The Economist - USA (2022-02-12)

The Economist February 12th 2022 Business 55

mission­critical to many industrial supply
chains as semiconductors are.
It is no surprise that Japan, a famously
robot­loving  place,  has  spawned  a  strong
Automation Inc. Just­in­time manufactur­
ing, pioneered by efficiency­obsessed Jap­
anese  companies  such  as  Toyota  in  car­
making  or  Panasonic  in  consumer  elec­
tronics,  has  involved  replacing  humans
with machines for decades. This source of
competitive advantage became an existen­
tial  necessity  for  domestic  manufacturers
after  Japan’s  working­age  population  be­
gan  to  shrink  in  the  1990s.  Today  it  is  be­
coming one for other rich countries as they
enter  demographic  dotage.  Keyence  and
smcnow  derive  more  than  half  their  rev­
enues from abroad. Fanuc and Lasertec are
even  more  international,  with  more  than
80% of sales coming from overseas. 
Some of the new foreign demand is the
result  of  the  world’s  insatiable  hunger  for
computer  chips.  smc,  which sells  pneu­
matic  control  devices  to  chipmakers,  has
seen  its  business  boom,  especially  as
places including America and Europe (see
next article) strive to bring more semicon­
ductor  production  home,  says  Masahiro
Ota, who sits on smc’s board. Lasertec en­
joys a near­monopoly on inspection tools
for  the  most  advanced  semiconductor
photomasks—plates  through  which  cir­
cuit  patterns  are  etched  onto  silicon  wa­
fers. Its share price has ballooned four­fold
since the start of 2020, making it one of the
best­performing  blue­chip  stocks  in  Asia.
Keyence’s  precision  sensors  are  likewise
crucial  for  the  detection  of  flaws  in  semi­
conductor surfaces.
The  companies’  devices  are,  of  course,
also handy in other sectors. Fanuc, which
makes large factory­floor robotic arms, has
long  been  a  fixture  of  car  assembly  lines.
Mike  Cicco,  who  runs  Fanuc’s  American
operations, notes that the development of
electric cars requires a range of new capa­
bilities on the part of carmakers—and that
in turn necessitates new types of robot. Fa­
nuc expects to supply Ford’s factory in Co­
logne,  in  Germany,  with  500  robots  this
year as the plant becomes the Ford Cologne
Electrification Centre. 
Being  indispensable  has  proved  to  be
lucrative. All four stars of Japan’s automa­
tion­industrial  complex  boast  operating­
profit  margins  of  over  20%.  That  of
Keyence, the most profitable of the lot, ex­
ceeds  50%.  The  firm  has  reported  record
net  profits  in  each  of  the  past  three  quar­
ters.  Like  chip  firms  such  as  Nvidia,
Keyence  does  not  manufacture  products
but  rather  designs  them  and  assists  cus­
tomers  in  deploying  them  in  their  fac­
tories.  Lasertec,  too,  does  little  of  its  own
manufacturing.  This  capital­light  ap­
proach  helps  sustain  profits.  Keyence
spends just 3% of its net sales on research
and  development  (r&d).  Similarly,  smc

spendsaround4%.Fanucdoesmakeal­

mostallitsproductsindependentlyand

investsmoreinproductioncapacityand

r&d. Butit usesthatcapitalefficiently,not

least,asbefitsa robot­maker,bydeploying

plentyofitsownrobotstobuildrobotsfor

customers.Itsbiggest“lightsout”factory

canrunformorethanamonthwithno

priceyhumanoperatorsaround.

Japan’s automation firms also owe

someoftheirsuccesstocorporateculture.

smcmaintainsa networkof6,000sales­

peoplewhodoubleassystemsengineers

with in­depth knowledge of customers’

equipment.Keyenceusesnomiddlemen

tosellitsproducts,relyingentirelyonits

ownsalesforce.Aswithsmc, manyareen­

gineers,whospenda lotoftimeoncus­

tomers’factoryfloorsidentifyingniggles

andtweaksthatmightotherwisegounno­

ticed.Theyarerewardedhandsomelyfor

theirefforts.Nikkei,a Japanesepublisher,

reportsthataveragesalariesatKeyenceex­

ceeded$150,000inthelastfiscalyear.

Theautomationstars,likeJapanIncas

awhole, tendto be less generouswith

shareholders.Mostsit onpilesofcash;

Keyenceheldover$10bnincurrentassets

in the last financial year.The reserved

characterofthecompaniesandtheirtight­

fistednessissowell­establishedthatsome

investorssayanysuddenshiftsinthatatti­

tudemaybea signofbigandpossiblyun­

welcomechangesatthefirms.

Investors haveto relyonsuchrune­

readingbecauseitisnotalwaysclearwhat

isgoingoninsidethecompanies,atleast

by contemporary Western standards of

openshareholderrelations.smc’s“tradi­

tionalJapaneseapproachtocorporatego­

vernance”, as Baillie Gifford, a tech­fo­

cusedBritishassetmanager,delicatelyput

itin2020,offersonlylimitedengagement

with shareholders. One asset manager

with a stake in Keyence reports never

speakingdirectlywithitsmanagement.

Asthecompaniesbecomeevermorein­

ternational,theywillfacepressuretobe

morecandid—andlessfrugal,bothwith

payoutstoshareholdersandwithinvest­

ments.Fanucincreaseditsdividendsharp­

lyin 2015 underpressurefromThirdPoint,

anAmericanactivisthedgefund.AsJapan

becomeslessaverseto gadflyinvestors,

AutomationIncshouldexpectmoresuch

calls.To maintaintheirinnovativeedge,

meanwhile,thefirmsmayneedtospend

considerablymoreonr&d. Amidtech­in­

flected geopolitical tensions with the

West,Chinawantstoreduceitsrelianceon

foreign suppliers of all manner of ad­

vancedtechnology,includingrobotics.If

successful,theChinesestrategywouldat

oncedeprivetheJapanesefirmsofabig

marketandcreatenewglobalrivals.Be­

comingindispensableisonething.Staying

soisquiteanother.n

J, robot

Sources:InternationalFederationofRobotics;

RefinitivDatastream;Bloomberg

*FinancialyearsendingMarchorJune

300

200

100

0

22192017

Marketcapitalisation

$bn

Keyence FANUC SMC Lasertec

Japan,selectedautomation-equipment

manufacturers

60

40

20

0

21192017

Operatingmargin*

%

Industrial-robot production, 22, % of total

Restof

world 30

Germany 6

South

Korea 7

China 1

Japan 4

Armed and ready