Business | ANALYSIS

Japan machine-makers avoid the caterpillar crawl

by Anjani Trivedi

Bloomberg

What’s that whirring noise? It’s Japan’s machinery-makers at work, in contrast to investors’ expectations.

Results from Fanuc Corp. and Komatsu were a mixed bag Monday. Factory-automation giant Fanuc reported an 8.4 percent drop in fiscal first-half operating income and saw its shares rise, while construction-equipment-maker Komatsu posted an 80 percent profit surge that was rewarded with a stock decline. Put that perplexing share reaction down to the topsy-turvy world of machinery-makers, where investors tend to view dismal earnings as a sign that a company is nearing the bottom, and good results as a warning that it’s close to the top.

The overall picture, though, is that concerns sparked by U.S. bellwether Caterpillar Inc. last week of late-cycle cost pressures and a deteriorating China outlook have been overdone, at least as far as the Japanese firms are concerned.

China’s faltering economy has been a key focus. Fanuc’s sales in the country, already shrinking, fell a further 42 percent in the quarter through Sept. 30, compared with the previous three months. There was little surprise there: For months, an impending drop in iPhone shipments has weighed on the company, which sells so-called robodrills that make the metal casings of smartphones. Meanwhile, Fanuc’s factory automation business grew 4 percent from a year earlier, with China accounting for 20 percent of those sales.

Komatsu said China demand rose 36 percent in the first half from a year earlier, a contrast with Caterpillar, which has been affected by the U.S.-China trade war. The country accounted for 7 percent of Komatsu’s sales, broadly unchanged from the year-ago period. Still, the company said it expects construction demand to slow from its current firm level.

China certainly presents challenges. The announcement of an anti-dumping investigation into Japanese high-tech machinery-makers including Fanuc has worried investors. As we’ve noted, though, this is unlikely to hurt the Japanese manufacturers much. Chinese machine-makers don’t make the high-performing vertical-machine centers (core-equipment manufacturing facilities for autos and other advanced processes) that are being probed, according to Goldman Sachs Group Inc. analysts.

Moreover, while worries of an eventual slowdown loom, Chinese manufacturing sector profits are still humming along. They grew 12.5 percent in the 12 months through September from a year earlier. The other good news is that the Chinese government will lower “most-favored nation” tariffs on more than 1,500 goods including construction equipment and industrial machinery starting Nov. 1.

More importantly, as China cools the Japanese firms have plenty of buffers: They’re exposed to a variety of geographical and segmental business cycles that don’t move in lockstep, ensuring weakness in one area is often offset by growth elsewhere.

While Fanuc’s China sales declined by 12.7 percentage points as a portion of total revenue in the past year, it gained a cumulative 12.9 percentage points in other regions. And as its iPhone-making robotic machines lost 9 percentage points of sales, the company gained as much across other business segments.

For Komatsu, Southeast Asian demand climbed more than 22 percent in the first half, while Fanuc recorded a 9.4 percent increase in orders from North America.

Signs elsewhere belie the pessimism. Earlier this month, Nidec Corp. posted record quarterly operating profits for its automotive, appliance, and industrial and commercial business. The motor-maker has been expanding production in the U.S. to supply manufacturers there, and noted that it was “capturing business opportunities under trade tensions.”

Operating profit at Nidec’s machinery segment, which supplies industrial robots and factory automation systems, rose 26 percent in the second quarter through September, while its industrial and commercial products business grew 35 percent. Hitachi Construction Machinery Co., which reported earnings last week, saw sales volumes gain sharply in North America and Australia, among other regions. It lowered its revenue forecast for China by 3 percent for the full year.

The likes of Fanuc and Komatsu are trading at steep discounts to the long-term averages of their one-year forward price-earnings multiples. There’s no doubt China will slow further at some point. But that doesn’t mean factories will shut down elsewhere in the world. Japan’s machinery-makers are likely to stay busy.