April 26, 2014 6:01 am JST

Komatsu losing its powers of prognostication for demand

YUTA TSUNASHIMA, KEITA SEKIGUCHI and TORU SUGAWARA, Nikkei staff writers

TOKYO/SHANGHAI -- Komatsu's earnings improved less than expected last fiscal year, largely because demand forecasts for its products proved uncharacteristically off the mark in the case of Indonesia.

     Sales grew 4% to 1.95 trillion yen ($18.8 billion) and operating profit rose 14% to 240.4 billion yen for the year ended March 31, the company said Friday. At the start of the year, it had projected sales of 2.05 trillion yen and operating profit of 305 billion yen.

     The operating profit margin of 12.3% was a stellar performance when compared against the average estimate of around 5% for Japanese manufacturers. That said, Komatsu stumbled in the first year of a three-year business plan that aims to lift the margin to 20%.

     Earnings fell short of expectations mainly because Komatsu misread demand for mining equipment in Indonesia. "We had believed that demand would recover," President Tetsuji Ohashi said.

     Mining machinery is Komatsu's bread and butter, thanks to high unit prices. In particular, the company was focusing on Indonesia, where demand was seen growing on the back of economic expansion. But virtually no negotiations were held on sales of new units there, belying a projection of demand turning up in the summer after Ramadan ended.

     The company's Komtrax system monitors more than 300,000 units of its construction and mining machinery around the world in real time, gathering such information as GPS location data and operating hours over the Internet. The system, introduced well before today's big-data services, helps Komatsu predict demand for its products.

     Earlier, Komatsu had anticipated higher demand in Indonesia because Komtrax showed that mining equipment was running at high operating rates and the volume of resources mined was growing. But coal prices fell, and the Indonesian currency weakened sharply. The rupiah's nearly 20% slide against the dollar from last summer though autumn led to a slump in sales of mining equipment, for which many transactions are denominated in the greenback. Sales have yet to recover.

Rivals hurting, too

One reason the forecast was so wrong is that the factors affecting demand have become more complex, with fluctuations faster and sharper than expected. For example, investors quickly move money into and out of emerging markets in reaction to changes in monetary policy across the globe, and the money flowing toward mining projects affects demand for equipment. There are more variables now, so machinery demand cannot be divined from equipment operating rates alone.

     "The world is moving so fast that making predictions has become difficult," Ohashi concedes.

     At least its competitors are also struggling in the global market. Caterpillar of the U.S. logged a 16% drop in sales for the year ended Dec. 31, and its chief says he does not know when the mining equipment market will recover. China's Sany group faces uncertainties over collection of accounts receivable due to the nation's shadow banking woes, in addition to weak domestic demand. Komatsu intends to take this opportunity to strengthen its competitiveness further.

I wanna be the top dog

At a Komatsu plant in Osaka Prefecture, where Komtrax analysis personnel gaze at four huge screens, Ohashi instructed workers to collect even more data and further hone their skills. Machinery should be monitored on each of Indonesia's islands instead of the entire nation, for example. Other steps to ramp up Komtrax will include closer examination of economic indicators and the participation of sales personnel.

     Komatsu also intends to step up development of competitive products that would win orders even if the company's forecasts are off. It will shorten delivery times to mitigate demand fluctuation risks. Cost-cutting is on the agenda as well.

     Aiming to become the undisputed leader, Komatsu is parlaying its latest setback into an opportunity to regroup and make a comeback.