Idemitsu can be traced through their words and actions during each of these periods.

Expansion into Manchuria and Delivery of Axle Oil to the South Manchuria Railway

In Manchuria during the first period, Russian-produced oil’s share shrank after the Russo-Japanese War, and the market was dominated by three Anglo-American companies: Standard Oil, Asian Petroleum (a Shell affiliate), and Texas Petroleum. Standard Oil, in particular, had tremendous power in the Manchurian market. Japanese oil companies were hesitant to enter the Manchurian market because Japanese petroleum products faced disadvantageous conditions in transportation costs, tariffs, and quality standards.

The South Manchuria Railway (Manchuria Railway) imported locomotives, passenger coaches, and freight cars from the U.S., and all lubricating oil used in these trains was also made in the U.S. After developing a comparable axle oil using Japanese petroleum products, Idemitsu approached various contacts associated with the Manchuria Railway to carry out analytical testing. After two years of analysis and tests it was found safe to use. At the next round of cost estimates, Idemitsu offered to deliver at half of Standard Oil’s delivery price.

Idemitsu’s sales efforts left a strong impression on Manchuria Railways, creating interest within the railway company to actively use Idemitsu’s machine oil. Idemitsu Shokai thus began delivering axle oil (lubricating oil) to Manchuria Railways in 1914.³ Idemitsu recounts the circumstances that led Manchuria Railways to purchase his company’s axle oil:

I first asked for an analytical test, and then a field test. Then I asked them to designate a branch line to carry it out. That was the Fushun Line. As I asked for the field test so eagerly, an engineer from the Manchuria Railway offered me the oil testing factory at the Shahekou plant of the Manchuria Railway. The factory had all kinds of testing machines, but none of them were being used and were collecting dust. I was provided with a technician, so I completed most of the practical tests that required machines. Fortunately, we obtained good test results, so we then conducted a field test on the Fushun line and it performed as well as foreign products. Then they decided to give us some business.⁴

Beginning with the delivery of lubricating oil to the Manchurian Railway, the company began to handle cement, volcanic ash, machinery and tools, in addition to petroleum products. In April 1916, Idemitsu Shokai opened its Dalian Branch Office—its first ever location beyond the head office, inside or outside of Japan.

During the abovementioned second period, Idemitsu Shokai achieved steady growth. The driving force was active expansion of distribution channels in East Asian regions.

Looking at the sales of Idemitsu Shokai by branch in 1929, the Dalian branch (1,074,782 yen) boasted the largest sales, followed by the Shimonoseki branch (1,073,038 yen). These were followed by Keijo (Kyeongseong/Seoul) branch (996,968 yen), Moji branch (979,351 yen), Taipei branch (931,050 yen), and Hakata branch (703,948 yen). Sales at the Wakamatsu branch (16,037 yen) were limited.⁵ Clearly, the expansion of distribution channels in Manchuria, Korea, and Taiwan played a major role in the company’s growth in the decade after World War I.

By 1929 the largest sales volume among all branches was found in Manchuria’s Dalian Branch, established in 1916 as the Dalian Outpost Office. Significant for its business expansion was the development of “No. 2 winter weather proof axle oil” for the Manchuria Railway.

In Manchuria’s extremely cold weather, the freezing of lubricating oil caused the axles of freight cars to overheat, taking a heavy toll on Manchuria Railway’s operations. Idemitsu Shokai began supplying axle oil to the Manchurian Railway in 1914, and in 1917 submitted 300 cans of “No. 2 winter weatherproof axle oil” as a sample batch. A year passed without any response, so the company tried to contact the railway but found it impossible to make any progress because the section chief in charge had been replaced. Manchuria Railway had an inventory of axle oil made by non-Japanese oil companies, which had been prioritized.

However, in early 1918, the axles of several hundred Manchurian Railway freight cars were damaged by overheating, resulting in a loss of 3-four million yen. Idemitsu Shokai was then called in by the Manchurian Railway and participated in the field tests in Changchun in extremely cold weather. Four types of axle oil were for testing: Vacuum, Standard Oil, Idemitsu’s regular winter weather oil that it had supplied in the past, and “No. 2 winter weatherproof axle oil” that Idemitsu submitted as a sample. In the test, only No. 2 winter weatherproof axle oil performed flawlessly; in contrast, Vacuum’s product performed the worst.

Sazo Idemitsu recounts the process and results of the field test as follows.

The Manchurian Railway burned most of the freight car axles. Winter was the season for transporting soybeans, and the transportation of soybeans was halted. At that time, the loss in freight fare was 3.4 million yen, and the indirect damage was enormous. The Manchurian Railway was severely criticized.... After conducting various oil tests in Changchun, we decided to test the [lubricant] oil in an actual train. They took out a locomotive and lubricated the four axles with different oils. One was Vacuum’s oil, which ended up burning, one was Standard’s quality oil used in the past, one was Idemitsu’s regular winter oil, and one was the sample I had brought with me. We loaded the four different types of oil and drove to Gongzhuling in the middle of the night and returned. The results showed that, with Vacuum’s oil, the wool had popped out of the axle box [journal box], and wool packing saturated with oil flew out, so it was only natural that it would burn. Next, [wool packing saturated with] Standard’s oil was half overhung and half remained inside the box. With Idemitsu’s normal winter weather oil, about half moved from under the axle into the box interior and was not yet burned but was going to burn. The sample winter weatherproof oil [No. 2 winter weatherproof axle oil] was perfectly contained under the axle and had not moved an inch. It was rare for the results to be so clear, so they decided that this oil was the one, making the decision based on actual performance.⁶

The two foreign oil companies had previously suggested to the Manchurian Railway that the box covers be tightened more securely to prevent freezing of the axle oil, but they did not refer to the performance of the oil itself.

Based on these test results, it was natural for the railway to fully adopt the “No. 2 winter weatherproof axle oil” supplied by Idemitsu Shokai. This oil eliminated freight car burnout accidents.

Pursuing an “Emphasis on Overseas Territories”

In the third period, Idemitsu Shokai shifted its emphasis to opening outlets abroad rather than in Japan. The tightening of petroleum controls by the government increased restrictions on business activities, leading the company to focus on overseas locations. However, it was not only on the Japanese mainland that state control over the oil industry was tightened in the mid-1930s—the same occurred in Manchukuo established by Japan in 1932, and in the Japanese colony of Korea.

The Mukden Incident (the Manchurian Incident) in September 1931, along with the banning of gold exports introduced again in December 1931, the establishment of Manchukuo in March 1932, and the establishment of Manchurian Petroleum in February 1934, had a significant impact on Idemitsu Shokai’s business activities in Manchuria, which were centered in its Dalian Branch. The implementation of an oil monopoly system in Manchuria through the establishment of Manchurian Petroleum had a particularly large impact.

The company’s response to the tightening of oil controls in Manchuria and its response to the oil crisis is described in the 11th edition of “Brief History of Idemitsu” (2008, Education Section, Human Resources Department, Idemitsu Kosan Co.):

In Showa 7 (1932), after the establishment of Manchukuo, the government sought to control key industries in the country under a policy to rein in capitalists, pressing ahead with an oil monopoly. Idemitsu opposed this erroneous policy and did its utmost to correct it, but the authorities refused to listen. Finally, in Showa 10 (1935), the petroleum monopoly policy was implemented in Manchukuo. Not only did the authorities reject Idemitsu’s advice, they also regarded Idemitsu as a mere capitalist commercial enterprise, and placed the company in such a difficult situation that at one point the Idemitsu began to prepare for withdrawal from Manchuria. With the tightening of controls on various commodities, commercial rights that had been cultivated over the past 20 years were taken away by a single piece of legislation. Almost all of Idemitsu’s products were subject to state control. The bulk of the company’s operations came to consist of distribution activities under the government’s rationing system.

Regarding petroleum products, with the implementation of the monopoly law, Idemitsu was solely responsible for the sale of machinery oil (a freely marketable product) made by Manseki (Manchurian Petroleum Company, founded in Showa 9) in Manchuria. However, Idemitsu helped ration fuel oil (subject to the monopoly policy) as a member of sales control companies located throughout Manchuria,

But Idemitsu, who had not been cowered by powerful capitalists under the past free economic environment, was predictably discontented with simply being the watchdog of laws and institutions under the state-controlled economy. Gradually, Idemitsu’s capabilities, built from on-the-ground experience, naturally surfaced, and the authorities had little choice but to rely on Idemitsu’s practical expertise. Much of the work, including the distribution of fuel oil, a monopoly commodity, and the importation of goods for mobilization (goods covered under the Materials Mobilization Plan), was entrusted to Idemitsu, who became busier than before the Mukden Incident (pp. 17–18).

Idemitsu Shokai was adamantly opposed to the oil monopoly system in Manchuria that denied it freedom of business activity. Despite this opposition, the oil monopoly system was enforced and dealt a heavy short-term blow to the company’s Manchurian business activities. Over time, however, Idemitsu’s field of activity gradually expanded and its business in Manchuria even expanded under the oil monopoly system. Thus a kind of “reverse phenomenon” occurred in Manchuria, in which Idemitsu Shokai was constrained in the short term under the tightening of oil controls, but managed to expand the scale of its business over the long run.

As restrictions on Idemitsu Shokai’s business activities in Manchuria and Korea intensified, the company shifted its business focus outside of Manchuria to China. The first step was to enter Shanghai, a stronghold of foreign oil companies. Idemitsu Shokai opened its Shanghai branch in 1935.

The fourth period began with the outbreak of the Japan-China Incident in July 1937. Idemitsu Shokai’s sales in fiscal 1938 (by region and branch) were as follows: the largest sales volume was in Manchuria (16,842,050 yen in total for the Dalian branch and Manchuria combined), followed by China outside Manchuria (13,456,526 yen). Sales in Japan (7,982,595 yen) were higher than those of the Gyeongseong branch in Korea (4,303,730 yen) and the Taipei branch in Taiwan (4,180,618 yen), but did not even surpass that of the Dalian branch (9,806,658 yen).⁷

Hence, as of 1938, Idemitsu Shokai was already focused on overseas operations, with an emphasis on Manchuria and China. This policy was thoroughly reinforced at a meeting of company branch managers held at the head office in Moji (in Fukuoka Prefecture) in December 1938. At the opening of this meeting, the branch owner, Sazo Idemitsu, made the following statement:

As you are aware from the newspapers, as a result of the national policy to tighten controls over foreign exchange and industry, the oil industry has decreased production of petroleum and machine oil, and Idemitsu’s business in Japan has been following an uninteresting path, but I am very happy to hear that business in Manchuria is growing steadily and that North China is developing as an extension of Manchuria… .

In the continent, we need to consider all angles to work on various tasks. Whether the achievement of expected results even in these [tough] times is from good fortune or from past sacrifices, I would like to express my gratitude to all of you for your efforts. I would also like to ask you how we can continue to make good progress on the continent, and how we can further develop our business. I wish you all the best in your endeavors.⁸

Sazo Idemitsu announced clearly that he would increasingly focus on his growing overseas business. Idemitsu Shokai, which had established a policy of actively pursuing business overseas while cultivating opportunities in Japan, reorganized its corporate structure from 1939 to 1940, shifting from a single company system under Idemitsu Shokai to a four-company structure (Idemitsu Shokai, Idemitsu Kosan, Manchuria Idemitsu Kosan, and China Idemitsu Kosan).

As of May 1942, the total number of personnel in these four Idemitsu companies reached 1095. The breakdown by company: Idemitsu Shokai (246 employees), Idemitsu Kosan (361 employees), Manchuria Idemitsu Kosan (105 employees), and China Idemitsu Kosan (383 employees). The breakdown by region was as follows: Japan (319), Korea (85), Taiwan (123), Kwantung Leased Territory and Manchuria (185), and China other than Manchuria (383).⁹

In the period after the Second Sino-Japanese War, as the Japanese military occupied more and more territory, oil controls by the military expanded to cover a wider area. However, even there, a kind of ‘reverse phenomenon’ occurred, in which Idemitsu was constrained in the short term under the tightened oil controls but expanded its business scale in the long term. This reverse phenomenon that first appeared in Manchuria occurred again in China after the Second Sino-Japanese War as the company expanded its storage network throughout China and opened a large-scale oil depot in Shanghai.

Construction of Idemitsu’s Shanghai oil depot, with a storage capacity of 50,000 tons, began in August 1939 and was completed in April 1940. The local Japanese military authorities provided the land and encouraged the construction of the oil depot. Idemitsu purchased the materials needed for construction from the U.S. using the foreign currency it had on hand. Of the oil imported from the U.S. and stored at Idemitsu’s Shanghai depot, kerosene was used for civilian purposes throughout China and Manchuria, while gasoline was supplied to the military.¹⁰

Deployment to the South and Japan’s Defeat in World War II

The fifth period corresponds to Japan’s engagement in World War II. The 11th edition of “Brief History of Idemitsu” cited earlier describes the company’s operations in China during World War II as follows:

As relations with Britain and the U.S. became increasingly tense on the Chinese mainland, Idemitsu scrambled to arrange emergency imports of petroleum products in case foreign imports were halted. Idemitsu also scoured products available on the market, striving to secure them. When the Pacific War broke out, Japan had no choice but to replace U.S. and British oil supplies in China. However, other than Idemitsu’s oil reserves, there were almost no other stocks of civilian oil. As the oil on hand was also under government control, Idemitsu devoted itself to the distribution of civilian oil under the rationing system. As supplies became increasingly tight, Idemitsu focused its efforts on purchasing and producing substitute fuel oil and lubricating oil in accordance with the government’s policy of local self-sufficiency. It also tried to tow oil from the south by private vessels. During the war, the company played an important role in the national oil policy in mainland China, constantly attempting to guide the authorities’ oil policy in the right direction (pp. 26–27).

In the six months following the outbreak of war between Japan and the United States in December 1941, large areas of Southeast Asia and the Southwest Pacific were occupied by the Japan’s Imperial Army and Navy. Military rule was imposed in these areas, and the oil resources in the region were to be used for military purposes as well as to supply local civilian needs.

At first, the local Japanese forces planned to establish an enormous oil distribution organization that would require approximately 2000 employees, and sought approval from the Defense Ministry. However, the Ministry rejected the plan based on its experience with the dysfunctional distribution system in China, and appointed Idemitsu to handle the task. In 1942, Idemitsu, entrusted with the task of rationing civilian oil supplies in the territories occupied by the Japanese army, dispatched more than a hundred personnel to the south as military attachés.

Immediately after their deployment, very serious “anti-Idemitsu sentiment” arose among Japan’s Southern Expeditionary Army. Although the deployed Idemitsu personnel faced challenges, they were efficient in their work in various locations and were able to get difficult tasks on track in a short period of time. As a result, the hostility toward Idemitsu that had been simmering within the local military gradually dissipated, and they even began to provide active support. In 1943, Idemitsu was also entrusted with oil rationing operations in areas in the south occupied by the Japanese navy.¹¹

In July 1942, Sazo Idemitsu offered the following encouragement to his employees heading south:

The new territory in the south is a blank sheet of paper. There are no customs or prejudices. In this new land of our own, we are trying to make a vast and complicated project simple and easy, and thereby manifest our true strength. This should not be considered merely a trivial matter in oil rationing. It should be a major mission for the nation. Moreover, we should be aware that this is a mission that only we can accomplish.¹²

With defeat on August 15, 1945, Japan lost its colonies in Korea, Taiwan, and South Sakhalin, and became an occupied country of the Allied Powers led by the United States. This is the sixth period.

During the war, most of Idemitsu’s domestic business was absorbed by a state-controlled company, and after defeat the overseas business that had been its focus was totally lost. The company was in a serious predicament – all that remained were approximately 1000 employees and debts of approximately 2.5 million yen.¹³

Amidst growing unease over such a “fresh start from negative territory,” Sazo Idemitsu said in September 1945:

Looking back on Idemitsu’s operations in Japan, only a small fraction of the company’s business remained after it was taken over by a state-controlled company during the war. Our operations in Taiwan, Korea, Manchuria, China, and the entire southern region were [figuratively] destroyed by the atomic bomb. Although Idemitsu had invested a considerable amount of its domestic funds overseas, neither the principal nor the profits were repatriated from abroad. Thus, Idemitsu was left with debts in Japan. Although the business disappeared and the debt remained, Idemitsu had 800 human personnel overseas. This is the only capital we have, and this is what will make our future business. Idemitsu, with its respect for individual human beings, should not be so rash as to lay off its personnel just because the war ended [in defeat].¹⁴

President Sazo Idemitsu at a press conference at Idemitsu Kosan’s Kawasaki Oil Terminal in 1962 (Courtesy of The Asahi Shimbun/Jiji Press Photo)

To have expressed such a quick and clear “no layoffs” policy in an extremely difficult business environment was an exceptional act in the social climate of the time.

Transformation into “Hero of Native Oil Companies”

Despite suffering a major blow with the loss of its overseas branches in 1945, Idemitsu Shokai made a fresh start in 1947 by transferring its business to its subsidiary Idemitsu Kosan (at that point, Sazo Idemitsu was also president of Idemitsu Kosan as an owner-manager). Idemitsu was designated by the Japan Oil Distribution Public Corporation as a distributor in 1947, followed by its designation as a wholesaler in 1949.

Sazo Idemitsu became the “Hero of native oil companies.” It did not team up with foreign companies and it implemented daring strategies as seen in the Nissho-Maru Incident in 1953. Idemitsu Kosan developed its business with financial support from the Bank of Tokyo and Tokai Bank, constructing the Tokuyama Refinery in 1957, building the [tanker] Nissho-Maru III in 1962, and constructing the Chiba Refinery in 1963. During this period, Idemitsu Kosan’s share of the Japanese oil market rose rapidly, from 8.6% in 1950 to 14.3% in 1960, and its share of refining capacity rose from 0% in 1955 to 13.7% in 1960. Sazo became chairman of Idemitsu Kosan in 1966; he retired from that position in 1972, and died in 1981.

In this case study we looked at the entrepreneurial activities of Sazo Idemitsu, focusing on the “oil merchant of the continent” aspect of his prewar years. The long period of strong growth in the Japanese economy from around the start of World War I through the 1980s was driven by a series of innovative entrepreneurial activities that primarily focused on the domestic market, but through this case, I wanted to show that there were some examples, although few, geared toward foreign markets.

Like Shitagau Noguchi and Yoshisuke Aikawa, Sazo could not escape the loss of his overseas assets and operations due to Japan’s defeat. Unlike Noguchi and Aikawa, however, Sazo revived himself phoenix-like as an innovative entrepreneur after the war, transforming from “oil merchant of the continent” with sights set on overseas expansion to “hero of native oil companies” focused on the domestic market.