Thinking Points

  • Keyence (TSE: 6861) is a global leader in factory automation solutions.
  • The company consistently delivers industry leading operating margins, often above 50%.
  • This performance is driven by Keyence’s operating philosophy: minimum capital and human investment for maximum added value.

In Japanese manufacturing, achieving double-digit operating margins is considered a success. CNC system and industrial robotics giant Fanuc (TSE: 6954) is worshipped for its consistent 30+% margins. Meanwhile, Keyence (TSE: 6861), a global factory automation leader, takes it three steps further.

Regularly delivering 50+% operating margins, the company is also known for paying the highest salaries in corporate Japan by a wide margin (Japanese source). A 3.43 million yen ($31,899 USD) margin to be specific: Keyence takes the top spot, offering employees an average annual salary of 18.61 million yen ($173,073 USD). Asahi Broadcasting (TSE: 9405) takes the number 2 spot at 15.18 million yen ($141,174 USD). Fanuc ranks in at number 6 with 13.18 million yen ($122,574 USD).

With its top talent, Keyence develops and sells things like automation sensors, machine visions systems, and measuring instruments.

Source: Keyence

Keyence pays top yen and still delivers industry leading operating margins. How could this be?

Tend to customer needs, not wants

Minimal capital and human investment for maximum added value is at the core of Keyence’s operating philosophy. In a recent interview with One Career, Keyence Human Resources Manager Ryu Nagata describes how the philosophy is applied to business operations.

First, it’s important to note that Keyence is a fabless manufacturer. The company focuses on product development and sales. The product development team is focused on creating the world’s and the industry’s first of everything. Meanwhile, the sales team takes a consultative approach to solving its customers’ problems.

The two teams complement each other.

The consultative sales team goes out to customer facilities to figure out what the customer needs. Then, the team gets with product development to create solutions. Finally, the sales team goes back to the customer to propose and implement solutions. Nothing out of the ordinary so far. But Don Norman, author of The Design of Everyday Things has some insight to share:

“One of my rules in consulting is simple: never solve the problem I am asked to solve. Why such a counter-intuitive rule? Because, invariably, the problem I am asked to solve is not the real, fundamental, root problem.”
― Don Norman, The Design of Everyday Things

 

If you’ve ever worked in consulting or marketing, you’re probably familiar with the concept of problem reframing. It’s the process of figuring out the root problem by looking at things from various perspectives.

This is what Keyence’s consultative sales team does. As a result, 70% of Keyence products are either the industry’s or the world’s first. These customized solutions often have no comparable products on the market, which means there is no room for price comparisons. Providing customers with exactly what they need drives the company’s industry leading operating margins.

 

All work and no fun?

One of the ways Keyence gets its industry leading operating margins is by working their employees hard. Again, minimum capital and human investment for maximum added value is the operating philosophy here. The word on the street is that you can build a new house in your 30s, then head to your grave in your 40s working for Keyence. To be blunt, working for Keyence isn’t an 8 to 5 job. From the western perspective, this may seem strange, but Keyence doesn’t allow employees to work after 9:30pm. Yes, you read that correctly, no work after 9:30pm.

Mr. Nagata emphasized that work hours are “dense” at Keyence, but also that the company has a work hard play hard culture. Employees are required to submit a detailed daily report showing the employees’ schedule. I don’t think this is particularly odd, except for the fact that Keyence tracks schedules down to the minute.

This all has a positive spin to it (at least through the interview), but parts of the internet (including former Keyence employees) have commented that the workload and intensity is simply too much (Japanese source).

[bctt tweet=”You can build a new house in your 30s, then head to your grave in your 40s working for Keyence.” username=”kenkyoinvesting”]

 

A comparison with Fanuc

What’s interesting to me about Keyence and Fanuc is that both companies consistently deliver outstanding performance, but with opposite strategies. Keyence is hyper-focused on custom solutions, which leads to the world’s and industry’s first products. Meanwhile, Fanuc is focused on standardization and cost control.

Both companies have a reputation for high workload and intensity. In fact, the internet sometimes refers to Fanuc as the “Yellow North Korea” (i.e., yellow is the corporate color). If it weren’t for the high salaries, both Keyence and Fanuc would be labelled “black companies”. The label is a Japanese term used for what I would call “white collar sweatshops”: Companies that push employees to the breaking point for little reward.

 

The bottom line

Keyence’s operating philosophy of minimum capital investment for maximum added value runs throughout the company. With a focus on product development and consultative sales, 70% of Keyence’s new products are the industry’s or the world’s first. This means Keyence solutions have little room for price comparisons. Hence, despite paying top yen for talent, Keyence is able to consistently deliver industry leading operating margins.

Author: Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.

    2 replies to "How Keyence Drives Industry-Leading Operating Margins"

    • Dwight

      How do you think Keyence is able to get better GPMs than Apple?
      Do you think it’s odd that you can never find a subcontractor factory of Keyence to understand the production process?
      When you actually get keyence components do you wonder why nobody else makes them instead?
      If the margins are so great why is this not arbed away?
      Misumi has similarly smart people, good business development guys and yet never gets near the margins
      Keyence is truly an amazing company with great disclosure.

      • Clayton Young

        Hi Dwight, thanks for reading and commenting!

        I don’t think comparing Apple to Keyence makes a lot of sense, but the high GPM is probably a function of custom solution (vs commoditized products) and cost control. I have wondered which companies actually produce Keyence products, but haven’t found any.

        As for margins not getting arbed away, I’m sure the constant flow of new “first” products help. I also read a blurb from a former Keyence employee that the company designs its products with both the end customer and production efficiency in mind. Reading any of Don Norman’s work (former Apple VP) would explain the end customer part. Designing for production efficiency is what companies with factories tend to do well and fabless companies tend to forget (or never learn). Being able to consistently design custom solutions with the end user in mind while also maintaining a high level of production efficiency is difficult, especially as a fabless company. This ought to make arbing away margins similarly difficult, because it’s not as simple as contracting out production and designing functional products. My guess is that Keyence is one of the only fabless companies that has early-Apple-like end user-minded design (with an industrial twist) coupled with production efficiency-minded design.

        With that said, I’ve never used a Keyence product. I’ve seen some sort of Keyence sensor on a rice ball machine line in development though. No idea what it was for!

        Anyway, I hope this helps! Thanks again for reading and commenting Dwight!

        Cheers,
        Clay

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