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Business Trends

Japan robot makers outperform Europeans in profitability

In-house motor production proving key as rivals compete for China market

Demand for industrial robots is expected to keep rising broadly.

TOKYO -- Japanese robot makers Fanuc and Yaskawa Electric continue to beat European rivals in profit margin as their ability to produce core motor parts in-house gives them a competitive advantage.

The pair and the other two top players worldwide,  ABB of Switzerland and Germany's Kuka, together hold more than 50% of the global market for industrial robots, Nikkei estimates.

Fanuc is strong in numerical control devices for machine tools, while Yaskawa boasts expertise in motor technologies. On the European side, ABB is known for dual-arm robots and supplies a wide array of manufacturing equipment, while Kuka's strength lies in automotive production equipment such as welding robots.

In the current fiscal year, Fanuc's net profit-to-sales ratio is projected at 24% and Yaskawa's at 10%, according to data from QUICK-FactSet. ABB's margin is forecast at 7% and Kuka's at 4%.

This marks the second year in a row that the two Japanese manufacturers beat the European peers in net profit margin.

Fanuc is far ahead of the other three in margin, but Yaskawa has boosted its number in recent years. Its margin rose to 9% last fiscal year, surpassing ABB's 7% and marking the first time in 14 years that the Japanese duo each logged better margins than their two European rivals.

In-house production of core component motors helps the Japanese players secure wider margins, said Yoshinao Ibara of Morgan Stanley MUFG Securities. Fanuc's thoroughly automated production processes also contribute to high profitability.

Moreover, Yaskawa has increased Chinese sales on expanded distribution channels. In addition to the booming demand for labor-saving equipment in manufacturing, a tail wind has also been provided by Chinese subsidies aimed at advancing domestic manufacturing technologies. A  Chinese plant Yaskawa opened in 2013 has operated at full capacity for some time, achieving a high level of proficiency.

"A volume increase from expanded production has improved profit margins," said Senior Managing Executive Officer Shuji Murakami.

ABB has strong Chinese operations, while Kuka has also been sharpening its focus there since becoming part of local appliance maker Midea Group last year.

 "Yaskawa has developed operational structures to compete in costs and deliverly lead time," said Masayasu Noguchi of Nomura Securities. Chinese sales accounted for 22% of the Japanese company's overall sales in fiscal 2017, up 6 percentage points from five years earlier.

In fiscal 2018, steady worldwide demand is likely to help Yaskawa, ABB and Kuka grow net profit, despite some concerns such as a slowdown in auto sales in North America. But Fanuc's profit is expected to shrink, due to a drop in demand for smartphone-related equipment.

Still, the Japanese companies will likely maintain the upper hand in margins, as European manufacturers rely on outside sources for many core components.

The market for robots and related products is expected to top $200 billion in 2021, doubling from the forecast for 2018, according to U.S. research firm IDC.

"With labor costs rising, businesses are investing aggressively in manpower-saving equipment, even in emerging economies," said Takeshi Kitaura of Deutsche Securities.

A key challenge for the Japanese manufacturers will be improving capital efficiency. Fanuc's return on equity came to 13% in fiscal 2017, compared with 16% for ABB, which makes good use of leveraging. Fanuc has been giving back more to shareholders, but its capital ratio is still more than 80%.

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