Kao to Make Aggressive Investment in its Chemical Products Businesses through Expansion of Globalized Production System

12-16-2004: Kao Corporation plans to make aggressive investment in its overseas production facilities for the chemical products business, for further global development. Kao conducts its chemical business under three domains: Oleochemicals, based on fats and oils, Specialty Chemicals including information-related materials and aroma chemicals, working closely with customers, and Functional Materials, centering on surfactants.

Kao will strengthen its chemical facilities in succession, focusing on overseas locations from the end of 2004 through 2006, with total investment amounting to approximately 10 billion yen (US$ 98.0 million).

Currently Kao's chemical products business provides approximately 20% of consolidated net sales with an overseas sales ratio of over 50%. The Company continues to expand its chemical product business through aggressive investment; as a result, the business size overseas is estimated to have increased 2.5 times (value base) over 10 years since 1995.

Principal investments in production facilities are as follows:

Oleochemicals Business

Kao will invest approx. 6.9 billion yen (US$67.6 million) into Pilipinas Kao, Incorporated (PKI) in the Philippines to strengthen its fatty alcohol facilities. The new facilities will have an annual production capacity of 100,000 tons and the project will be completed in summer 2006. The existing facilities will cease operating and be scrapped.

The fatty alcohol business, one of Kao's core businesses, holds its production bases in the Philippines and Malaysia. As a result of the expansion of facilities at Fatty Chemical (Malaysia) Sdn. Bhd in 2002, the annual production capacity for fatty alcohol is able to maintain over 200,000 tons in total with two production bases. However, facilities in both countries are operating to capacity due to dormant and closed facilities at several companies as well as the recent upswing in demand mainly in Southeast Asia and China.

The expansion plan for the facilities at Philipinas Kao is to respond to this severe supply shortage. With total annual production capacity raised to 300,000 tons through the two locations, Kao will establish a more solid and more stable supply system of fatty alcohol.

Kao's unique fixed-bed alcohol production technology with its original catalyst and manufacturing process which enables the production of superior quality fatty alcohol with high productivity, greatly contributes to the increase of production capacity. At Kao Chemicals GmbH in Germany, approximately 1.2 billion yen (US$ 11.8 million) was invested to expand the production facilities of tertiary amines, derivatives of alcohol, with 14,000 tons production capacity, and has started commercial production this December.

The demands on tertiary amines as raw materials for hair conditioners and surfactants used for dishwashing detergent are increasing. Kao will meet the demand in the future by raising Kao Group's total capacity at three production bases in Europe, the Philippines and in Japan, to the world's largest level of 50,000 tons.

Specialty Chemicals Business

Kao is producing and marketing toner for photocopiers and printers, and toner binders, materials for toners, at three locations, Japan, the U.S., and Europe, to satisfy the demands of respective local customers. As Kao developed polyester toner binders with functions such as energy savings and suitability for higher speeds of printing, the strong demand for Kao products has been increasing. To respond, the Company invested approximately 1.5 billion yen (US$ 14.7 million) in Kao Specialties Americas LLC (KSA) in the U.S. to establish additional toner binder facilities, which will be completed in January 2005, resulting in a doubling of production capacity.

Functional Materials Business

In accordance with the fact that many Japanese consumer electronics makers have shifted production of air-conditioning units to China, as well as the rise in demand, Kao will newly establish a production facility for polyolester used as refrigeration oils for compressors, at Kao Chemical Corporation Shanghai, China. The investment amounts to 600 million yen (US$ 5.9 million) and the facilities will be completed in March 2006.

Refrigerants for air-conditioning units have been replaced to CFC substitutes which do not deplete the ozone. Accordingly, refrigeration oils have also been replaced with polyolester which has compatibility with CFC substitutes. Kao will conduct investments based on this background.