Tatsuya Suzuki, portfolio manager of SuMi TRUST Japan Quality growth fund, talks about a very specific sector: electrical companies.

The UK signed a free trade agreement with Japan recently, and Japan’s economic odyssey, such as its experience of handling very low interest rates and modest growth for decades, holds lessons for European policymakers. Japan has embarked in recent years on certain supply-side reforms of the Shinzo Abe administration.  (Abe has stepped down to make way for a new prime minister). Japan, therefore, is in the news quite regularly, and naturally this will pique the interest of investors. 

In this article, Tatsuya Suzuki, portfolio manager of SuMi TRUST Japan Quality growth fund, talks about a very specific sector: electrical companies - which firms appear to be enticing investments and which might best be avoided. This is a deep dive into a specific investments space, and the editors here are pleased to share these insights. 

As always, the editors do not necessarily endorse all views of outside contributors. We urge readers to jump into the conversation! Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Japan is known worldwide for its top-range electrical devices, such as cameras, microwaves and TVs. The electrical appliance sector is still to this day the largest by market share in Japan (15.5 per cent in the Japanese TOPIX as at the end of September) but big traditional names like Canon, Panasonic and Toshiba are losing ground to Asian competitors and the sector is in the throes of an enormous change. Investors looking for opportunities in the Japanese electrical appliances sector now need to focus on newer, more highly specialised companies. These companies are involved in very specific parts of global production chains, often holding a significant slice of overall global capacity. Over the last few decades they have gradually supplanted the more traditional names. 

The lesson here is all about staying ahead of the curve. Originally, Japanese business to consumer companies like Canon, Panasonic and Toshiba dominated Asian and Western markets with high-quality, long-lasting products that were cheap to manufacture. They started losing their share of the market when other Asian companies adopted very similar designs, based on Japanese originals. At first these products were of lower quality and more prone to break but, as consumers adjusted and the technical ability of these companies increased, Asian competitors were able to make products that were almost equivalent to their Japanese counterparts at reduced costs. A good example of one of these competitors is the South Korean group Samsung, which gained market share in consumer electronics at the expense of Japanese companies. 

The rise of Asian competitors caused many Japanese B2C electrical appliance companies to lose profitability and market share, but a new generation of Japanese electrical companies has now come to the fore. The strongest companies in the Japanese electrical appliances sector today stay ahead of the curve by focusing on producing key parts in the manufacturing supply chain in ways that other Asian companies can’t match or copy and by doubling down on customer service and global sales. 

Rising stars of the next generation of leading Japanese electrical companies are to be found in two principal areas: those which focus on manufacturing industrial equipment, especially the parts used for factory automation, and those involved in producing parts for electric vehicles, or for other uses in clean energy and transport technology. 

Basd in Osaka, Keyence (the second largest holding in SuMi TRUST’s Japan Quality Growth fund as at the end of Sep 2020) is a key player in the factory automation sector. It develops precision machinery for factories, including microscopes, sensors and measuring equipment. Its unique selling-point is not the technology itself but the ability to provide added value that meets the unique needs of the client. Keyence shares all its success stories with the sales team, which enables it to be ready to respond to the unique needs of the customer quickly. By outsourcing the final production of its equipment and instead focusing on design and development, the company has been able to grow and capture overseas demand thanks also to its extensive global sales network. 

Another strong company in the factory automation sector is SMC, a manufacturer of pneumatic control systems which are smaller than hydraulic and voltage systems, but who are also more eco-friendly. SMC’s main customer is the automobile industry, and SMC’s personnel have close contact with clients’ factories. The company adds value by providing its clients with matching solutions based on their needs.

What’s more, when it comes to factory automation, Keyence and SMC have American and European companies as their main competitors, and there is currently no competition from other Asian counterparts.

Cleaner energy, transport
Companies like Nidec Corporation and Murata Manufacturing specialise in meeting demand for cleaner energy and transport. Nidec is a global leader in micro motor production. As computers become more sophisticated the demand for smaller and quieter motors is growing and Nidec excels at producing small precision motors for automobiles, including electric vehicles (and for some home appliances). The company’s management is renowned for swift decision-making and is pursuing a quite aggressive expansionist strategy to broaden its customer base through M&A. 

Murata Manufacturing focuses primarily on ceramic passive electrical components, such as capacitors used for 5G, enjoying a significant global share of production. It is very much a black box company; the procurement of raw materials, design of products and production facilities are all kept in-house and this makes it hard for other companies to imitate Murata Manufacturing’s products. The company is particularly strong in the production of multi-layer ceramic capacitors (MLCC) which are used in electronic devices like smart phones. Demand for MLCCs is going to be very high in the future as they are indispensable parts for the next generation of electrical devices, such as 5G. To put this into context, in a single phone there are approximately 1,000 MLCCs and there are 10,000 per car.

What the past few decades have shown is that the Japanese electrical appliances sector has made enormous changes to fend off the challenges that its Asian counterpart has been bringing, with new players making their mark over more established companies in Japan. Indeed, the cutting-edge companies in the sector now look totally different from  the big B2C conglomerates, and place a premium on client service and highly specialised products. They are well placed to tap into demand for niche, high-tech manufactured components as 5G and the next phase of the electriconics revolution gathers pace. With these rising stars, investors can have their pick of exciting stocks to choose from to beef up their portfolios for the long term, as these companies continue to grow and establish themselves in the market.