Every now and then we come across global companies which are dominant in their niche but few of us would have heard of as they quietly ply their trade efficiently in the background. We have featured the Dutch semiconductor lithography monopoly ASML here in the past. This piece in The Economist features Keyence, a Japanese manufacturing automation consultant.
“Founded in 1974 by Takizaki Takemitsu, a young entrepreneur without a university degree, the company has for decades been helping manufacturers get the most out of their factories with sensors and robotics. Its clients include giants from just about every industry, from aerospace (Boeing) to semiconductors (Samsung and TSMC).
As automation takes hold of industrial bosses’ imagination, they are willing to pay handsomely for Keyence’s services, which include designing clever kit and helping clients integrate it into their operations. Its revenues have nearly trebled since the early 2010s, to $6.7bn. Profits have grown faster still: the firm’s operating margin now exceeds 50%; net margin has averaged 36% over the past decade, 13 percentage points higher than that of famously profitable Apple. Today it is Japan’s fourth-most-valuable company, worth more than $90bn. Even after the recent stockmarket slump its share price is nearly ten times higher than a decade ago. Last year Mr Takizaki briefly became the richest person in Japan.
….It is “fabless”, dreaming up its gizmos but outsourcing their production to contract manufacturers; its capital spending is negligible and it devotes barely 2-3% of revenue to research and development, compared with around 9% for TSMC. And its designs are bespoke, and as such would seem to benefit less from economies of scale. You can think of it as the management consultant to the world’s factories. Like McKinseyites, its engineers act as its only sales reps, tasked with bringing in business to the firm; the company employs no specialised sales team and its offerings cannot be bought from anyone else. These sales engineers, if you will, are also akin to consultants by being embedded within a client firm for a time to see how it ticks—and how it might tick better.
…So how does a company that does not make anything and invests next to nothing pull this off? And can it keeping doing so?
Explanations of Keyence’s remarkable run usually start with its focus on its clients. People who have witnessed up close the relationship between the company’s engineers and those who employ their… services describe a painstaking process of optimisation. Without Keyence’s engineers to ensure that all possible efficiencies are eked out, factories risk a bit more downtime and a bit less productivity, which can prove crippling in markets more competitive than the Japanese firm’s, which is to say most of them. Engaging with analysts, investors and the odd journalist is an afterthought: a distraction that is best kept to a minimum.
Keyence’s second trump card is its approach to personnel. Even by Japanese standards, working for the company is regarded as a relentless slog. But the sales engineers are compensated handsomely for their dual roles. The average salary it paid in the last financial year was ¥22m ($196,000). It regularly ranks as the country’s highest-paying large company, above banks and other financial firms. This draws in ambitious youngsters who, also like many management consultants, put in a few years of hard graft before moving on. The average age of its employees is 36, far below the Japanese median age of 49.
The third factor behind the company’s success is the breadth of its order book. It works for almost every large global manufacturer of note, ranging from aliments to aeroplanes. When a client brings in Keyence consultants, it is benefiting from their accumulated knowledge of best practice across most manufacturing subsectors. That may include insights from the client’s direct rivals, which are also likely to rely on Keyence’s services.”
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.
