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Robot king Fanuc risks missing out on 5G boom

After forecasting 60% profit drop, company faces new challenges as clients ditch metal casing

The industrial robot maker generates about a fifth of its sales in China. (Photo courtesy of Fanuc)

TOKYO -- Japanese robot maker Fanuc expects group net profit to plunge 60% in the fiscal year ending March 2020 amid a decline in smartphone-related orders, a trend that looks unlikely to improve even with the transition to 5G.

The company had flourished in recent years thanks to the smartphone boom. Its Robodrill machine tools are widely used to make metal casings for handsets including the iPhone. But demand has fallen off lately, which means fewer equipment orders from Chinese factories.

Fanuc said Wednesday it forecasts profit of 62.3 billion yen ($557 million) -- 40 billion yen below the QUICK Consensus average of analyst forecasts -- with sales falling 16% to 536.9 billion yen. Should this projection hold, it would mark the first time in a decade the company's net profit dropped below 100 billion yen.

For the latest year ending March 31, sales declined 13% to 635.6 billion yen, while net profit slid 15% to 154.2 billion yen.

With Chinese smartphone makers now developing new models made for fifth-generation networks, capital spending is expected to pick up in the second half of 2019, but Fanuc may not benefit.

Casings for 5G phones are expected to be made of materials that are poor conductors of electricity, such as glass or plastic, rather than metal, which could interfere with the higher-frequency spectrum used for 5G. That is likely to cut into demand for the Robodrill, which -- along with other equipment in the Robomachine line -- accounts for about 20% of the company's sales.

In response to this shift, Fanuc is working to build up its Field system as its next big profit driver. The platform connects factory equipment via the "internet of things," providing operating data that can be used to boost productivity.

Fanuc has teamed with partners including Cisco, the NTT group and Japanese artificial intelligence company Preferred Networks on the system -- an unusual move for a company that has historically tended to go it alone.

Investors also took interest in the impact of U.S.-China trade tensions on the company, which generates about a fifth of its sales in China. The trade war has driven many companies to put off capital spending, eroding demand for factory automation equipment such as Fanuc's mainstay numerical control systems.

"I'm not optimistic" about the outlook for the Chinese market, President Kenji Yamaguchi said. "We've heard talk that there will be growth in the second half, but we don't see it."

There are some positive signs. China's real gross domestic product grew 6.4% on the year last quarter, holding steady after three quarters of deceleration, the government said last week.  As Beijing implements stimulus measures to keep the economy humming along, corporate capital spending may improve.

Fanuc's orders rose about 3% on the quarter in the January-March period to 140.7 billion yen, the first improvement in five quarters.

But Yamaguchi remains bearish. "There's room for growth, but [the business] is still weak," he said.

Fanuc raised its full-year dividend to 1,003.11 yen per share, up about 80% from fiscal 2017, lifting its dividend payout ratio to 126% of net profit. The company did not disclose a dividend plan for fiscal 2019.

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