Global Strategy of Mori Seiki

“How successful is the unorthodox global strategy of machine tool manufacturer Mori Seiki?”

(07 Sep 2011) This article from Toyo Keizai looks at the unconventional business strategy implemented by machine tool manufacturer Mori Seiki, and evaluates the success of that strategy.

Increased investment in Gildemeister

In spring 2011, Mori Seiki increased its holdings in leading German machine tool manufacturer Gildemeister AG, thereby making Gildemeister an equity method affiliate. Mori Seiki borrowed heavily to finance this investment, thereby lowering its equity ratio to 54.6%, from a previously healthy ratio in the 70% range.

Strategy going forward

Sales and Service: Mori Seiki gains access to Gildemeister’s competitive network in Europe, South America and Russia, thereby complementing Mori Seiki’s Asian and North American sales and service operations. The two companies plan to integrate sales operations in various countries, and have recently opened a marketing headquarters in Switzerland.

Production: By gaining access to Gildemeister factories in Germany and Shanghai, and by opening its first overseas factory in North America in 2012, Mori Seiki hopes to shift from a dependence on exports to global production in Japan, America, Europe and Asia. They also intend to achieve economies of scale by integrating R&D operations of the two companies.

Financial standing

Mori Seiki has been significantly curtailing capital investment while drastically increasing its investment outlays overall. Also, its cash flow from operations has been in negative territory two years running, and its balance of cash and deposits has marked a year-on-year decrease for five consecutive years.

Mori Seiki in relation to its competitors

Cash flows: Whereas most companies in the industry have been cutting back on capital investment since the collapse of Lehman Brothers, Mori Seiki has been ramping up outlays in this area. Moreover, although Mori Seiki’s competitors Okuma and Makino have averaged positive free cash flows over the last five years, Mori Seiki shows negative results for that same period.

Operating income: Although many companies in the machine tool industry are likely to achieve positive operating results for Q1 of FY2012, Mori Seiki looks poised to report negative figures.

Return on investment and synergies with Gildemeister

It will be some time before Mori Seiki realizes a gain on its significant investment in Gildemeister, and any revenues realized are likely to be used to offset goodwill write-downs. Moreover, there are likely to be many challenges to overcome before production- and marketing-related economies of scale will be realized.

Article overview

Equity Finance in Japan: private placement (第三割当増資)

In this post, I will look at how companies, specifically in Japan, use private placement.

Companies can use private placement as a means of:

1. Facilitating strategic alliances with other companies

This can result in cross shareholdings, such as in the case of Hitachi's and Toyo Denki Seizo's purchases of the other party's respective shares. (English, Japanese)

2. Raising funds to drive corporate rehabilitation initiatives

Real estate developer ES-Con Japan has issued press releases concerning its efforts to use private placement as a means of raising funds for its rehabilitation efforts (English, Japanese, refer to press releases dated September 25, 2009).

3. Raising funds for use toward improvements of business operations

4. Thwarting hostile takeover attempts

Some companies have used private placement as a takeover defense strategy whereby shares of the target company are privately placed with a white knight, thereby diluting shareholdings of the party attempting the takeover.

In 2006, for instance, Hokuetsu Paper Mills thwarted a hostile takeover bid launched by Oji Paper through a private placement of newly-issued shares with trading company Mitsubishi Corp. and Nippon Paper.

To learn more about the Hokuetsu incident, see this Japan Times article and these Mitsubishi press releases (Japanese, English) concerning the private placement of Hokuetsu shares.

The Daiwa Institute of Research has released a report on private placement as part of its Corporate Governance Reform series. The report details concerns related to private placement in Japan and provides examples of disputes related to private placement. 

Equity Finance In Japan: What is meant by an "allocation of new shares to a third party"?

第三者割当増資 (daisansha wariate zoshi)

You may have seen a term such as allocation of [new] shares to a third party, third-party allotment, or similar used in reference to security offerings of Japanese companies—and may have wondered what exactly was meant by it. Some IR departments in Japan opt to use such terms as a direct translations for daisansha wariate zoshi. Other IR departments, business publications, and so forth opt for the more globally recognized term, private placement of newly-issued shares (第三者割当による新株発行) or private placement of treasury shares (第三者割当による自己株式の処分). Refer to the table below for various ways the term daisansha wariate is translated, frequency of use of those translations (measured in Google hit counts), and for links to websites using the respective translations.

 

Companies in Japan can raise additional capital (増資, zoshi) through: (1) a public offering (公募, kobo¹), (2) a private offering (私募, shibo) involving a rights issue (株主割当, kabunushi wariate) to all current shareholders, or (3) a private offering involving private placement (第三者割当, daisansha wariate²) of shares to one or more specified third parties, such as employees or business affiliates, who may or may not currently hold shares in the company.

In a future blog entry, I will show how certain companies in Japan have used private placement.

Notes:

1. 有価証券の募集 (yukashoken-no-boshu) is an alternative term for kobo.

2. 縁故募集 (enkoboshu) is an alternative term for daisansha wariate.

 Translations of 第三者割当増資 and Frequency of Use

Notes:

1. The terms listed are sometimes used as translations for daisansha wariatezoshi (第三者割当増資)

2. Figures indicate Google hit counts for material posted over the last one year, on '.jp' websites only and on all websites.

3. Used by Nomura Securities in a terminology glossary.

4. Used by SoftBank in a press release.

5. Used by Sumitomo Mitsui Financial Group in a press release.

6. Used by Panasonic in a press release.

What Japanese Automakers Can Learn from the Semiconductor Industry

Since February 2008, Toyo Keizai Weekly magazine (東洋経済, in Japanese) has been running a thought-provoking weekly segment translated here as, “Major Transformations Following Economic Crisis—Choices for Japan” (経済危機後の大転換――ニッポンの選択) written by Yukio Noguchi^*. His column explores the changing economic climate facing Japan and how those changes are likely to impact various aspects of Japanese business going forward.

In the November 13, 2010, issue, installment 39 titled “The Decline of Japan’s Once World-leading Semiconductor Industry” (かつて世界を制覇した日本半導体産業の凋落, in Japanese), Noguchi looks at factors behind why Japanese companies NEC, Toshiba, and Hitachi are no longer ranked among the world's top four semiconductor manufacturers as they were back in 1990 (today Intel, Samsung, and Texas Instruments hold the top three spots). He notes that efforts to reorganize—such as in the form of Elpida Memory established by NEC and Hitachi, and Renesas Technology established by Hitachi and Mitsubishi Electric—did not fully address new demands posed by shifts in the market from the 1980s to the 1990s.

Going forward, Noguchi warns that Japan’s motor vehicle industry could meet a fate similar to that of its semiconductor industry. He points out that if Japanese industry fails to change, venture companies such as those based in Silicon Valley might be better suited to meet potential growing demand for electric vehicles in the high-tech segment, and demand in the low price category might be better met by Chinese automakers.

Finally, the article winds up noting that NEC and its 9801 personal computer lost out to Microsoft, and that software and Internet venture companies, such as those launched in Silicon Valley, ultimately did not emerge in Japan. As a result, Noguchi laments, Japan today lags decisively behind in the increasingly crucial IT and software industries.

* Yukio Noguchi, the author of the weekly series, is currently a professor of finance at Tokyo’s prestigious Waseda University. His background includes experience in Japan’s Ministry of Finance, a Ph.D. in economics from Yale University, and a stint as a visiting professor at Stanford University. He is regularly quoted in the English-language media on business and economic issues (see, In Toyota Mess, Lesson for Japan, The New York Times)

Electronic component manufacturers experiencing upturn

Fortunately, certain Japanese manufacturers of leading technologies are apparently seeing an upturn in business conditions. This, according to an article (in Japanese) by the Weekly Toyo Keizai business magazine.

Article title: "スマートフォンが電子部品需要を牽引、村田、京セラの意外な活況"

(Electronic component demand driven by smartphones yields unexpected benefits for Murata and Kyocera, Weekly Toyo Keizai, November 12, 2010)

Some key points of the article follow:

• Murata is increasing facilities investment in Japan and in China, particularly focusing on products such as ceramic capacitors and filter components. The company also plans to resume operations at previously closed facilities.
• Kyocera has a backlog of orders, and its factories that manufacture components for electronic devices are operating at full capacity. The company has plans to expand semiconductor manufacturing capacity at their Kagoshima prefecture plant.
• Nidec Corporation is building a plant in Guangdong province, China, that will produce miniature motors for optical disk drives and other components.
• The article notes that recent trends will result in winners and losers:
  – Those who are poised to benefit include manufacturers of components used in smartphones, tablet PCs and 3D TVs.
  – On the other hand, those who may face continued difficulties include: LCD component manufacturers, low-priced digital device manufacturers hit by increased competition from Korean and other overseas manufacturers, and Japanese manufacturers of general components who may face increasingly severe price competition.

• The article referred to an analyst's report issued by Goldman Sachs (related report here) stating that growing popularity of smartphones and other such devices will benefit manufacturers of capacitors and other passive components, but those manufacturing CPU packages and other such components may face calls for lower pricing.