"A Japanese consultant to the world's factories is an unlikely profit machine
K EYENCE IS NOT exactly a household name, even by the low-key standards of corporate Japan. Ask most people, including some professional market-watchers, and the odds are they will struggle to say much about it. Put the same question to the world's factory-owners, and they will recognise it instantly.
Founded in 1974 by Takizaki Takemitsu, a young entrepreneur without a university degree, the company has for decades been helping manufacturers get the most out of their factories with sensors and robotics.
Its clients include giants from just about every industry, from aerospace (Boeing) to semiconductors (Samsung and TSMC).
As automation takes hold of industrial bosses' imagination, they are willing to pay handsomely for Keyence's services, which include designing clever kit and helping clients integrate it into their operations. Its revenues have nearly trebled since the early 2010s, to $6.7bn. Profits have grown faster still: the firm's operating margin now exceeds 50%; net margin has averaged 36% over the past decade, 13 percentage points higher than that of famously profitable Apple. Today it is Japan's fourth-most-valuable company, worth more than $90bn. Even after the recent stockmarket slump its share price is nearly ten times higher than a decade ago. Last year Mr Takizaki briefly became the richest person in Japan.
This rip-roaring success is something of a riddle. Few companies of any size enjoy that sort of profitability. Especially among big firms like Keyence, those that do tend to belong to one of three groups: regulated champions (think Saudi National Bank), dominant firms in industries with large barriers to entry (such as TSMC, whose chip factories cost $20bn a pop, or its Dutch supplier of chipmaking gear, ASML), or unregulated de facto monopolies in technology markets (Alphabet in online search, for example).
Keyence is none of these. Regulators mostly ignore its market. It is "fabless", dreaming up its gizmos but outsourcing their production to contract manufacturers; its capital spending is negligible and it devotes barely 2-3% of revenue to research and development, compared with around 9% for TSMC. And its designs are bespoke, and as such would seem to benefit less from economies of scale. You can think of it as the management consultant to the world's factories. Like McKinseyites, its engineers act as its only sales reps, tasked with bringing in business to the firm; the company employs no specialised sales team and its offerings cannot be bought from anyone else. These sales engineers, if you will, are also akin to consultants by being embedded within a client firm for a time to see how it ticks--and how it might tick better.
McKinsey, though, must fight for clients with rivals such as Bain or BCG; Accenture, a rare listed consultancy among what are mostly opaque private partnerships, reports net profits equal to roughly 10% of sales. Keyence, by contrast, faces no real competition. Firms that have tried to enter its market, such as Basler of Germany and Omron, a fellow Japanese company, are about a quarter as lucrative and have not competed away its margins. If anything, Keyence's have been edging up in recent years. So how does a company that does not make anything and invests next to nothing pull this off? And can it keeping doing so?
Explanations of Keyence's remarkable run usually start with its focus on its clients. People who have witnessed up close the relationship between the company's engineers and those who employ their services describe a painstaking process of optimisation. Without Keyence's engineers to ensure that all possible efficiencies are eked out, factories risk a bit more downtime and a bit less productivity, which can prove crippling in markets more competitive than the Japanese firm's, which is to say most of them. Engaging with analysts, investors and the odd journalist is an afterthought: a distraction that is best kept to a minimum.
Keyence's second trump card is its approach to personnel. Even by Japanese standards, working for the company is regarded as a relentless slog. But the sales engineers are compensated handsomely for their dual roles. The average salary it paid in the last financial year was ¥22m ($196,000). It regularly ranks as the country's highest-paying large company, above banks and other financial firms. This draws in ambitious youngsters who, also like many management consultants, put in a few years of hard graft before moving on. The average age of its employees is 36, far below the Japanese median age of 49.
The third factor behind the company's success is the breadth of its order book. It works for almost every large global manufacturer of note, ranging from aliments to aeroplanes. When a client brings in Keyence consultants, it is benefiting from their accumulated knowledge of best practice across most manufacturing subsectors. That may include insights from the client's direct rivals, which are also likely to rely on Keyence's services.
McKeyence & Company
This is yet another similarity to management consultancies, which likewise enjoy access to the inner workings of their clients' rivals. Where Keyence has an edge over the McKinseys and Bains is in its more specialised offerings. That makes the self-reinforcing stockpile of institutional knowledge harder for rivals to replicate. This phenomenon of scale begetting more scale is reminiscent of big tech's vaunted network-effect "flywheels".
Keyence is not without challenges. This year's global tech crunch has shaved around $60bn from its market capitalisation. As once-placid investors in Japan become more assertive they may press the company to do something with its large cash holdings of around $8bn. And even tech flywheels with seemingly unstoppable inertia can be disrupted--just ask Meta, whose social-media dominance is under threat from TikTok, a Chinese upstart. Until that happens, though, manufacturing bosses around the world will happily keep enlisting platoons of Keyence sales engineers with a tacit understanding of what their competitors are up to." [1]
· · · 1. "Unlocking Keyence's secret; Schumpeter." The Economist, 23 July 2022, p. 65(US).
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