(Bloomberg) -- It’s the rise of the robots: Japan’s second-largest company is now a maker of industrial automation systems, highlighting the rising importance of a less visible sector to a nation long associated with consumer-facing brands.Keyence Corp., a maker of machine vision systems and sensors for factories, has jumped 19% this year to become Japan’s second-largest company by market value. At a valuation of over 11 trillion yen ($100 billion), it has overtaken telecommunications giants SoftBank Group Corp., and NTT Docomo Inc., which have jostled for the honor to sit behind Toyota Motor Corp. over most of the past decade.Keyence is famed for its dizzying profitability with an operating profit margin of more than 50%, among the country’s highest. That’s enabled by its “fabless” output model, according to analysts, with production of its array of pressure sensors, barcode readers and laser scanners outsourced to avoid high capital costs.Its industry-leading sales system creates bespoke solutions for clients, and its frequently listed as the highest-paying company in Japan. The surge in its shares has also benefited founder Takemitsu Takizaki, who has overtaken SoftBank’s Masayoshi Son by a good margin to become Japan’s second-richest man.“It’s got everything — high growth, high dividends and a high operating margin,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “It’s the type of long-term stock you want to leave to your kids or your grandkids.”Keyence has more than tripled in market value since early 2016. “We feel the sense of expectation from our shareholders,” said Keyence director Keiichi Kimura when asked to comment on the milestone. “We’ll do our best to live up to those expectations.”The rise has also underscored how important the country’s parts and robot makers have become to the stock market, shown in the weighting of companies that make up the the country’s benchmark Topix index. Japan stocks were once dominated by banks and automakers — but years of zero rates which now dip into negative have hurt the profitability of the former, while the importance of the latter was declining even before the coronavirus sent the industry into reverse gear.The weighting of the Topix’s Electrical Appliance sector, also home to the likes of Sony Corp., Murata Manufacturing Co., and Fanuc Corp., has increased to almost 15%, the highest in about a decade, as the importance of the Banks and Transportation Equipment sectors have declined. The Information and Communication sector, headed by the five listed companies that dominate Japan’s mobile carriers, is the second-most heavily weighted segment.The growing presence of IT shares has also been a feature in the U.S. stock market, with the sector making up the highest proportion of the S&P 500 Index since the dot-com bubble burst. The coronavirus pandemic has amplified a trend for investors to prefer companies that eliminate humans from the process — a trend Keyence benefits from both with its fabless production model, and by enabling companies to automate their own production.“It’s a business model that grows the more factory automation throughout the world progresses,” said Mitsubishi UFJ Morgan Stanley Securities’ Fujito.Founder Takizaki holds about 23% of Keyence’s shares, Bloomberg-compiled data show. For the Topix, which takes the free float of the shares into account in its weightings, those holdings mean Keyence is less heavily weighted than Sony, whose market value trails by comparison. Toyota the biggest company on the index, and even forecasting an 80% drop in profit this year, the automaker remains Japan’s largest business with a market value double that of Keyence.“We like Keyence as it outsources production instead of owning factories, allowing it to focus on R&D,” HSBC analysts including Helen Fang wrote in a May 26 report that initiated coverage of the company with a buy rating. “It also uses a direct-sales model that keeps it close to clients. This strategy means it can better capture market share in a widening array of industries and can focus on high-value client solutions.”While the coronavirus pandemic will depress profits this year, Nomura sees a recovery “to record-high profit levels” the following year and sees a record profit the next, analyst Masayasu Noguchi wrote in a report May 28 raising its target price on the stock.“It’s unclear how long the coronavirus pandemic will continue,” Keyence’s Kimura said. “The global uncertainty is likely to continue and in the midst of that we’ll continue to do what we can.”Factory Automation in Asia May Be First to Recover From PandemicThe notoriously tight-lipped Osaka-based company does not provide earnings guidance in its sparse quarterly disclosure. It’s an outlier in a country where companies are being encouraged to boost their transparency and communication with the market.“They are an efficiency-above-any-other kind of company, so doing extra that doesn’t result in revenue addition is probably less of a priority,” said Bloomberg Intelligence analyst Takeshi Kitaura. “They think generally those following the company are happy when they manage solid earnings and growth.”Yoshiharu Izumi, an analyst at SBI Securities Co., says that Keyence holds talks with shareholders and that reassures investors, and doesn’t view the paucity of disclosure as a problem. “Keyence has overtaken Sony, which is extremely proactive in responding to shareholders,” he said. “When Keyence starts putting energy into disclosure, that might be the time to sell.”(Updates with quotes from Keyence from sixth paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg Opinion) -- If there was ever a good time for the robots-taking-over-jobs argument, this may be it. Not just because factory owners don’t want to pay for rising labor costs, but because workers don’t want to gather every day in petri dishes. Chinese manufacturing is facing a challenge since employees returned to production lines: keeping them on the job. Some companies reported a 90% turnover in workforce after the economy started reopening in March, compared to 25% to 30% in a normal, pre-coronavirus year. Such spikes are expected worldwide as lockdowns ease. The pandemic has made “humans the risk to continued operations” in supply chains, note analysts from Sanford C. Bernstein & Co. Leave aside how businesses reopen. The bigger question is, how will they be thinking about the future of their factories? Re-enter the robot, or more precisely, automation, a trend that was already alarming labor advocates and will be aggravated by Covid-19. Nascent signs from the order books of industry giants like Fanuc Corp., Keyence Corp. and Harmonic Drive Systems Inc. point to businesses wanting to get their operations up and running – increasingly, without humans.Industrial robot exports from Japan, the heartland of automation machinery, grew to some parts of the world from the previous year. Fanuc, maker of robots used in factories for companies ranging from Apple Inc. to Amazon.com Inc., saw orders in the fourth quarter to March climb 7%. Its revenues in the U.S. and China rose, while inventories of components ticked down as demand edged up. Bookings also increased for Harmonic Drive, which makes parts for small robots. This interest was manifested while the world was consumed by the initial shock wave of Covid-19, suggesting how big a priority automation has become.There’s room for robots. Worldwide, density remains low as many companies have had little desire to deal with integrating them into operations, or in triggering politically sensitive social backlash. Still, nearly 60% of production work globally is in areas that can easily be automated. In China, almost 40% of jobs are machine replaceable. Differences across and within industries matter — robots do most of the stamping and welding in car factories, while humans conduct final inspections. Tasks requiring significant dexterity remain difficult for machines.A big change in the Covid-19 era may be the lowering of barriers to adoption, which have largely come down to attitude. South Korea and Germany can be held out as positive examples that have achieved high factory-automation levels while keeping unemployment low. A more pointed prod, though, may be simple necessity, which has driven most big changes in the way we use technology. The global health emergency has hamstrung companies in a way most never expected. A survey by PricewaterhouseCoopers LLC of almost 300 chief financial officers found that they didn’t get what they needed to make informed decisions and response times were delayed. More automation could improve agility. While most CFOs of industrial production companies surveyed plan to cancel or defer investments, only 15% are planning to cut investments for automation, artificial intelligence and industrial internet-of-things. The post-coronavirus dilemma looks like the old one, but worse. The world will need more productivity, and automation is a way to get it. In Germany, deploying robots led to an increase of gross domestic product per capita of 0.5% over 10 years. But what will happen to displaced, less-skilled workers? The pandemic could reduce working hours by 6.7% across the world, equivalent to 195 million full-time workers, according to the International Labour Organization. For now, governments are offering wage subsidies to businesses to retain employees. The onus will eventually also fall on companies to reskill and accommodate their workers. Separately, governments are incentivizing the transition to the robotic future. Japan wants companies to bring supply chains home from China. Where there aren’t enough skilled workers, more machines will be needed to collaborate – or so-called Cobots. In China itself, industrial subsidies that support automation loom large. “New infrastructure” has become a way to justify fiscal stimulus that will put billions of dollars toward 5G and other technologies that will employ far fewer people.This doesn’t mean the end of productive human labor, or the loss of jobs en masse. It does require more openness to exploring options in addition to, and beyond, people. The reality is, companies that invest in automating processes now are likely to come out faster – and perhaps stronger — on the other side. Not only because robots won’t be sick or afraid in the petri dish, but because the future of work is changing. No one wanted the Covid-19 experiment. But companies and people have to come to terms with it.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal. For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.