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The Disruptive Strategist: Thoughts and observations from Japan

Given Japan has long been a major player on the global industrial landscape, it is no surprise that several Japanese companies have emerged as leaders in areas such as automation, machine vision, sensors, and robotics, which feeds directly into the Industry 4.0 theme, a longstanding area of interest for the global equities team.

07 February 2023

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Kevin Kruczynski shares his thoughts and observations from his recent visit to Tokyo when he met with companies, consultants, and experts in this field, and attended the Japan International Machine Tool Fair (JIMTOF), a biannual event showcasing new manufacturing technologies.

Catching up on Digital Change?

Japanese companies have been reluctant to shift from legacy systems, as shown by Japan’s lagging cloud penetration numbers, but the tone from many of our meetings suggests that this is starting to change. Management teams are finally embracing digital change, and many mentioned investments in new customer relationship management (CRM), enterprise resource planning (ERP), product lifecycle management (PLM), and computer-aided design (CAD) systems as key elements in helping achieve mid-term profit and efficiency targets. Digital change has also been embraced by the wider population where cashless digital payments have made significant inroads over the last three years. For example, PayPay’s QR code payment App was launched at the end of 2018 and now has over 51 million users and is accepted by 3.9 million merchants, an astounding achievement in a famously cash driven economy.

Energy efficiency

Decarbonisation and environmental considerations are top of mind for most companies, and energy efficiency is a key source of differentiation among product offerings right across the value chain, from suppliers of components such as bearings and valves, to system integrators – all were keen to highlight their environmental credentials, the incremental productivity gains from increased precision and the lower payback periods of switching to more energy efficient products and components in the current energy price environment.

Deglobalisation is leading to reshoring and changing production patterns

China is still an important manufacturing base, but equipment suppliers are clearly reporting a surge in orders from the US and other countries such as Vietnam and India, suggesting that manufacturers are responding to geopolitical tensions and government incentives by broadening their manufacturing footprints.

Order books remain elevated, but a slowdown is expected

A combination of short-term supply chain bottlenecks and long-term secular trends have helped fill order books more than usual. Indeed, many companies we spoke to have the highest backlogs in their history. Although most participants expect some degree of slowdown over the next few quarters, as demand for certain underlying products, such as personal electronics and smartphones, continues to weaken. Many companies also acknowledge there has probably been a degree of double ordering. Some suggest this could account for up to 30% of their order books, but even after accounting for this, it still leaves a healthy order book to work through which should provide a cushion during a cyclical pullback.

Collaborative robots have unlocked new use cases

The automotive and electronics industries have been an early adopters of advanced manufacturing technologies, which were easily placed on well organised and static production lines. With the onset of smaller and cheaper collaborative robots, designed to share workspace with humans, automation has now been embraced by a much wider array of industries such as pharmaceuticals, food processing, and logistics.

Robots are getting smarter, unlocking more use cases

Improvements in AI, machine vision, and sensor technology are making robots smarter and unlocking further use cases. We saw demonstrations of robots with various combinations of sensors and other hardware attached being able to carry out more sophisticated tasks. We even noticed several examples where legacy non-automated machine tools were operated by a robot. One company estimated that about half of the machine tools sold today in Japan are operated with a robot, compared to about 20% in 2018.

Industrial Internet of Things fuelling greater data insight and efficiency

Fanuc demonstrated its FIELD system, which is an Internet of Things (IoT) platform that allows users to connect production machines from different manufacturers and generations, enabling data collection and analysis along the entire production process. This helps with predictive maintenance, decreasing equipment downtime and improving operational efficiency. Globally Fanuc now has over 30,000 robots connected and using its Zero Downtime system, which monitors mechanical, process and system health – this equates to 4% of its installed base, so has plenty of room to grow.

3D Printing / Additive Manufacturing still not ready for mass production

The range of applications we saw was quite underwhelming and suggests that additive manufacturing is still more suitable for small production runs, rather than part of a mass production system.

We have long thought that smart manufacturing with more efficient, intelligent factories is the future for manufacturing, and we received a comprehensive insight into the component technologies that are making this possible. In contrast to the pessimism in financial markets, the mood from the ground was buoyant. Companies are not oblivious to a decelerating macroeconomic backdrop but feel the impact of a slowdown can be managed. Order books are elevated as labour shortages and high energy prices are driving the need for investment in efficiency. This dynamic coupled with factors such as the switch to electric vehicles, Covid exposed supply chain bottlenecks, and geopolitical tensions which have highlighted the need to rethink and reconfigure global production footprints, have all combined to create a capex cycle that is somewhat detached from normal economically sensitive production trends.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of future results or current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. There is no guarantee that forecasts will be realised.

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