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How Fanuc quietly took over the world

Fanuc's distinctive yellow robots have been making their way onto the production floor for VW's Golf compact car.

TOKYO -- Fanuc may not be a household name, but the Japanese industrial robot maker likes it that way. It is no exaggeration, however, to say that without its products, global assembly lines, including those of iconic brands such as Apple, would come to a shuddering halt.

    Fanuc controls the lion's share of the world market for production machinery and boasts an almost unheard of 40% operating profit margin. Recently, the company caused a stir in the stock market by announcing it will funnel up to 80% of its profits to shareholders through higher dividends and share buybacks. 

     The industrial robot maker was spun off from Fujitsu in 1972 when the Japanese information technology company was shedding noncore operations. Since then, Fanuc has gone on to achieve astonishing success by crafting a business model that defies conventional wisdom.

Manufacturing policy

Turning heads in Germany

At Volkswagen's headquarters complex in Wolfsburg, Germany, a red brick factory over half a century old evokes a bygone era of manufacturing. But a look inside the facility presents a markedly different tableau: numerous robotic arms moving quickly and with great precision, assembling the Golf compact car.

     Orange is the predominant color on the factory floor, as it is the color of the robots made by German manufacturer Kuka. But over the past several years, a new color has been entering the mix in the factory -- the bright yellow of Fanuc's robots.

     Kuka robots have traditionally been the go-to choice for VW and its domestic peers Daimler and BMW. But Fanuc is chipping away at its rival's dominance in the German auto industry. In overhauling its development and manufacturing operations, VW conducted a thorough review of the products of industrial robot makers. The carmaker said Fanuc products proved the smarter choice.

     "We compared German and Japanese robots featuring the same levels of technology, reliability and quality and realized Fanuc robots were less inexpensive than the offerings from Kuka," an official at the VW factory said. The official did not give any prices, but the Fanuc products are thought to have been about 10% cheaper.

     The Wolfsburg plant turns out 1,700 to 1,800 Golfs a day, and their floor panels are now assembled by Fanuc robots. The Japanese company has supplied about 2,000 robots to VW, so a 10% cost reduction is certain to reflect well on the carmaker's bottom line. There appears to be strong likelihood that VW will also begin using Fanuc machines at its factories outside Germany.

     Peter Mohnen, Kuka's chief financial officer, said his company acknowledges that Fanuc builds excellent robots. With its current momentum, the Japanese maker may someday play a key role in the German auto business, the crown jewel of the country's manufacturing industry.

     Fanuc has increased its market share in Germany mainly because of its low prices. Given that fat profit margins are usually made possible by high prices, how is the company able to achieve the astonishingly high margin of 40% -- rare for a manufacturer -- if low prices are its key weapon? 

Robots making robots

A visit to a Fanuc factory yields telling clues. The village of Oshino, in the central Japanese prefecture of Yamanashi, is home to a sprawling Fanuc "campus" that houses a good number of plants, in addition to dormitories and other facilities. Inside one of the factories, robots assemble arms for other robots to be shipped to carmakers. The production process is handled almost exclusively by robots, making it appear as though the machines are replicating.

     "About 80% of the assembly work is automated, and by autumn we plan to have robots doing all the work except for the wiring," said Senior Executive Vice President Kenji Yamaguchi.

     Fanuc is not the only company to embrace automation -- Canon is just one example -- but few, if any, have taken it as far. Many production machinery makers build a wide array of products in small lots and offer customized products to customers. This approach requires engineers to perform much of the assembly work.

     Fanuc is different. It makes a limited variety of products in large lots, which makes automation much easier. The company turns down most orders for customized products. But it pays close attention to its clients' needs and feedback and uses that knowledge to predict demand trends. Armed with that information, Fanuc then embarks on mass production.

     This strategy enables the company to continually tweak its products to make them better, much in the way a smartphone's operating system is regularly updated. By constantly refining the same product instead of always creating new ones, Fanuc is able to keep its prices down while giving customers a carefully designed machine that meets all their needs. This is how many Fanuc products have become the industry standard.

     Although 80% of the company's group sales are generated outside Japan, all of its machines are made there. The company believes this centralized approach enables it to bring its products to global markets quicker. This contrasts with the trend among many of its competitors to build products in the markets where they are sold and tailor them to local preferences.

Serious about service

Because it makes machines for use in every corner of the world, Fanuc strives to build equipment that holds up well in any environment. The company appears to have taken to heart the words of its founder, who urged his employees to not be seduced by fancy new technologies or stray into fields that veer too far from Fanuc's areas of strength. The manufacturer has made a point of building a reputation for reliability by using familiar technologies. Its products come with few high-tech bells and whistles, and Fanuc wants it that way.

     This is how a company with workaday products has risen to global prominence. Fanuc now controls half of the world market for numerical control systems, 20% of the robot market and 80% of the smartphone processing robodrill machine market. Those shares have held steady even though it now serves more customers in emerging markets than in the developed world. This means factories that are springing up in emerging countries are as likely to use Fanuc machines those in the U.S.

     Fanuc has rivals in China and South Korea, but unlike what has happened with Japanese TV makers, it has not been driven out of the market by these companies. Low prices and dependable products are a big reason for that, but perhaps equally as important is Fanuc's reputation for excellent service, which has won it repeat customers.

    In the manufacturing industry, companies tend to give top priority to production, followed by marketing and then service. But Fanuc President Yoshiharu Inaba says service is king. This is evident in the way the company does business in Thailand.

     At the offices of Bangkok-based Fanuc Thai, most of the space is taken up by a warehouse. Inside the building are mountains of replacement parts, including motors and electronic substrates. Many manufacturers take pride in keeping their inventories small, but Fanuc takes the opposite approach. "We stock more parts than necessary so we can quickly repair customers' machines," said Kazuhisa Takahashi, president of the local unit. 

     Fanuc Thai prioritizes serving existing customers over winning new customers. The company has sold some 45,400 numerical control systems and other machines in Thailand. Members of its team of 32 engineers will rush to a customer's plant as soon as they learn of a problem. "I visit about three factories a day," said a Thai engineer.

     In mid-May, the same engineer drove to the factory of Japanese car parts maker Murakami in the Rojana industrial park to examine a plastic molding machine.

     "We would be in big trouble if a machine broke down and was unable to turn out a product," said Masashi Ishigaki, president of Murakami's Thai unit. "Even if a company offers excellent products, we won't buy from it if it doesn't offer repair services." Murakami procured plastic molding machines from Fanuc for the first time when it built its Thai plant in 2001. The company now also uses Fanuc products at its Japanese factory.

     Fanuc operates 243 service centers in 46 countries and territories. A total of 1,600 engineers, or 1 out of 3.5 employees, are dedicated to services. By comparison, rival Mitsubishi Electric operates just 27 service centers.

     "Even Chinese rivals want to buy Fanuc's numerical control systems simply because they want their machines to be serviced by Fanuc engineers," said Masaru Tashiro, who heads Mitsubishi's numerical control system business.

     Fanuc strives to keep its products simple and sturdy, but breakdowns are inevitable. And when they occur, Fanuc places a premium on getting its customers' operations up and running as quickly as possible.

     While its competitors typically perform repairs on-site, Fanuc replaces the entire module containing a faulty part. This means the customer does not have to wait for what can be days to resume operations. If, for example, a customer's numerical control system breaks down, Fanuc will immediately replace it with a good system and take the broken mechanism back to its plant for repairs. Once the faulty system is fixed, it will be used as a replacement part for another customer in the event of a similar problem.

     This approach has created immense customer loyalty. "Although we haven't made it our policy to buy Fanuc machines, our purchases are pretty much 100% guaranteed to come from Fanuc," said Takao Nishijima, CEO of Tsugami, a midsize Japanese maker of machine tools.

Cash management

$8 billion war chest

Fanuc has amassed a huge pool of funds, and the way it is spending that money is only reinforcing its dominance.

     The company has some 1 trillion yen ($8.14 billion) in cash reserves, or the equivalent to 140% of its sales for the year ended March. President Inaba sees that stockpile as a strategic buffer against adversity. "If we have 1 trillion yen, we can cope even if we are simultaneously hit by falling demand, heavier competition and plant damage due to a natural disaster."

     Inaba's biggest worries are not the performance of Fanuc's stock or the happiness of its investors, but losing market share and customers due to the inability to supply customers. "Even if the worst thing imaginable happened, we could never say we weren't prepared," said Inaba. A core belief at Fanuc is that a strong financial foundation is crucial to winning customers' trust.

     With so much cash sloshing around, the company is able to make investments with almost unparalleled freedom. "Fanuc came out of the 2008 global financial crisis unscathed," said Kazushige Okuno, chief investment officer at Japan's Norinchukin Value Investments. "The company expanded investment [during that time] because it had the financial means."

     In 2009, the value of machine tool orders plunged 66% on the year. While many manufacturers reined in spending, Fanuc built a numerical control system factory and made other investments. In the year through March 2011, when exports to Asia increased, Fanuc overwhelmed competitors with its supply capacity, which enabled it to boost sales and post a record operating profit.

     If it had been dependent on banks for money, it may not have received a single yen, given how risk-averse financial institutions were at the time. But thanks to its deep pockets, Fanuc has the luxury of not having to be overly concerned about near-term market trends and can instead make investments based on the likely demand picture several years down the road.

     Even when the Japanese economy stagnated following the 2011 earthquake and tsunami disaster that devastated parts of northeastern Japan, Fanuc constructed a total of two factories in 2011 and 2012. And despite predictions from some quarters that demand growth for numerical control systems will start slowing, Fanuc announced in February a plan to build a numerical control system plant in the town of Mibu, Tochigi Prefecture, at a cost of about 100 billion yen.

     In April, the company decided to return 80% of its net profit to shareholders. That may seem like a recklessly large amount, but Inaba has done the math. "Even if net profit does not exceed 200 billion yen (the amount the company earned for the year through March), the remaining 20% will bring in 40 billion yen in cash a year," said the executive. In other words, even with that restricted income, Fanuc would be able embark on an investment project more costly than the Mibu plant in just three years.

ROE isn't everything

When it comes to Fanuc's financial strategy, one thing that stands out is Inaba's relative indifference toward return on equity. ROE, or net profit divided by shareholder equity, serves as a gauge of how efficiently a company uses shareholder equity in turning a profit. To boost ROE, a company must increase net profit. It can also do so by reducing total assets, such as cash and equipment (efficiency), or by reducing the ratio of shareholder equity to total assets by borrowing (financial leverage).

     Fanuc is so profitable that its ROE is 16%, nearly double the average among manufacturers listed on the first section of the Tokyo Stock Exchange. In the areas of efficiency and financial leverage, Fanuc's figures are below the average because its ratio of assets to sales is high, and much of the assets are held in cash. If Fanuc changed that, its ROE would go up, but the company does not seem especially interested in doing so.

     "I'd rather spend time with customers than investors," said Inaba.

     After Fanuc founder Seiuemon Inaba, who was the company's sole spokesman, stepped down as president to become chairman in 1995, Fanuc's information disclosure slowed to a trickle. In the wake of the 2011 disaster, the company stopped holding briefings for investors and became something of a mystery.

     With its cash hoard and aloof attitude toward investors, people began wondering why Fanuc remained listed on the stock exchange. But the fact is, the company never ignored the stock market.

     While some activist investors have tried to sway the robot maker's management, other investors want the company to preserve its unique strengths. Fanuc highly values this group for its loyalty. Even before it decided to pass on 80% of its profit to shareholders, the company was allocating 30% of its net profit as dividends, earning big kudos from long-term shareholders. And in late May, the company further impressed shareholders by retiring a large chunk of treasury stock.

Corporate culture

Yellow brick road

Fanuc's contrarian style is evident even in the aesthetics of its campus in Oshino, where almost everything is yellow.

     The some 2,000 engineers and other employees there have at times been compared to "members of a cult." They move to the campus as soon as they join the company. One 35-year-old employee remembers his first impressions: "The buildings were yellow, the dorms were yellow. The work jackets, hand towels and even the cups we drank out of were yellow. At the induction ceremony, everyone was wearing a yellow jacket. I was nervous and felt a little lost."

     It is not long, however, before the young recruits begin taking pride in the Fanuc yellow. "It may not be cool to be dressed all in yellow," said a 24-year-old employee, "but it allows you to focus on the task of developing technology without worrying about your outward appearance, and I like that. Some people might think this is strange, but I'm fine as long as customers understand us."

     The company's yellow facilities are scattered across a wooded area of some 1.62 million sq. meters.  But the quiet setting belies a go-go work culture. "I'm often on the job until 10 at night, so work is hard," said a 30-year-old employee.

     Young employees have strict deadlines to meet and are under constant pressure to develop new products quickly. So it is difficult for them to leave the campus to enjoy their free time on weekdays. 

     The campus has its own bar, a gym and a huge bath that is over 20 meters long and is especially popular among employees. "I go to the bar only once a month, but some people drink there every day," said another employee. "When I complete my work for the day and don't have to put in overtime, I reward myself with a soak in the bath."

     High salaries may help explain why Fanuc employees seem so motivated. The average pay at the company is about 10 million yen a year, more than double the Japanese average. Ten Fanuc board directors received more than 100 million yen for the year ended March 2014, compared with seven at Toyota Motor.

     The numerous luxury cars in the campus parking lot reflects the company's premium pay. A 26-year-old employee who owns a sleek Audi A3 said he and his girlfriend often drive to Tokyo on weekends. But come Monday, he is back at the yellow battleground, "ready to fight."

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