TOKYO -- Although many Japanese watchmakers are struggling to cope with flagging demand from foreign tourists, Citizen Watch continues to flourish by shifting its focus to another key business area: machine tools.
Citizen Watch stock reached a new year-to-date high of 832 yen on Tuesday. It is approaching where it was in 2015, when explosive shopping sprees by tourists, mainly from China, became a social phenomenon known here as bakugai.
Tourists' appetite for Japanese products has since waned. Citizen Watch is now cultivating a different kind of Chinese demand, namely among manufacturing plants looking to curb their dependence on human labor.
Machine tool subsidiary Citizen Machinery has been operating its main plant in Nagano Prefecture at full capacity since the beginning of the year. It has received a flood of new orders from markets like China, the U.S. and Europe as manufacturers across the world ramp up capital investment. "We can barely keep up," says President Keiichi Nakajima.
The company is known for metal-shaping machines that use low-frequency vibration-cutting technology, which makes them less likely to jam. Its smaller models, used to make screws for cars, construction equipment and even dental implants, have been particularly popular.
Citizen Watch expects operating profit at its machine tool business to jump 17% to a record 7.5 billion yen ($66.2 million) for the current fiscal year ending March 2018. The operating profit margin is seen rising 1.3 points to 14.2% on reduced downtime and more favorable contracts, and sales are expected to break records as well.
Japanese machine tool makers got 88.3 billion yen worth of orders from abroad in June, according to preliminary figures released by the Japan Machine Tool Builders' Association. The figure has increased 51% on the year, marking the seventh straight month of gains.
Much of the demand is said to come from China. "Because of efforts to increase automation in factories, there is growing demand for a wide range of machine tools," says Koya Miyamae, a senior economist at SMBC Nikko Securities. Many Apple suppliers are also preparing to produce the next generation of iPhones, which could come out as soon as this fall.
"For better or for worse, we have almost no smartphone-related orders," says Citizen Watch CEO Toshio Tokura. The company is doing well regardless, thanks to a boost from the "Made in China 2025" campaign.
As labor costs rise, China can no longer count on a cheap, abundant workforce to shore up its manufacturing sector. The government is instead leading a push for technological advancement. Southeast Asia has also seen a rush of new manufacturing centers, and demand for machine tools looks likely to remain strong.
Meanwhile, Citizen Watch's mainstay watch business has improved somewhat from last year. But "a real recovery is still far ahead," says Tokura. Even Swiss luxury brands have only just stemmed the decrease in exports. Despite merging overseas hubs and other structural reforms, machine tools are becoming a bigger part of Citizen Watch's operations.