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Fanuc robots lose bounce as China order book fails to fill

Trade war looms heavily over auto-reliant Japanese company

Fanuc's industrial robots are enjoying brisk demand even as sales of the company's machine tools slump.

TOKYO -- China's industrial slowdown is proving to be a challenge even Fanuc's robot arms cannot lift.

Net profit for the Japanese robot maker tumbled 51% from a year earlier to 40.1 billion yen ($367 million) in the first half, the company reported Monday. It subsequently downgraded its full-year guidance by 2.4 billion yen to 57.9 billion yen, which would mark a 62% decline.

In the six months ended in September, sales sank 24% to 260.9 billion yen, while operating profit halved to 49 billion yen. Fanuc's customers -- nearly half of which are thought to be in the auto industry -- curbed investment, especially in China.

"Chinese users are taking a wait-and-see stance on investment, and orders are weaker than expected," President and CEO Kenji Yamaguchi told analysts at the company's headquarters at the foothills of Mount Fuji.

The bleak earnings picture marks a sharp downturn for the once formidable company behind iPhone metal cases. An indirect casualty of the U.S.-China trade war, the Yamanashi Prefecture-based robot maker is facing the need to diversify its product offering to secure the next stage of growth.

The business that builds numerical control devices, or the brains of machine tools, saw orders plunge 35% to 29.7 billion yen, while the business that develops machine tools for producing smartphones posted a 31% drop. With smartphones having become a ubiquitous commodity around the world, demand for investment in this area appears to have lost momentum.

While Yamaguchi speculated that orders "will not fall further," he failed to give a clear reason other than to say that "inventory corrections have been progressing, so we believe orders reflect actual demand."

One bright spot was the business that develops industrial robots. July-September orders rose 3% to 53.6 billion yen for a second quarter of recovery thanks to robust demand in the North American auto industry. Sales in this business account for 30% to 40% of the consolidated total.

Products that previously fueled Fanuc's profits, such as numerical control devices and Robodrill machining centers, used for smartphone processing, have been hurt by structural changes and market saturation. In contrast, articulated robots used for welding and assembly enjoy potential demand among businesses looking to address worker shortages, and can be used in general industries such as food and electronics as well.

The global market for industrial robots is expected to more than double to nearly 3 trillion yen between 2018 and 2025, according to market research firm Fuji Keizai. Fanuc is bolstering research and development efforts in this field.

Fanuc faces several challenges. One is the outlook for the auto market. The growth of electric vehicles threatens the need for Fanuc's robots because these cars have fewer parts than their gasoline-fueled counterparts. Future outlook is further clouded by the spread of the sharing economy.

Profit margins are worrisome as well. While the company does not disclose operating margins by segment, the margin in the robot business is estimated to be in the "10% range," says Shinji Kuroda at Credit Suisse Securities (Japan). The number is lower than the 20% to 30% average thought for numerical control devices because the robot business buys speed reducers and other components from suppliers such as Nabtesco and Harmonic Drive Systems.

Overdependence on the auto industry appears to be backfiring. The quality of Fanuc's robots is high and they have passed automakers' rigorous screenings. But precisely because of this, the company's products are overdesigned for industries that use much simpler steps, such as food and beverage.

Fanuc should "expand the lineup of lower-priced products that meet bare-minimum quality requirements," said Tomohiko Sano at JPMorgan Securities Japan. But compact robots for the service sector are a tough field with competition from Japanese peers like Nachi-Fujikoshi, Mitsubishi Electric and Denso. It is a field that is easy for Chinese companies to enter.

Fanuc has been the leader among the four players dominating industrial robots. That list includes Yaskawa Electric, Swiss company ABB and Germany's Kuka. Fanuc's lead looks threatened, however, with Yaskawa joining hands with Chinese partners to secure sales channels. ABB and Kuka are gaining a broader array of customers in Europe, a region that has four times as many system integrators -- specialists who support equipment installation -- as Japan.

Fanuc shares ended Monday at 21,640 yen, down 40% from the 33,450 yen record reached in January 2018. While the stock has advanced 27% since the beginning of this year, the rise falls short of Yaskawa's 57% surge. Fanuc has started to tap external expertise, acquiring a collaborative robot startup. It now needs to show investors its next steps.

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