Keyence looks like the dullest business in the world. Its website advertises all manner of widgets — sensors, barcode scanners, laser etchers, ink-jet printers and digital microscopes — used in the automation of factory assembly lines.
Yet this Osaka company is a corporate monster that last year made $1.9bn in operating profits on revenues of $3.7bn, a 53 per cent operating margin. Return on assets, stripping out its pile of cash and securities, was about 75 per cent.
With a market capitalisation of $73bn, Keyence is the sixth-largest company listed in Japan and its founder Takemitsu Takizaki is the fourth richest person in the country with a net worth of $18bn. The company’s rise, in the space of 40 years, symbolises the entrepreneurial spirit of Kansai.
“There are two areas where Keyence is just a complete standout company: the first is its growth and the second is its profit margin,” says Morten Paulsen, head of Japan research at the brokerage and investment group CLSA. “And the profitability is not something recent — it’s been like this for four decades.”
Keyence keeps up compound sales growth of 14 per cent a year (1986-2016) even with sales in the billions of dollars. It takes seemingly simple products such as barcode readers and sells them for five times the cost of manufacture. Something amazing is going on: the mystery is what. Answers are hard to come by as Keyence is secretive, refuses most requests for interviews — including for this article — and publishes little financial data. Customers and analysts describe a remarkable business model and a relentless corporate culture.
Keyence’s first secret is its production outsourcing. It buys raw materials in bulk and sends them to component suppliers; it collects the components and sends them to assemblers and performs the final inspection of goods itself.
As a result, there is no risk of its suppliers, a network of small Kansai companies, becoming competitors. “None of their suppliers know how to make the whole product; the assemblers don’t even know who the suppliers are,” says Mr Paulsen. “In my view they do outsourcing even better than Apple.”
The suppliers are well treated so Keyence gets first-class service. “They pay cash 30 days after shipping so they’re like gods to their suppliers,” says Masayasu Noguchi, an analyst who covers the company for Nomura.
The second secret is what Keyence really sells: not a product, but a way to make a factory more efficient. Graeme McDonald, machinery analyst at Citigroup in Tokyo, says the group’s sales engineers “can often provide an idea of how to improve your manufacturing set-up literally on the site with an idea of the payback time and return on investment”. It offers quick victories — such as a sensor to replace manual inspection, for example — not risky projects. “The products they sell are not capital expenditure, they’re cost to the factory manager,” says Mr Noguchi. If the manager can save a $40,000 salary with a $20,000 gadget, they will sign off quickly, without worrying how much Keyence earns.
The products are high quality, if not necessarily unique. Keyence has a modest research budget and less than a tenth of the US patents held by rival automation companies such as Fanuc.
Keyence comes to know how the factories work even better than its customers, which links to the company’s third secret: a profit-driven sales culture. Employees receive a monthly bonus based on profitability and they are by far the best-paid engineers in Japan.
The average Keyence employee is 36 and earns ¥18.6m ($170,000). “It’s one of the best examples of a meritocracy in Japan,” says Mr McDonald.
That model turns out to work just as well abroad as it does in Japan. All three analysts think there is still room to expand overseas, within manufacturing and in new areas such as ecommerce warehouses. “The underlying point is they’re good at creating structures to motivate the business,” says Mr Noguchi. “Even if they were selling umbrellas they’d make a huge margin.”
Shareholders have been rewarded with spectacular growth in the stock price but fret about corporate governance. Disclosure is minimal. Keyence keeps billions of dollars in cash.
Deloitte audits the company and a huge pile of cash is difficult to fake, says Mr Paulsen, suggesting that the underlying business must have generated it. There are also fears the money will be spent on a wasteful acquisition. “It’s fair to say that shareholders aren’t the priority for Keyence,” he adds.
For Mr Noguchi, as long as Keyence keeps rejecting interview requests and evading questions when investors come to Kansai, it means all is well. “If they do become shareholder friendly then it’ll mean they face a threat,” he says. “As long as they’re unfriendly, it’s a sign they have confidence in their earnings.”
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