Japan | Industrials 9 October 2014
Industrials EQUITY RESEARCH Robotics Revolution: Pursuit of Improved Efficiency and Human Care Key Takeaway Robotics is a key global factory and process automation method. The industry is set to expand not only in the industrial but also in the service sector where we see issues coping with changes in the population structure globally. The Japanese government emphasizes the importance of robotics market expansion, and Japanese firms also act as key component suppliers to the industry globally. Growth prospects in China have also attracted major robot manufacturers. JAPAN Japanese government's focus on robotics: The Japanese government considers expansion of the robotics market to be crucial for Japanese society in the future. In the “Japan Revitalization Strategy (2014 Revision) – Japan’s challenge for the future”, the government aims to realize a new industrial revolution through robotics so that the issues Japan is likely to face in the future can be handled effectively. They target doubling the size of the industrial sector robotics market and expanding the services sector market by 20x from current levels by 2020, followed by continued growth in the Japan market. Japanese companies act as major robot and key component suppliers globally as well. We see increasing demand for nursing services globally reflecting the acceleration of the aging society. However, issues have emerged such as the lack of nursing care related employees, the increased burden on nursing care related workers, increases in government spending on nursing care, the handling of the dignity of people who are receiving nursing care due to the declining demographics of working age people to support those over 65 years old, as well as the increase in nursing care expenses within GDP.
Key end market in the industrial sector is China: The global robotics industry has seen long-term sustainable growth. IFR estimates that global multi purpose industrial robot shipments are set to grow by c.12% CAGR over the next three years, with key growth coming from China where the next three year growth rate is set at 25% by IFR. the China robotics market has the largest potential for growth in the long run in our view. Traditional markets should steadily grow, and emerging market growth may remain decent in the industrial robot market fostering factory automation. Japanese robotics manufacturers believe revenues from China are set to increase in major industries such as the auto and other general manufacturing sectors. We expect Chinese local robot manufacturers are also emerging and the local players' growth rate is estimated to surpass that of non-local giants based on IFR's assumptions.
Beneficiaries in this growing industry: We think companies with robotics industry exposure should benefit from sustainable demand growth. Within our coverage, Fanuc is a leading industrial robot maker globally with strength in the US, and Nabtesco is a leading precision reduction gear manufacturer with a 60% market share. Both Kawasaki Heavy Industries and Sumitomo Heavy Industries have industrial robot exposure as well. We believe all these companies are likely to enjoy sustainable robot demand growth given they have decent shares in the industrial robot market globally.
Stock market's focus: The 4 major robotics players globally include 2 Japanese manufacturers: Fanuc (6954 JP), Yaskawa Electric (6506 JP). The key component suppliers Yukihiro Kumagai * Equity Analyst are Nabtesco (6268 JP), Sumitomo Heavy Industries (6302 JP) and Harmonic Drive Systems +813 5251 6184 [email protected] (6324 JP). We are seeing increasing interest from investors in the service robotics industry in Hongguang Zheng * Japan, in particular in nursing care robotics, and players in the sector include CYBERDYNE Equity Associate +81 352516176 [email protected] (7779 JP), Kikuchi Seisakusho (3444 JP), Daiwa House Industry (1925 JP), etc. We believe * Jefferies (Japan) Limited there will be more companies entering the industry, and we think the stock market should continue to pay close attention to the nursing care robotics industry in addition to general industrials.
Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 54 to 57 of this report. Industrials
9 October 2014
Executive Summary Robotics market expansion has been a major industry focus, and we emphasize the new Japanese administration’s efforts to expand the robotics market in Japan along with a global demand boost led by major emerging countries. Japanese companies have large market exposure globally in the robotics industry, and two of the four major industrial robot manufacturers are located in Japan. Japan is also trying to rapidly expand the services robot industry, and the government promotes robot market expansion in both the industrial and service sectors. Regarding general robot growth globally, China clearly is the fastest growing market globally, and major robot manufacturers are shifting their focus to the China market. Global industrial robot demand growth rate is estimated at 12% CAGR according to IFR (International Federation of Robotics) for the next three years.
Attractive market growth The Japanese government set a robot introduction target in near future and the Japan robot market is now set to rapidly grow in both the industrial and service sectors by 2020. In order to cope with the aging society in Japan, the government would like to expand the industrial robot market by 2x and the service robot market by 20x from current levels by 2020. Industrial robot market shipments are expected to grow sustainably at a 12% CAGR over the coming 3 years according to IFR. Factory automation needs have been a major driver of demand growth, and we believe the continuing replacement cycle in traditional markets and new pent up demand in emerging markets should continue to create decent demand growth. IFR asserts global robot installation is expected to surpass 1,600,000 units in 2016, compared to less than 200,000 in 1985.
Service industry key growth driver in Japan The service industry is currently a key growth driver in the robot market in Japan. Due to the nature of the change in Japanese demographics, depending upon robotics technologies to support the elderly is inevitable, in our view. The government aims to expand service robotics by 20x by 2020 from current levels, and we have begun to see various types of service robotics for the elderly being introduced. In 2050, the number of productive age people required to support one elderly person is estimated to be only 1.2 from 2.8 in 2008, so non-human labor is required to cope with the social issues that are highly likely to appear since the net birth rate in Japan is already negative.
China is the fastest growing market globally China has been and probably is going to be the largest focus end market for major robot manufacturers in the industrial space. While overall industrial robot growth is expected to be 12%, growth in China is estimated at a 25% CAGR over the next three years. Japanese industrial robot makers have been shifting their focus to China and we think China has the largest growth potential for the time being.
Chart 1: Global robot sales growth to continue
350 +12% CAGR 300
250
200
150 ('000 units) of ('000 100
50
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2015e 2016e 2017e
Source: Jefferies estimates, company data page 2 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Next Generation Robotics Revolution Industrial robotics boom Government’s focus In the “Japan Revitalization Strategy (2014 Revision) – Japan’s challenge for the future”, the government aims to realize a new industrial revolution through robotics technologies. Japanese manufacturing companies are facing issues such as cost competition globally, and they are also facing the lack of productive age workers in the SME manufacturing sector, medical/welfare service sector and agriculture/construction industries. In an aging society, there are two key factors to monitor: improvement in logistics and securing the labour force. The government would like to improve productivity, improve corporates’ profitability, and increase wages by taking advantage of robotics technologies.
The Japanese government established a “robot revolution realization committee”, and they set a “5 year plan” as an action plan to execute detailed development plans. They are targeting doubling the robot market in the manufacturing sector by 2020 through technology development, regulatory easing, and standardization. In the service sector, they would like to expand the market by 20x by 2020. Through these efforts, the government is trying to improve productivity in various sectors (i.e. they would like production efficiency to improve by more than 2% every year). They are also contemplating hosting a Robot Olympics, along with the Tokyo Olympics in 2020, and introducing universal designs of robot suits and other types of robotics in different fields.
Growth potential remains large In 2010, METI (Ministry of Economy, Trade and Industries) and NEDO (New Energy and Industrial Technology Development Organization) made assumptions to measure the future market size of the robotics industry. In 2015, they estimate the industry will be worth ¥1.6tn and will continue to expand to ¥2.9tn in 2020, ¥5.3tn in 2025, and ¥9.7tn in 2035.
METI estimates the breakdown of ¥9.6-9.7tn in 2035 as follows: manufacturing industry ¥2.7tn, robot technology product industry ¥1.5tn, agricultural/forestry/fisheries industry ¥0.5tn and services industry ¥4.9tn. The services industry is expected to lead the growth, while the manufacturing industry continues to show steady growth.
In 2011, the market size of the global industrial robot market excluding chip mounters was US$8,497mn, and Japanese companies’ shipments were ¥332.8bn (US$4,267mn: exchange rates are based on 2011 data), so the Japanese share was 50.2%, according to METI.
The industrial robot market growth has been driven by major Asian countries such as China and South Korea since the early 2000s, with China growth at a 37% CAGR between 2001 and 2011, South Korea at a 21% CAGR, and the remaining Asian countries at a 21% CAGR. Going forward, growth is expected to be driven by Japan, China and North America.
The major users of industrial robots are the automobile and electronics industries, followed by metals/machinery. In 2011, China was the largest in the auto industry with 11,204 units, Germany was the second largest with 10,531 units, the US 8,426 units, and Japan 7,330 units. In the electronics industry, Korea accounted for the most globally at 13,224 units, and Japan came in second at 12,096 units in 2011.
page 3 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 2: Annual shipment value: Global market gradually expanding
9,000 Global Market of Industiral Robotics 8,000 7,000 6,000 5,000
4,000 (US$mn) 3,000 2,000 1,000 0 2005 2006 2007 2008 2009 2010 2011
Japan Korea North America Germany Others
Source: Jefferies, METI
Chart 3: Industrial robot installments: Installments to show steady growth
2,500,000 Global robot operation
2,000,000
1,500,000
(Units) 1,000,000
500,000
0 1985 1990 1995 2000 2005 2010 2012 2013 2014E 2017E
Asia Americas Europe Africa Not Specified
Source: Jefferies estimates, IFR
Japan/Europe/Americas market Japan/Europe/Americas were the first to introduce robotics technology, so the relative growth rate compared to emerging markets is lower. In Japan, investments in robotics facilities for welding or painting are plateauing, but demand by new markets that use assembly and conveying robotics such as the food, toiletries and medical industries is expected to grow in our view.
European market growth is slowing; however, we think investments in the auto industry are largely expected. On the other hand, European robotics makers seem to be shifting their focus to China and a major robotics manufacturer, ABB, has shifted its development center and headquarters to China. The Americas continues to see robotics demand expansion on the back of the need for automation and ’return-to-the-US’ efforts in the manufacturing industry. However, the growth velocity should remain low since the introduction has largely been done. Robotics introduction in the US auto market has been quite active, and steady growth is expected including in related industries.
Asia market Although the China economic environment started to slow in late 2012, the demand for industrial robotics has been rising rapidly reflecting increases in labor costs. In particular, the welding/painting robotics market has grown substantially since major European auto manufacturers such as Volkswagen and BMW made investments in China. Local Chinese auto manufacturers have also promoted factory automation utilizing industrial robots. One big concern/risk would be any action to avoid “China risks” as seen in late 2012
page 4 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
reflecting the political and economic situation there, and that could potentially slow down the proactive introduction of industrial robots from non-local manufacturers.
South Korea is another major country that has experienced decent robotics growth. The major industries in South Korea that use industrial robots are the auto, smartphone, tablet and FPD manufacturing industries.
Factory automation in Asian countries has been in a steady growth phase and we expect the market to grow gradually reaching ¥310bn by 2020 (Chart 4).
Major growth in the Asia market comes from Assembly/Transfer robotics which should have an 11% CAGR by 2020 in our view. The Assembly/Transfer type accounted for 33% of total demand as of 2013, and we think it will go up to 45% of the total by 2020. We believe the total market size should reach ¥310.6bn in 2020, compared to ¥165.1bn in 2011 and ¥191.3 in 2013.
The China market should continue to be considered the largest potential market that can become the largest consumer of industrial robotics in the world, and penetration in the China market should be a major swing factor that will impact global market share in the long run. Major industrial robotics manufacturers are shifting production to China and they are likely to continue to do so going forward. Local manufacturers are also focusing on industrial robot development and the Chinese government asserts that they will focus on high-end manufacturing facilities between 2011-2015, including industrial robots.
Chart 4: Growth Driver is to be Assembly/Transfer robotics in Asia 2011 2012 2013 2014 2015 2020 CAGR by 2020 (bn yen) Actual Actual Expected Estimate Estimate Estimate Welding/Painting Type 72.4 84.5 100.8 105.2 111.7 126.9 3% Ark Welding 37.7 38.2 44.6 47.7 49.7 57.2 3% Spot Welding 21.4 33.0 39.2 41.9 44.8 49.7 3% Painting 13.3 13.4 17.0 15.6 17.2 20.0 2% Actuator Type 5.5 5.9 6.2 6.9 7.6 10.1 6% Single Axis 2.0 1.9 2.0 2.2 2.4 3.6 8% Orthogonal 1.8 1.8 1.9 2.1 2.4 3.2 7% Electric Slider 1.8 2.2 2.3 2.6 2.8 3.3 5% Assembly/Transfer Type 47.9 54.1 62.6 71.2 83.8 140.0 11% Desk Type 2.5 2.5 2.6 2.8 3.1 4.6 7% Palletizing 5.4 6.4 7.6 8.9 10.5 19.5 13% Take-Out 28.3 30.1 33.4 37.5 43.5 77.0 11% Scala 3.0 3.8 5.2 6.0 7.5 8.0 6% Small Vertical Multi Joint 7.6 10.2 12.5 13.9 15.2 19.9 6% Small Vertical Multi Joint (Slim, Quick, Dual-arm type) 0.2 0.2 0.2 0.7 2.0 5.6 52% Parallel Link 1.1 1.1 1.1 1.5 2.1 5.5 22% Clean Transfer 39.2 16.2 21.7 24.5 26.7 33.7 6% Glass Substrates 34.5 11.4 17.0 19.5 21.4 25.8 5% Wafer Transfer 4.7 4.8 4.7 5.0 5.4 7.9 7% Total 165.1 160.8 191.3 207.7 229.9 310.6 6%
Breakdown Welding/Painting Type 44% 53% 53% 51% 49% 41% Ark Welding 23% 24% 23% 23% 22% 18% Spot Welding 13% 21% 20% 20% 19% 16% Painting 8% 8% 9% 8% 7% 6% Actuator Type 3% 4% 3% 3% 3% 3% Single Axis 1% 1% 1% 1% 1% 1% Orthogonal 1% 1% 1% 1% 1% 1% Electric Slider 1% 1% 1% 1% 1% 1% Assembly/Transfer Type 29% 34% 33% 34% 36% 45% Desk Type 2% 2% 1% 1% 1% 1% Palletizing 3% 4% 4% 4% 5% 6% Take-Out 17% 19% 17% 18% 19% 25% SCARA 2% 2% 3% 3% 3% 3% Small Vertical Multi Joint 5% 6% 7% 7% 7% 6% Small Vertical Multi Joint (Slim, Quick, Dual-arm type) 0% 0% 0% 0% 1% 2% Parallel Link 1% 1% 1% 1% 1% 2% Clean Transfer 24% 10% 11% 12% 12% 11% Glass Substrates 21% 7% 9% 9% 9% 8% Wafer Transfer 3% 3% 2% 2% 2% 3% Total 100% 100% 100% 100% 100% 100% Source: Jefferies estimates, company data
page 5 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Robot market growth driven by Asia The global robotics market has been led by Asian countries, and in particular growth has been led by China and Korea (Chart 5). China saw 37% CAGR from 2001 and 2011, and Korea had 21% CAGR during the same period. Total robotics has seen an 8% CAGR.
Sales growth will continue to be led by Asian countries; however, IFR expects it will be mainly China which should have an 11% CAGR from 2011 to 2015, followed by acceleration to 25% CAGR from 2015 to 2017. On the other hand, they estimate Korea will decline at a 1% CAGR in the same period. They assert Japan and North America should see decent growth at 6% CAGR and 7% CAGR, respectively. Total robotics sales growth is estimated at a 6% CAGR from 2011 to 2015, followed by accelerated growth at a 12% CAGR until 2017, according to IFR.
Chart 5: Growth driven by China (shipment figures)
350 Outlook of industrial robots sales 300
250
200
150
Thousand Units 100
50
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2017E
Japan China Korea North America Germany Others
Source: Jefferies, METI
Chart 6: Global Robot Peers Share price as of 10/8/14 Code Company Name Rating Share Price P/E (x) P/B (x) ROE EV/EBITDA (x) Dividend Yield Dividend Payout Ratio (LC) FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3 Domestic 7012 JP Equity KAWASAKI HEAVY INDUSTRIES Hold ¥413 15.5 13.6 12.1 1.8 1.6 1.5 11.4% 11.8% 12.2% 8.5 7.7 7.1 1.7% 1.9% 2.2% 26.2% 26.4% 26.3% 6302 JP Equity SUMITOMO HEAVY INDUSTRIES Hold ¥580 17.8 16.2 14.4 1.0 1.0 0.9 7.1% 7.4% 7.9% 6.5 6.2 5.8 1.6% 1.7% 1.7% 27.6% 27.9% 24.8% 6954 JP Equity FANUC CORP Hold ¥18,830 18.8 22.4 20.1 2.8 2.5 2.3 15.5% 11.8% 12.2% 12.0 14.3 12.7 1.6% 1.3% 1.5% 30.0% 30.0% 30.0% 6268 JP Equity NABTESCO CORP Hold ¥2,583 19.8 17.7 15.8 2.2 2.0 1.8 12.1% 12.4% 12.6% 11.0 9.9 9.0 1.5% 1.7% 1.8% 30.6% 30.1% 28.2% 6506 JP Equity YASKAWA ELECTRIC CORP NC ¥1,370 17.9 16.0 14.8 2.3 2.1 1.9 12.8% 12.9% 12.6% 9.2 8.3 7.9 1.0% 1.1% 1.3% 18.5% 18.3% 18.6% 6481 JP Equity THK CO LTD Hold ¥2,619 19.2 17.8 16.2 1.4 1.4 1.3 7.7% 7.9% 8.1% 7.6 7.2 6.8 1.4% 1.5% 1.5% 26.4% 25.8% 24.7% 6324 JP Equity HARMONIC DRIVE SYSTEMS INC NC ¥1,496 30.9 28.6 26.7 4.2 3.9 3.5 13.7% 13.5% 13.2% 16.6 16.4 14.8 0.9% 1.0% 1.1% 28.3% 28.0% 28.2% 7779 JP Equity CYBERDYNE INC NC ¥3,560 -980.7 459.9 125.4 49.7 45.1 36.2 -5.1% 9.8% 28.8% -645.5 391.4 124.1 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 9735 JP Equity SECOM CO LTD NC ¥6,325 17.6 17.1 16.2 1.8 1.7 1.6 10.1% 9.8% 9.7% 7.7 7.4 7.1 2.0% 2.0% 2.2% 34.8% 34.9% 35.2% 1925 JP Equity DAIWA HOUSE INDUSTRY CO LTD NC ¥1,932 11.7 11.4 11.1 1.2 1.1 1.0 10.1% 9.8% 9.5% 7.0 6.6 6.4 2.5% 2.6% 2.7% 29.6% 29.3% 29.4% Overseas ABBN VX Equity ABB LTD-REG NC CHF 20.77 16.4 13.9 12.4 2.5 2.4 2.2 15.2% 17.0% 17.8% 9.5 8.4 7.7 3.7% 3.9% 4.2% 60.8% 54.8% 51.8% KU2 GR Equity KUKA AG NC € 44.26 23.1 17.5 15.8 3.5 2.9 2.6 15.0% 16.8% 16.2% 8.0 7.3 6.8 1.0% 1.4% 1.5% 22.1% 23.7% 23.7% 300024 CH Equity SIASUN ROBOT & AUTOMATION-A NC CHF 35.76 63.9 46.9 35.5 9.6 9.3 7.6 15.0% 19.9% 21.4% 52.9 39.3 31.0 0.2% 0.2% 0.3% 10.7% 10.5% 10.9% Source: Jefferies estimates, company data
page 6 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 7: Global robot operation (cumulative installment figures) (Unit) 1985 End 1990 End 1995 End 2000 End 2005 End 2010 End 2012 End CAGR (7 years) Asia 93,427 282,239 416,820 447,165 481,652 520,831 628,889 3.9% Japan 93,000 274,210 387,290 389,442 373,481 307,698 310,508 -2.6% China 930 11,557 52,290 96,924 35.5% India 70 1,069 4,855 7,840 32.9% Malaysia 390 1,695 3,677 4,708 15.7% Republic of Korea 3,020 18,149 37,988 61,576 101,080 138,883 12.3% Singapore 200 1,389 3,275 5,370 5,463 3,685 5,382 -0.2% Taiwan 227 1,290 3,849 6,942 15,464 26,896 32,455 11.2% Thailand 2,472 9,635 17,116 31.8% Other Asia 900 2,417 3,200 3,937 3,949 6,490 7.4% Australia/NZ 1,430 1,840 2,833 4,938 7,066 8,583 8.2% Americas 20,375 34,240 57,424 91,955 143,634 179,785 207,017 5.4% North America (Canada, Mexico, US) 20,000 34,090 56,945 89,880 139,984 173,174 197,962 5.1% Brazil 1,230 2,672 5,721 7,576 16.1% Other Americas 375 150 479 845 978 890 1,479 6.1% Europe 24,655 134,509 130,542 211,298 296,918 352,142 380,546 3.6% Austria 249 1,150 2,323 3,046 4,148 5,749 6,619 6.9% Benelux (Belgium, Netherlands) 604 2,422 5,096 8,212 9,362 11,689 13,608 5.5% Czech Republic 375 915 1,971 4,462 6,830 19.4% Denmark 164 470 672 1,414 2,661 4,234 4,613 8.2% Finland 257 810 1,398 2,647 4,159 4,611 4,311 0.5% France 4,150 8,350 13,276 20,674 30,236 34,495 33,624 1.5% Germany 8,800 27,320 51,375 91,184 126,294 148,256 161,988 3.6% Hungary 67 200 247 261 458 1,406 3,301 32.6% Italy 4,000 12,200 22,963 39,238 56,198 62,378 60,750 1.1% Norway 323 440 477 540 811 1,012 1,019 3.3% Poland 520 493 474 846 3,321 4,590 27.3% Portugal 56 496 1,090 1,542 2,280 2,524 7.3% Romania 53 317 939 50.8% Russian Federation 64,204 10,000 5,000 5,049 1,058 1,771 -13.9% Slovakia 532 500 576 1,870 2,294 21.8% Slovenia 238 363 460 1,032 1,474 18.1% Spain 688 2,100 4,913 13,163 24,141 28,868 28,911 2.6% Swenden 2,046 3,340 4,459 6,276 8,028 9,387 9,824 2.9% Switzerland 290 1,510 2,672 3,742 3,732 4,417 5,010 4.3% UK 3,017 5,940 8,314 12,344 14,948 13,519 15,046 0.1% Other Europe 3,477 223 215 1,245 7,781 11,500 37.4% Africa 0 0 0 90 634 2,232 2,858 24.0% South Africa 90 622 2,074 2,586 22.6% Other Africa 12 158 272 56.2% Not Specified 4,172 16,079 Total 138,457 450,988 604,786 750,508 922,838 1,059,162 1,235,389 4.3% Source: Jefferies, company data Major issues to be faced Because of the Oil Shock in the 1970s, Japan started to see increasing demand for an improvement in productivity, and due to the required technology expansion of microprocessors and servo motors, programmable robotics were developed and penetrated manufacturing industry in Japan. Robotics became a commonplace capital good in the manufacturing industry due to AC servos, absolute encoding, the development of controller processors and highly improved reduction gears and other components. The expansion of the robotics industry was led by the auto industry, particularly for welding, which has been the most important usage until now.
In the 1990s, the robotics industry started to stall along with the collapse of the bubble economy in Japan. Manufacturing industry started to be more selective about introducing and investing in robotics and market growth slowed. Robot usage in clean processing such as LCDs, semiconductors, and electronic devices started to be visible at this time.
In the late 2000s, the industrial robotics industry started to see a growth phase, and in 2005, multi joint robotics shipments reached their historical peak at 81,000 units at with rapid growth following the IT bubble. Growth came from the demand for shifting
page 7 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
production locations to emerging countries such as China. Due to increased concerns over the Japanese “hollowing out of industries”, we are seeing more talk regarding the challenges for cell-production to cope with flexible production.
Industrial robotics have existed for more than 30 years in Japan, and along with the macroeconomic situation, demand from society has been changing gradually. In the 1980s, demand mainly came from the need for “better robotics”, in the 1990s, enhancing robot utilization was sought, and in the 2000s, solutions have been a major theme.
The average service life is generally regarded as being 12 years; however, a UNECE/IFR study indicated that the average service life of industrial robots could be as long as 15 years. In 2013, total robot stocks were calculated at 1,332,218 units, but with the 15 year assumptions it could in fact be 1,600,000 units.
Globalization of robotics is the next theme Industrial robotics shipments were 95,551 units in 2012 (worth ¥303.1bn), and direct exports amounted to 66,871 units (worth ¥179.2bn) out of total shipments. The exports accounted for 70% of total shipment units and 60% of total shipment value in 2012. In terms of the number of shipments, it is close to record high levels. Major industrial robot makers are shifting their focus to overseas locations from both production and sales perspectives.
Chart 8: Domestic robotics production has been steady in the long run
120,000
100,000 CAGR 7%
80,000
60,000 (Units) 40,000
20,000
0
2004 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sequence robots Playback robots Numerically controlled robots Intelligent robots
Source: Jefferies, METI
Auto is a key demand driver in the industrial robot market According to our auto parts analyst, Shinya Naruse, it is likely that global vehicle production will be led by increasing demand from emerging markets, and we forecast global vehicle production will grow at a CAGR of 4% over the period CY13-17. We expect Japanese car manufacturers’ production share to see a recovery. Japanese carmakers’ global market share has been sluggish in the past few years due to the following factors (which have subsided now): 1) unintentional acceleration problem for Toyota Motors in the US, 2) natural disasters (the east Japanese earthquake and floods in Thailand), 3) production cuts when the JPY was strong; and 4) the political dispute with China and boycott of Japanese branded products.
Based on IFR’s statistics, auto industry customers substantially increased investments in industrial robots globally, and about 69,400 new robots were installed in the auto industry in 2013, a record high installation. The share of total supply was 39%, accounting for the largest portion of the overall industry. The installation of robots bottomed in 2009 in the auto industry at 19,300 units and surged to 66,500 units in 2012.
page 8 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 9: Global light vehicle production forecast (1)
100 90 80 70 60 50
40 (mnunits) 30 20 10 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14E 15E 16E 17E Japan ASEAN China India North America South America West Europe Others
Source: Jefferies estimates, IHS Automotive, MarkLines, JAMA
Chart 10: Global light vehicle production forecast (2) (mn) CY11 12 13 14E 15E 16E 17E CAGR(13-17) Japan 8.4 9.9 9.6 9.3 9.2 8.9 8.8 yoy -13% 18% -4% -3% -1% -3% -1% -2% ASEAN 2.9 4.1 4.3 4.3 4.7 5.0 5.5 yoy -4% 43% 6% 0% 8% 6% 10% 6% China 17.3 18.2 20.1 21.6 23.3 24.9 26.2 yoy 3% 6% 10% 7% 8% 7% 5% 7% India 3.8 3.9 4.0 4.2 4.6 5.0 5.5 yoy 11% 4% 1% 5% 10% 10% 9% 8% North America 13.1 15.4 16.2 16.8 17.2 17.5 17.8 yoy 10% 18% 5% 4% 2% 2% 2% 2% South America 4.3 4.3 4.5 4.7 4.9 5.1 5.3 yoy 3% -1% 6% 4% 4% 4% 4% 4% West Europe 13.7 12.6 12.2 12.5 12.9 13.2 13.5 yoy 4% -8% -4% 3% 3% 2% 2% 3% Others 13.9 13.5 13.3 14.0 14.5 15.0 15.7 yoy 9% -3% -1% 5% 4% 3% 5% 4% Total 77.4 82.0 84.1 87.4 91.2 94.6 98.3 yoy 3% 6% 3% 4% 4% 4% 4% 4% Source: Jefferies estimates, IHS Automotive, MarkLines, JAMA Note: Japan production includes medium & heavy-duty trucks.
Chart 11: Main use of robots is in the automotive industry
Automotive industry
Electrical/electronics*
Metal** 2011
Chemical, rubber and plastics 2012
Food 2013
Others
Unspecified
- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 (units) Source: Jefferies, IFR Note: * includes communication, computer and medical precision. ** includes metal products, basic metals and machinery industry.
page 9 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Auto capex outlook Looking ahead, auto industry capex is set to rise. We have summarized auto industry capex history and outlook given the sector is the most critical to industrial robot growth globally. Globally, auto industry capex is expected to trend up steadily at high levels in the coming years. Consensus estimates show investments in both Japan and Europe are expected to stay high. Compared with the previous peak, before the financial crisis, the absolute value of global capex (JPY denominated basis) is already higher in 2014, which should be followed by a slight increase in 2015 and onwards.
At the previous peak the overall capex value was slightly above ¥7tn, followed by a huge decline after the financial crisis to below ¥4tn. After bottoming in 2010, we saw a steady recovery until 2013, and 2014 is likely to be a year with decent growth. We believe continued capex growth will be a major driver for the demand growth in industrial robots. In 2014, the value is estimated at ¥7.8tn, followed by gradual increase, reaching ¥8.1tn in 2016, according to Bloomberg consensus estimates.
Based on Bloomberg consensus estimates, auto capex in Japan is estimated to remain largely flat in the next three years; however, the absolute value of investments is expected to remain at high levels. As for Europe, the value of investments is estimated to be close to EUR30bn, and capex by Volkswagen is estimated to grow over the next three years. According to Fourin, it appears Volkswagen will increase production capacity to 13.15mn units/year by 2018 with a reasonable addition in Asia. The contribution to global capex value from the European region is large and Volkswagen accounts for a large portion of incremental investments in Europe.
In the US, consensus estimates calls for growth to be steady, with a 10% CAGR from 2013 to 2017. Two major companies (GM and Ford) are both expected to see decent capex growth based on consensus estimates. The US market has seen decent trends in machine tool market orders, and although there are other industries that have reasonable investment prospects such as aerospace and electronics, auto capex growth should remain a major contributor in the overall US market given industrial robot exposure to the auto industry is high.
China is clearly the most important market for industrial robot manufacturers; however, the incremental investment contributions by Chinese local manufacturers to overall capex from the auto industry seem low. Also, the street is estimating that the investments in the auto industry by local manufacturers will drop over the next three years. On the other hand, we believe investments from non-local manufacturers will continue to contribute to boost capex in China; hence, industrial robot manufacturers should benefit as well.
Chart 12: Global auto industry capex
9 40% 8 30% 7 20% 6 10% 5 0%
4 -10% (tnYen) 3 -20% 2 -30% 1 -40% - -50% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e2015e2016e
Capex (LHS) YoY (RHS)
Source: Bloomberg, Jefferies Note: Overseas companies’ capex values are denominated in JPY in the chart. The values in the chart include key auto manufacturers in each region.
page 10 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 13: Japan auto industry capex Chart 14: China auto industry capex
3,500,000 30% 35,000 100%
3,000,000 20% 30,000 80% 10% 60% 2,500,000 25,000 0% 40% 2,000,000 20,000 -10% 20% 1,500,000 15,000
(mn Yen) -20% 0% (mn RMB) 1,000,000 10,000 -30% -20%
500,000 -40% 5,000 -40%
- -50% - -60% 2009 2010 2011 2012 2013 2014e2015e2016e 2009 2010 2011 2012 2013 2014e 2015e 2016e
Capex (LHS) YoY (RHS) Capex (LHS) YoY (RHS)
Source: Bloomberg, Jefferies Source: Bloomberg, Jefferies Note: Major 10 companies are used for calculation Note: Major 6 companies are used for calculation
Chart 15: US auto industry capex Chart 16: Europe auto industry capex
18,000 35% 30,000 40%
16,000 30% 30% 25,000 25% 14,000 20% 20% 12,000 20,000 15% 10% 10,000
mn) 10% 15,000 0%
$ $ 8,000 ( 5%
(mn EUR) -10% 6,000 10,000 0% -20% 4,000 -5% 5,000 2,000 -10% -30% - -15% - -40% 2009 2010 2011 2012 2013 2014e 2015e 2016e 2009 2010 2011 2012 2013 2014e 2015e 2016e
Capex (LHS) YoY (RHS) Capex (LHS) YoY (RHS)
Source: Bloomberg, Jefferies Source: Bloomberg, Jefferies Note: Major 2 companies are used for calculation Note: Major 4 companies are used for calculation
Major global competition Global big 4 and others Fanuc and Yaskawa Electric are two major players in Japan in the industrial robotics space. The global big 4 comprises the Japanese big 2 and the European big 2, ABB and KUKA. In addition to the global big 4 players, there are major robotics manufacturers in Japan and overseas which have exposure to various industries, such as KHI, Nachi-Fujikoshi, Mitsubishi Electric, Toshiba Machine, etc.
The 4 major companies accounted for more than 80% of global robot shipments in 2012, according to the Nikkei. The dominance by those 4 companies has not changed much over time, and we do not think there will be a significant change in market structure anytime soon. Fanuc has sustained its top global position in the multi-joint robot market.
Chinese local manufacturers also have potential for growth given that similar trends could happen in the machine tool industry such as the emergence of Shenyang Machine Tool in China, which could potentially become a comparable competitor in the future. Japanese component manufacturers are trying to get into the Chinese market as well, and we believe Chinese local manufacturers will continue to increase industrial robot production in the long run at a faster pace than global robotics production.
page 11 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 17: Major 4 account for more than 80% of total multi-joint robot market
2012 Multi-joint Robot Share (Global) Others Kawasaki Heavy 10% Fanuc Industries 27% 8%
KUKA 14%
ABB Yaskawa Electric 24% 17%
Source: Jefferies, Nikkei
Chart 18: Global robot manufacturers by usage Purpose Japanese European Asian Arc Welding Fanuc Yaskawa Kobelco Daihen ABB KUKA Panasonic Spot Welding Fanuc Yaskawa KHI Nachi Fujikoshi ABB KUKA Comau Hyundai Heavy
Painting Fanuc Yaskawa KHI ABB KUKA Staubli
Palletizing Fanuc Yaskawa KHI Nachi Fujikoshi ABB KUKA Hyundai Heavy MELCO Fuji Yusoki Okura Glass Substrates Transfer Yaskawa Nachi Fujikoshi Nidec Sankyo Hirata Hyundai Heavy
Wafer Transfer Yaskawa KHI Daihen Hirata Brooks Automation
SCARA (Selective Compliance- MELCO Yamaha Motor Toshiba Machine Denso Wave Adept Technology Staubli Hiwin Assembly Robot Arm) Seiko Epson Orthogonal Yamaha Motor Denso Wave Toshiba Machine IAI
Source: Jefferies, company data
Table 1: European companies are entering China market which has the highest growth potential Company Production in China ABB ABB is the first amongst major robotics manufacturers that started production in China, and they position Shanghai as the central location for robot production, by centralizing development, sales and production resources. In China, they manufacture painting robotics, and they have been focusing on local procurement of major components in recent years. KUKA KUKA does final assembly to meet the delivery schedule. In order to cope with demand growth in China, they are planning to start to manufacture in China in 2014, starting off with welding type robotics. Source: Jefferies, company data
Table 2: Chinese local companies are increasing robotics development Company Efforts Siasun Sales and development of welding and transfer type multi joint robotics. In 2011, they sold c. 250 units of robotics (mainly transfer type) GSK CNC is their major product, and they also manufacture robotics which is an application of CNC. It has domestic share of 50% for CNCs, and China machine tool makers are the major customers. They are planning to build a large plant in Huanan area in China and are targeting 10,000 units/per. ADTECH Established in 2002, their main business is motion control business. They are known to be a SCARA robotics manufacturer. Bosin Their main product is single axis robotics, and they procure drive parts such as ball screws, belts, bearings from Chinese and Taiwanese makers. They are also proactive about expansion of robotics businesses (i.e. they developed drawing system that have image sensors built-in to ABB's vertical multi joint robotics) Source: Jefferies, company data
page 12 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Earnings comparison of 4 Major Global Players As mentioned above, the 4 major global players are Fanuc and Yaskawa Electric in Japan and KUKA and ABB in Europe. The four companies are said to dominate the industrial robot market in the industrial space. We compare revenue trends and Chart 19 shows a recovery after bottoming in FY2009. Since ABB does not disclose their robotics segment revenues any longer, we compared the other three major companies.
Chart 19: The Global Major 4 accounts for more than 80% of total multi-joint industrial robot demand
160,000
140,000
120,000
100,000
80,000
(mnyen) 60,000
40,000
20,000
0 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
Fanuc Yaskawa Electric KUKA
Source: Jefferies, company data Note: Chart excludes ABB since they do not disclose robotics revenues Competitiveness of Japan Strength in manufacturing industry and sensing technology Japanese companies have strength in robotics used in manufacturing industry, while North America/Europe have strengths in different fields such as Ocean and nuclear power. We see strengths for North America in investigation related robotics, and welfare, agriculture and stock raising related robotics in Europe as shown in Table 3.
Regarding element technologies, Japan has an edge in sensing and visionary recognition technologies. North America has strengths in many fields as shown in Table 4. Europe, on the other hand, is strong in transportation and remote control technologies.
Table 3: Strength of robotics applications differ by region (Applications) Applications Japan US/Canada Europe * Manufacturing High Middle Middle Construction High Low Low Welfare Middle Middle High Medical Low Middle Low Nuclear Power Middle High High Counter Disaster Low Middle Middle Aerospace Middle High Middle Entertainment High High Low Bio Industry Low Middle Middle Agriculture Middle Middle High Home Use Low Low Low Service Middle Middle Middle Stock Raising Middle Middle High Ocean Middle High High Investigation Low High Low Source: Jefferies, company data * Only countries that have active robotics research
page 13 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Table 4: Strength of robotics applications differ in each region (Element Technologies) Element Technologies Japan US/Canada Europe * Transportation (Crawler) Middle Middle High Remote Control Middle High High Human Interface Middle High Middle Intelligent Control Technology Middle Middle Middle Sensing Technology High High Middle Visionary Recognition Technology High High Middle Source: Jefferies, company data * Only countries that have active robotics research Japan Market Steady production growth Historically, industrial robotics orders have gradually gone up over the past 20+ years at an 8% CAGR since 1980. In 1980, orders amounted to only c.20,000 units, and volumes have gradually increased. In 2013, order volume reached close to 120,000 units. Global industrial automation demand has been steady and Japanese manufacturers have played an integral part in this growth since they have maintained high market penetration in the key components of robotics, as well as actual robots.
Regarding shipments, exports have played an important role in raising the overall figures over the past 20+ years. In particular, export volumes have been rapidly increasing over the past 10 years. In 1980, robotics shipments were mainly for domestic use, accounting for 94% of total use; however, in 2013, 75% of total shipments were for exports, so the increase in export shipments has been highly visible. In fact, domestic shipments have been declining over the past 10 years, while exports continued to trend up. We believe Japanese robotics manufactures will need to continue focusing on overseas markets in order for them to benefit from global automation demand.
Chart 20: Orders with steady growth in Japan
140,000 140% 120% 120,000 100% 100,000 80% 80,000 60% 40%
(Units) 60,000 20% 40,000 0% -20% 20,000 -40% 0 -60%
Orders units (LHS) YoY (RHS)
Source: Jefferies, Japan Robot Association
page 14 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 21: Export growth has been a major driver in shipments in Japan
140,000 80%
120,000 70% 60% 100,000 50% 80,000 40%
(Units) 60,000 30% 40,000 20% 20,000 10% 0 0%
Domestic (LHS) Export (LHS) Export Weight (RHS)
Source: Jefferies, Japan Robot Association
Market growth in Japan to be led by services As the government asserts, the robotics industry is a growing industry in Japan reflecting the birth rate and social systems in Japan. Current manufacturing sector robotics market value is estimated to be c.¥660bn, according to METI, and they are targeting raising this figure to ¥1,256.4bn by 2020 and ¥2,729.4bn by 2035. In the services sector, the current market value is c.¥60bn, and it is estimated to reach ¥1,024.1 by 2020 and ¥4,956.8bn by 2035, according to METI. Overall robotics market value is c.¥860bn now, and it is estimated to continue to grow and reach ¥9,708bn in 2035. The major growth driver would be the service sector.
The manufacturing sector now accounts for 77% of total demand, while the service industry accounts for only 7% of the total. However, in 2035, the manufacturing sector is estimated to account for 28% of total robotics market, while the services industry is estimated to be the largest at 51% of the total robotics industry, according to METI.
Growth rates differ in each sector, and METI estimates the manufacturing sector will grow at a 5% CAGR from 2015 to 2035, while they estimate the services sector will have a 14% CAGR during the same time period. With continued growth in the Japan market, both robotics manufacturers and component manufacturers should continue to benefit in the long run. We are also seeing the emergence of service robot companies to reflect the sustainable demand growth.
Chart 22: Services to have the largest growth with 14% CAGR until 2035
12,000
10,000
8,000
6,000 (bnyen) 4,000
2,000
0 Current 2015 2020 2025 2035
Manufacturing Robot Technology Agriculture/Forestry/Fishery Services
Source: Jefferies, METI
page 15 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Table 5: Market outlook of Japanese robotics industry (¥bn) Current 2015 2020 2025 2035 Manufacturing 660 1,002 1,256 1,581 2,729 Robot Technology 140 177 452 806 1,556 Agriculture/Forestry/Fishery 1 47 121 226 466 Services 60 373 1,024 2,646 4,957 Total 861 1,599 2,853 5,258 9,708 Breakdown Manufacturing 77% 63% 44% 30% 28% Robot Technology 16% 11% 16% 15% 16% Agriculture/Forestry/Fishery 0% 3% 4% 4% 5% Services 7% 23% 36% 50% 51% Total 100% 100% 100% 100% 100% Source: Jefferies, METI
Introduction to construction space Construction companies are suffering from a shrinking labor force to inspect land and construction structures in Japan, so they are considering coping with the issues by introducing robotics into the Tokyo Olympics in 2020, so that they can smoothly progress with their old infrastructure.
In research for boring underground, Obayashi Corporation has developed robotics that can dig pipes underground. Human workers with experience in researching the foundations are currently doing the task, but robotics recognizes the hardness using sensors by automatically controlling the velocity of progression. Human workers remotely monitor the work, and the robotics do not require a human workforce to be there. Typically, one task of boring requires 4 people, but if robotics is utilized, only 2 people are required. A small number of people can be responsible for the project, and there will be lower risks to slow down projects. A project typically takes 2-3 weeks and costs ¥20mn to dig at 5 different locations; Obayashi Corporation expects there to be 30% cost reduction from introducing robotics.
Shimizu Corporation has started to develop robotics that can move inside a tunnel at 40km/h and that can take photos of the inside walls analyzing the sizes of cracks with the camera equipped on the robotics. They are targeting putting this technology into practice by 2017. If humans were used for the same task, it would typically take 4 people 20 hours per square kilometer; however, with the introduction of robotics, it is estimated to take 3 people only 3 hours.
Penta-Ocean Construction developed remote control research equipment to do crack checkups on dams. The equipment takes pictures of cracks and recognizes flaws through the sound from hammers. By introducing the equipment, the company estimates it can cut total costs by 80% . They are planning to start testing this fiscal year and put the technology into practice within a few years.
After the 2020 Olympic Games, we expect large scale construction projects to decline, and the labor force in industry should fall. In 2013, the labor force in the construction industry numbered 4.99mn workers, and 1/3 of the total labor force is over 55 years old. The Japan Federation of Construction Contractors estimates that labor force will decline by 1mn in 10 years. The introduction of robotics should lead to secure the skills of experienced workers. Incremental Earnings Impact on Robotics Manufacturers in Japan Majors to be beneficiaries We believe the major Japanese robotics manufacturers such as Fanuc and Yaskawa Electric will be beneficiaries of an expansion in industrial robot demand. As for Fanuc, robotics revenues account for c.30% of total revenues and roughly half of the robotics revenues come from the Americas, while Japan accounts for 10-15% of total robotics revenues. page 16 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Assuming that Fanuc’s robotics revenues double in Japan, we estimate the impact on total robotics revenues would be +10-15%, and the impact on total revenues would be c.5%.
We assume Fanuc’s robotics segment OP margins are the lowest amongst their businesses at about 15-20%. Fanuc clearly has the largest margins in its FA (Numerical control equipment and servo motors) segment where revenue contribution is also the largest of all segments. Fanuc continues to rely on smartphone industry capex and their robodrill sales remain the key volatility factor for earnings.
Fanuc introduced new robots, “collaborative robots” in Fanuc’s new product exhibition held in April 2014. The robot enables users to work closely with the robot. The robot is able to stop operations if any part of the equipment is touched by users to secure safety, it allows users to remove fences and manipulate the robot using a handling system attached to the edge of the robot. Also, the surface of the arms uses a soft material, so even if it hits users, it does not hurt them.
In addition, Fanuc is recruiting full time employees in its robotics segment. Fanuc is looking for domestic robot sales personnel, export/order managers in the robotics market, and robot system engineers. We believe market demand for industrial robots is quite strong and Fanuc is increasing the number of employees, accordingly.
Fanuc’s robot production capacity is 5,000 units/month, or 60,000 units/year. Since total demand for robotics globally was 178,132 units in CY2013, Fanuc’s capacity is capable of manufacturing over 30% of total demand.
Chart 23: Fanuc (6954 JP) earnings forecast table (¥bn) Sales (YoY) OP (YoY) RP (YoY) NP (YoY) EPS (¥) BPS (¥) DPS (¥) FY3/10 253.4 55.0 60.1 37.5 187.8 4,133.9 56.3 FY3/11 446.2 76.1% 189.8 244.9% 195.4 225.4% 120.2 220.3% 613.8 4,550.7 184.1 FY3/12 538.5 20.7% 221.8 16.9% 228.6 17.0% 138.8 15.5% 709.2 5,013.7 212.8 FY3/13 498.4 -7.4% 184.8 -16.7% 191.2 -16.3% 120.5 -13.2% 615.6 5,565.6 184.7 FY3/14 451.0 -9.5% 164.1 -11.2% 174.4 -8.8% 110.9 -7.9% 566.9 6,102.2 170.1 FY3/15E 695.0 54.1% 289.0 76.1% 299.5 71.8% 195.9 76.6% 1,001.2 6,808.3 300.4 FY3/16E 595.0 -14.4% 240.0 -17.0% 250.9 -16.2% 164.3 -16.1% 839.7 7,390.4 251.9 FY3/17E 655.0 10.1% 270.0 12.5% 281.2 12.1% 183.6 11.7% 938.3 8,041.6 281.5 FY3/15 COE 688.2 52.6% 268.0 63.3% 280.9 61.1% 185.1 66.9% 946.0 NA NA FY3/15 Consensus 620.1 37.5% 248.8 51.6% 261.8 50.1% 171.4 54.5% 856.0 6,722.5 264.1 Source: Jefferies estimates, company data
Chart 24: Fanuc’s robotics revenues to continue to trend up
180,000 60.0% 160,000 50.0% 140,000 40.0% 120,000 30.0% 20.0% 100,000 10.0% 80,000 (¥mn) 0.0% 60,000 -10.0% 40,000 -20.0% 20,000 -30.0% 0 -40.0%
Robotics divisional sales (LHS) YoY (RHS)
Source: Jefferies estimates, company data
page 17 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Fanuc’s robotics scenario analysis We compare robotics segment revenue growth prospects in different scenarios and compare the impact on EPS growth for Fanuc under those scenarios. Since the sector is cyclical, it might be difficult to justify 12% secular growth over the next three years; however, we assume 12% growth over the next three years for Fanuc under the bull case, and we assume declining momentum under our bear case scenario.
Under our bull case scenario, assuming incremental margins to be 20% for robotics, revenues are likely to surpass ¥200bn in FY3/17, and NP , would be 2.5% higher than in the current base scenario. On the other hand, under the base case scenario, with revenue growth slowing, the NP contribution would be 0.7% lower than the current base case scenario.
We analyzed consolidated NP impact based on different growth outlooks as shown in Table 7. If Fanuc is able to sustain 12% revenue growth with margins being flat, then the robotics segment’s NP contribution would be 1%; however, since Fanuc is a highly profitable company with ongoing automation efforts in its production lines, and if Fanuc can increase robotics margins to higher levels as in the table, the NP contribution would be higher, accordingly. With 20% and above margins, and even if robotics segment revenues remain flat, the overall NP contribution could be as much as 3.9%.
The magnitude of the impact on incremental NP would be small since NC equipment (FA segment) and robodrills (robomachine segment) have higher margins and incremental impacts were assumed to be larger compared to robotics in our view.
Table 6: Fanuc’s three scenarios in the robotics segment Robotics revenues (¥bn) FY3/14 FY3/15E FY3/16E FY3/17E Bull 146.9 164.5 184.2 206.3 YoY 23.3% 12.0% 12.0% 12.0% Base 146.9 160.0 165.0 170.0 YoY 23.3% 8.9% 3.1% 3.0% Bear 146.9 154.2 158.8 160.4 YoY 23.3% 5.0% 3.0% 1.0%
OP value from robotics (Jefferies assumptions) Bull 25.6 29.5 33.9 OP margin 16% 16% 16% Incremental margin 20% 20% 20% Base 24.7 25.7 26.7 OP margin 15% 16% 16% Incremental margin 20% 20% 20% Bear 23.5 24.4 24.7 OP margin 15% 15% 15% Incremental margin 20% 20% 20% Source: Jefferies estimates, company data
page 18 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 25: Fanuc – 3 cases for robotics revenue growth
250
200
150
(bnyen) 100
50
0 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E
Bear Base Bull
Source: Jefferies estimates, company data Table 7: Scenario analysis of Fanuc’s robotics segment contribution to bottom line Robotics OP est. Revenue upside (¥bn) -12% -9% -6% -3% 0% 3% 6% 9% 12% 8% 11.1 11.5 11.9 12.3 12.7 13.0 13.4 13.8 14.2 10% 14.7 15.2 15.7 16.2 16.7 17.2 17.7 18.2 18.7 13% 18.2 18.8 19.4 20.0 20.7 21.3 21.9 22.5 23.1 Margin assumptions 15% 21.7 22.4 23.2 23.9 24.7 25.4 26.1 26.9 27.6 18% 25.2 26.1 26.9 27.8 28.7 29.5 30.4 31.2 32.1 20% 28.7 29.7 30.7 31.7 32.7 33.6 34.6 35.6 36.6 23% 32.3 33.4 34.5 35.6 36.7 37.8 38.9 40.0 41.1
NP contribution est. (%) Revenue upside from Robotics -12% -9% -6% -3% 0% 3% 6% 9% 12% 8% -4.4% -4.3% -4.2% -4.0% -3.9% -3.8% -3.7% -3.5% -3.4% 10% -3.3% -3.1% -2.9% -2.8% -2.6% -2.5% -2.3% -2.1% -2.0% 13% -2.1% -1.9% -1.7% -1.5% -1.3% -1.1% -0.9% -0.7% -0.5% Margin assumptions 15% -1.0% -0.7% -0.5% -0.2% 0.0% 0.2% 0.5% 0.7% 1.0% 18% 0.2% 0.5% 0.7% 1.0% 1.3% 1.6% 1.9% 2.1% 2.4% 20% 1.3% 1.7% 2.0% 2.3% 2.6% 2.9% 3.3% 3.6% 3.9% 23% 2.5% 2.8% 3.2% 3.6% 3.9% 4.3% 4.6% 5.0% 5.4% Source: Jefferies estimates, company data Note: Base figures are FY3/15 robotics segment OP estimates Robotics related companies
Reduction Gears: A reduction gear or Nabtesco a reduction drive is a mechanical Nabtesco has the highest market share in the precision reduction gear industry for device to shift rotational speed. industrial robotics globally. They have a 60% market share in precision reduction gears Using gears, rotational speed is used in joint sections of industrial robotics. Nabtesco is an “essential” manufacturer in the reduced and torque is generated. industrial robot market. They are well positioned in the industry, and we believe the The torque generated is in company will continue to benefit from robotics industry growth over the next several proportion to the reduced ratio. If decades. the rotational speed is reduced to ½, Precision reduction gears are used in industrial robots to bring about precise movements the obtained torque would be 2x. and torque control. Nabtesco has been engaged in this area for decades. Nabtesco’s lightweight and compact precision reduction gears generate advantages in their high accuracy and rigidity, and the range of applications of their precision reduction gears is gradually expanding to fields such as machine tools, semiconductor production equipment and heliostats for solar thermal power generation.
We think the company will continue to benefit from industrial robot demand growth globally, and since the product margins are high, the company’s incremental profitability should continue to gradually rise in the long run. Precision reduction gear orders have recently been cyclically declining, as shown in Chart 27; however, we think any dips are
page 19 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
to be considered buying opportunities as the company is extremely well positioned in a growing industry in the factory automation sector.
Chart 26: Nabtesco (6268 JP) earnings forecast table (¥bn) Sales (YoY) OP (YoY) RP (YoY) NP (YoY) EPS (¥) BPS (¥) DPS (¥) FY3/10 126.2 8.0 9.3 4.0 31.7 628.3 9.0 FY3/11 169.3 34.1% 20.2 153.8% 22.4 139.5% 13.4 233.3% 105.9 713.8 25.0 FY3/12 198.5 17.3% 22.9 13.1% 24.7 10.2% 14.8 10.2% 116.7 784.1 34.0 FY3/13 179.5 -9.6% 15.0 -34.3% 17.9 -27.4% 13.3 -10.1% 104.6 894.9 34.0 FY3/14 202.3 12.7% 20.1 33.8% 24.2 35.4% 15.0 12.9% 118.0 1,035.7 38.0 FY3/15E 217.0 7.3% 22.0 9.5% 25.6 5.7% 16.5 10.3% 130.6 1,196.0 40.0 FY3/16E 224.0 3.2% 24.4 10.9% 28.4 10.8% 18.5 11.9% 146.1 1,301.3 44.0 FY3/17E 231.0 3.1% 27.0 10.7% 31.5 11.1% 20.6 11.6% 163.0 1,421.5 46.0 FY3/15 COE 216.0 6.8% 21.6 7.5% 24.4 0.7% 15.5 3.5% 122.5 NA 40.0 FY3/15 Consensus 218.2 7.9% 22.6 12.5% 26.2 8.2% 16.6 10.5% 131.9 1,125.3 39.9 Source: Jefferies estimates, company data
Chart 27: Precision reduction gears are a core product for Nabtesco
500
400
300
200
100
(YoY (YoY growth rate) 0
-100
Jul-12 Jul-10 Jul-11 Jul-13 Jul-14
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Sep-10 Sep-11 Sep-12 Sep-13
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
Nov-10 Nov-11 Nov-12 Nov-13
May-10 May-11 May-12 May-13 May-14
Precision reduction gear
Source: Jefferies, company data Nabtesco’s precision reduction gears are their core competence and long-term growth driver. Marginal profitability of the product is high and the company continues to invest in production capacity additions. Nabtesco is planning to invest in China, and they will increase overall production capacity of precision reduction gears. Since domestic plant capacity additions are quite difficult due to the lack of space, the company is increasing production capacity where there is the largest demand. Nabtesco currently has 600,000 units/year production capacity and they are planning to increase it to 700,000 units/year by adding 100,000 units/year capacity in China. They are planning to start China production in 2016.
Chart 28: Nabtesco's precision equipment segment revenues have shown decent growth
60,000 140% 120% 50,000 100% 40,000 80% 60% 30,000 40%
20% (mnyen) 20,000 0% 10,000 -20% -40% 0 -60%
Precision Equipment segment revenues (LHS) YoY (RHS)
Source: Jefferies estimates, company data
page 20 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Nabtesco’s precision reduction gear demand scenario analysis Similar to Fanuc, we also analysed the incremental earnings impact on Nabtesco’s precision reduction gears for industrial robots in different scenarios. Based on our bull case scenario, with 12% growth in robotics related precision reduction gear demand and an increased weighting in the robot industry, the incremental NP impact would be 8.5% from current levels. On the other hand, if the robotics revenues weighting was assumed to decline by 12% and the segment revenue weighting were to remain at 80%, then incremental NP drops by6.5%.
Different from Fanuc, since precision reduction gear contributions to overall profits are higher as it is one of their core growth products, the delta in the revenue base would likely impact incremental NP figures more than Fanuc’s overall NP would be impacted.
We assumed 12% growth for our bull case, 6% as base case, and 3% as bear case over the next three years in robotics related precision reduction gear sales in the precision equipment segment. We believe the profitability (OP margin) of the product can be c.20% with incremental margin assumptions of 40%.
Chart 29: Nabtesco’s three scenarios in robot related segment (precision equipment) Sales (bn yen) Current Sales Estimate 202,291 217,000 224,000 231,000 238,000 Precision Equipment 42,853 47,000 49,000 52,000 55,000 Robot 34,282 37,600 39,200 41,600 44,000 Bull scenario (robot sales) 34,282 38396 43004 48164 53944 YoY 12% 12% 12% 12% Total sales 202291 217,796 227,804 237,564 247,944 Base scenario (robot sales) 34,282 37600 39200 41600 44000 YoY 9.7% 4.3% 6.1% 5.8% Total sales 202291 217,000 224,000 231,000 238,000 Bear scenario 34,282 35311 36370 37461 38585 YoY 3.0% 3.0% 3.0% 3.0%
Total sales 202291 214,711 221,170 226,861 232,585 Source: Jefferies estimates, company data
Chart 30: Nabtesco - three cases for precision equipment revenue growth
70,000
60,000
50,000
40,000
(¥ mn)(¥ 30,000
20,000
10,000
0 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15E FY3/16E FY3/17E
Bear Base Bull
Source: Jefferies estimates, company data
page 21 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Table 8: Scenario analysis of Nabtesco’s robotics segment contribution to bottom line OP estimate Robot related revenue upside (¥bn) -12.0% -9.0% -6.0% -3.0% 0.0% 3.0% 6.0% 9.0% 12.0% 60% 5,800 6,100 6,400 6,700 7,000 7,300 7,600 7,900 8,300 65% 5,700 6,000 6,300 6,700 7,000 7,400 7,700 8,000 8,400 70% 5,600 5,900 6,300 6,700 7,000 7,400 7,700 8,100 8,500 75% 5,500 5,900 6,200 6,600 7,000 7,400 7,800 8,200 8,600 Robot weight 80% 5,400 5,800 6,200 6,600 7,000 7,400 7,800 8,300 8,700 85% 5,300 5,700 6,100 6,600 7,000 7,500 7,900 8,300 8,800 90% 5,200 5,600 6,100 6,600 7,000 7,500 7,900 8,400 8,900 95% 5,100 5,600 6,000 6,500 7,000 7,500 8,000 8,500 9,000 100% 5,000 5,500 6,000 6,500 7,000 7,500 8,000 8,600 9,100
NP estimate Robot related revenue upside -12.0% -9.0% -6.0% -3.0% 0.0% 3.0% 6.0% 9.0% 12.0% 60% -4.9% -3.7% -2.4% -1.2% 0.0% 1.2% 2.4% 3.7% 5.3% 65% -5.3% -4.1% -2.8% -1.2% 0.0% 1.6% 2.8% 4.1% 5.7% 70% -5.7% -4.5% -2.8% -1.2% 0.0% 1.6% 2.8% 4.5% 6.1% 75% -6.1% -4.5% -3.2% -1.6% 0.0% 1.6% 3.2% 4.9% 6.5% Robot weight 80% -6.5% -4.9% -3.2% -1.6% 0.0% 1.6% 3.2% 5.3% 6.9% 85% -6.9% -5.3% -3.7% -1.6% 0.0% 2.0% 3.7% 5.3% 7.3% 90% -7.3% -5.7% -3.7% -1.6% 0.0% 2.0% 3.7% 5.7% 7.7% 95% -7.7% -5.7% -4.1% -2.0% 0.0% 2.0% 4.1% 6.1% 8.1% 100% -8.1% -6.1% -4.1% -2.0% 0.0% 2.0% 4.1% 6.5% 8.5% Source: Jefferies estimates, company data Yaskawa Electric As one of the leading robot manufacturers, Yaskawa Electric has a high market share in the industrial robot market. Since the initial shipment of “MOTOMAN” in 1977 in Japan, they reached total cumulative shipment of 280,000 units in September 2013. They are strengthening their robot production/marketing structure and have renewed production lines. At its domestic plants, Yaskawa centralized robot production into three main locations. The first robot plant is capable of 1,000 units/month production and main robots manufactured are arc welding, handling, and assembling/transfer robots. The second robot plant is capable of manufacturing 500 units/month, and the plant is a clean robot plant established in 2013. Major target industries for the robots are FPD/Semiconductor, bio medical, food, toiletries, etc. The third robot plant is capable of manufacturing 700 units/month, and its main products are spot welding, painting and palletizing robots.
Yaskawa Electric established a plant in China where the production capacity is 250 units/month in FY3/14, and they are planning to increase it to 1,000 units/month in FY3/16. The company focuses on China as they believe the growth potential of the market is robust, and they want to “GLOCALIZE” management systems.
Harmonic Drive Systems Harmonic Drive Systems manufactures precision reduction gears for smaller size robotics compared to Nabtesco’s products. Harmonic Drive is also an equity affiliated company of Nabtesco since Nabtesco owns 20% of Harmonic Drive Systems. There are only a limited number of precision reduction gear manufacturers globally, and the market is largely dominated by those manufacturers only. Harmonic Drive Systems has a 30% market share globally in the precision reduction gear market, so together with Nabtesco, the Japanese companies have c.90% global market share in the reduction gear industry.
Nabtesco’s RV reduction gears and Sumitomo Heavy Industries’ Cycro Reduction gears are relatively larger sized with a greater number of components used, known as planetary gear mechanism, while Harmonic Drive’s reduction gears are relatively smaller, and their products are typically used in the arm section of robotics or small size robotics which use less torque. In the European market, the three Japanese manufacturers basically dominate
page 22 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
the market in the precision reduction gear industry for industrial robotics, and SPINEA, a Slovakian manufacturer, has a small share.
High barriers to entry have been a major factor and reason why the industry is dominated by a certain number of competitors. Harmonic Drive’s fundamental structure’s original patent has been no longer effective since the 1970s, so anybody can theoretically copy the same product; however, there are no effective competitors around yet. The company asserts “it is only Harmonic Drive Systems that can commercially produce Harmonic Drive®”, that is the entry barrier comes from the production technology, not just the original patents. In addition, Harmonic Drive Systems have been enhancing product quality, and they have kept patents for upgraded products which prevent new entrants copying HarmonicDrive®. They black boxed product development and manufacturing know-how, and competitors cannot easily imitate what Harmonic Drive Systems can make. Also, c.90% of the products are customized depending upon needs, and Harmonic can manufacture those products effectively. They also secure skilled labour to transfer their technologies to younger generations. Some manufactures have tried to copy their products; however, the product durability and production capabilities have not been enough to manufacture products with the same quality as Harmonic Drive Systems’.
Their production capacity is 40,000-50,000 units/month, and they are now running at close to full capacity utilization due to smartphone related order surge.
Harmonic Drive is used in various precise industries and products such as ASIMO, a humanoid robot by Honda, Airbus’ navigation system , Subaru Telescrope in Hawaii’s Mauna Kea operated by the National Astronomical Observatory of Japan and the National Institutes of Natural Sciences, motion control of German Carl Zeiss’ neurosurgery system, Mars rover’s motion control of cameras, etc.
Chart 31: Reducer orders gradually trending up
6,000 350% 300% 5,000 250% 4,000 200% 150% 3,000 100%
(mn (mn yen) 2,000 50% 0% 1,000 -50% 0 -100% 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14FY3/15
Reducers Orders (YoY)
Source: Jefferies, company data
page 23 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 32: Harmonic Drive Systems’ parent order value trends: Robotics related orders are trending up
8,000
6,000
4,000 (mnyen) 2,000
0 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q FY3/06 FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14FY3/15
Semiconductor equipment Flat panel display equipment Robotics Gearbox for motor manufactures Machine tools Excavation system for the oil, etc. Others
Source: Jefferies, company data
Chart 33: YoY growth rate of Harmonic Drive Systems' parent orders
200% 150% 100% 50%
0%
1Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 1Q 2Q 3Q 4Q 1Q -50% 1Q FY3/07 FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 -100%
Semiconductor equipment Flat panel display equipment
Robotics Gearbox for motor manufactores
Machine tools Excavation system for the oil, etc.
Others
Source: Jefferies estimates, company data
Chart 34: HarmonicDrive® structure
Source: Harmonic Drive Systems THK THK is a leading Linear Motion Guide (Actuator) manufacturer globally, and their products are used in the industrial robot industry. The main robots that use their products are 5-joint closed-link robots where THK’s cross roller rings are used in the swing section to realize rigidity and speed. Arc welding robots also use cross roller rings in the rotary motion section of joints. SCARA robots use their LM guide systems to ensure accuracy of stroke movement and rotation, and double-arm robots use linear motion systems and cross roller rings that reduce the size of robots while increasing rigidity and speed. Although the incremental revenue impact from the industrial robot industry remains quite
page 24 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
small for THK, growth in robotics industry demand should benefit the company from a long-term perspective.
Chart 35: THK’s monthly orders by region
18.0 200 187 16.0 162 180 16 16 15 15 15 15 15 15 15 15 14 15 160 14.0 14 14 14 14 14 13 13 13 14713 138 13 12.0 131 140 127 12 12 12 12 12 12 12 11 11 11 119 11 11 120 10.0 109 107 105 9 106 113 100 8.0 94 93 8.0 8.2 7.7 86 84 7.4 7.9 7.7 7.3 6.8 81 6.9 80 6.3 6.6 6.4 6.5 6.7 6.6 (RMBmn) 6.0 6.1 5.6 6.1 60 4.0 40
2.0 20 (JPYbn, (JPYbn, USDmn, EURmn)
0.0 0
Jul-13 Jul-14
Jan-14
Jun-14 Jun-13
Apr-13 Apr-14
Feb-14
Oct-13
Sep-13 Sep-14
Dec-13
Mar-14
Aug-13 Aug-14
Nov-13
May-13 May-14
Japan (LHS) US (LHS) Europe (LHS) China (RHS)
Source: Jefferies, company data
Human Assisting Robotics Trends in Nursing Care Robotics Nursing care service needs to be expanded in light of an aging society We are seeing an increasing demand for nursing services globally reflecting the acceleration of an aging society. However, there is an emergence of issues such as lack of nursing care related employees, the increased burden on nursing care related workers, an increased burden on government spending for nursing care, handling of the dignity of people who are receiving nursing care due to the declining number of working age staff that support those over 65 years old, and the increase in nursing care expenses within GDP. In the current environment, there are trends to develop and introduce nursing care robotics so that there will be improved efficiency in the nursing care industry, reduced burdens on nursing care personnel and costs, elimination of the lack of nursing care employees, promotion of independency of those being cared for in developed countries.
In welfare oriented countries such as Northern European (Sweden, Denmark, etc.), government policies promote the introduction of nursing care robotics in nursing facilities and/or homes. In the US and South Korea, there are governmental policies to develop nursing care robotics in order to stimulate manufacturing industry as they value the nursing care robotics industry as a growing market.
page 25 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 36: Productive-age population ratio to drop in many countries
Number of productive-age population to support one aged (over 65 years old)
10 8.9 7.9 8 6.3 6 4.7 4.2 4.2 3.7 3.3 3 2.8 4 2.6 2.4 2.6 2.1 2.1 2.3 2.2 1.5 1.6 1.2
(# of people) 2 0
2008 2050
Source: Jefferies, DBJ, OECD Note: The numbers for Japan are slightly different from those in Chart 44 due to different sources; however, the general direction is the same.
Increased demand in nursing care expenses in Japan According to the Ministry of Health, Labour and Welfare, the nationwide burden from nursing care expenses is estimated to be ¥19.8tn (3.2% of GDP) by 2025, and the required number of employees is estimated to be 2.37-2.49mn, which compares to ¥8.4tn (1.8% of GDP) and 1.49mn employees in 2012. In Japan, we have started to see various actions to develop nursing care robotics and put it into practice just as we saw in “the 5-year robotic nursing care equipment development plan”. Due to these actions, METI estimates the nursing robotics industry market will be worth over ¥400bn by 2035.
Chart 37: Nursing care expense weight of GDP to increase over time
Weight of nursing care expenses in GDP
6.0% 5.5%
5.0% 4.5% 4.2% 4.0% 4.0% 3.6% 3.4%
3.0% 2.4% 2.4% 2.4% 2.1% 2.0% 1.6% 1.2% 1.0%
0.0% Sweden Denmark Norway Finland Japan OECD Avg.
2010 2050
Source: Jefferies, DBJ, OECD
Robotics demand sustains decent growth in nursing care industry METI forecasts that the Japanese robotics market in the nursing/welfare industry will grow to over ¥400bn by 2035 from the current ¥1bn. METI expects the market will gradually expand and in 2015 it will have reached ¥17bn and ¥54bn in 2020. By 2025, the market is estimated to be ¥124bn before reaching ¥404bn in 2015. METI forecasts a 17% CAGR over the 20 years after 2015. The market growth largely comes from the acceleration of the aging society in Japan.
page 26 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 38: Nursing care related robotics demand should continue to rise
Market Size of Nursing Care Robotics
500.0
400.0
300.0
(bnyen) 200.0
100.0
0.0 Current 2015 2020 2025 2035
Independence Support Nursing Care Support
Source: Jefferies, METI Table 9: Governmental actions with regards to nursing care robotics industry Institutions Contents Main activities METI, NEDO Life assistance robotics project Started in FY2009. Research & development for 5 years until FY2013. ¥6bn project. Research & develop life assistance robotics' safety measurement method and develop life assistance robotics with safety technologies.
MHLW, The Association Welfare equipment/Nursing Started in FY2011 and is still process with ¥83mn annual budget. for Technical Aids robotics practice support In 2013, advising support was carried out by professionals. Support development/nursing locations to put robotics activities into practice (advice from professionals and/or monitoring research budget provided in nursing facilities). Carry out experiment.
MHLW, METI "Key areas in utilizing robotics Determined in Dec 2012. technologies for nursing care" As key areas in nursing care robotics industry, they set (1) hoisting assistance, (2) transportation assistance, (3) egestion assistance, (4) help people with dementia. In Feb 2014, they added bath support, and they set 5 areas as key areas.
METI Nursing robotics equipment Started in FY2013 with ¥2.39bn budget. FY2014 budget estimated at ¥3bn. development/introduction project Prepare for an environment required for commercial viability such as support for the companies that develop nursing care robotics or safety/standard measurement settings.
Japan Revitalization 5 year nursing care robotics Determined in Jun 2013. In order to prepare for the accelerated expansion of Strategy development plan dissemination, they continue to develop highly helpful robotic equipment through competition. Determine the approval regulations and safety standards within a year. Seeds and needs matching to promote companies develop equipment.
METI Nursing care robotics purchase Started in FY2014. support project The main purpose is to create a path for mass production of nursing care robotics. When nursing care providers purchase products, half of the costs are supported. Target to introduce over 100 facilities in Japan. Utilizing nursing care robotics, they intend to carry out large scale effectiveness testing. Source: Jefferies, DBJ
page 27 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Development of Nursing Care Robotics in Japan and Globally Japan continues to see both venture and mega scale company mix In Japan, we see lots of companies participating in nursing care robotics, and large scale electric machinery makers or auto makers participate in the nursing care robotics industry, in addition to venture companies. On the other hand, in the US, Europe, South Korea and other countries, there is an accelerated development of nursing care robotics and it is common that these countries’ development is led by robotics manufacturers (specialists), venture companies, and academic institutions such as universities or research institutions.
Population dynamics change In Japan, population dynamics are facing a severe challenge with an increase in the elderly population and a decrease in the working age population. Clearly, the population of over 65 years old has been increasing gradually over time, and we will likely see a declining younger population. The change in population structure is likely to cause issues with welfare for those who have difficulty staying healthy going forward. Assistance of those who have health issues may be required and human assisting robotics (nursing care robotics) demand is likely to surge in the long run in our view.
In the mid-1950s, people over 65 years old accounted for only c.5% of total population, and this gradually went up over time and in the mid-1980s surpassed 10% for the first time. In 2010, it is estimated to have surpassed 20%. Finally by 2030, it is likely to surpass 30% according to United Nations’ estimates. The increase in the proportion of elderly population implies an increased need for a better social welfare system to support their daily lives.
Chart 39: Proportion of people over 65 years old has been gradually increasing in Japan
45 40 40 35 35 30 30 25 25 20 20 (%) 15 (mnpeople) 15 10 10 5 5
0 0
2060 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2065 2070 2075 2080 2085 2090 2095 2100
Population of over 65 years old in Japan (LHS) Weight of over 65 years old (RHS)
Source: Jefferies, National Institute of Population and Social Security Research, United Nations
In addition to an increase in the elderly, Japan is facing or going to face another population issue , which is the decline in the productive population. After peaking in the 1990s, the productive population has been declining gradually, and we have not seen any recovery in this younger age group so far. The productive age demographic is expected to drop to roughly c.60mn levels from the current c.100mn levels as shown in Chart 40. Those who are supposed to support the society are likely to face difficulties were it not for certain measures such as human assisting equipment that can physically and mentally support those who are in need.
page 28 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 40: The number of productive age people to drop over time
140
120
100
80
60 (mnpeople) 40
20
0
2005 2080 2100 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2085 2090 2095
Population of below 65 years old in Japan Population of over 65 years old in Japan
Source: Jefferies, National Institute of Population and Social Security Research, United Nations
Elderly population continues to rise In Japan, the proportion of the population over 65 years old is set to rise gradually going forward. In the 1950s, it was well below 10%, and it has gone up gradually, reaching c.25% in 2010. The rate is estimated to continue to go up to c.35% by 2050, followed by a gradual decline. The increase in the elderly population should continue to be a long term issue in Japan from social welfare and GDP growth perspectives. Research indicates similar trends are expected in other major industrialized countries such as the US and Germany where the proportion of the elderly is estimated to trend in a similar manner to Japan’s.
Chart 41: The other industrialized countries are also facing increasing elderly populations
40 Weight of over 65 years old population 35 30 25
20 (%) 15 10 5
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100
Japan US Germany
Source: Jefferies, National Institute of Population and Social Security Research, United Nations
Comparison with other industrialized countries Amongst major industrialized countries (Japan, the US and Germany as reference here), the population is estimated to grow only in the US which continues, while in Japan and Germany the absolute number will continue to drop in the next decades. The US population is estimated to grow from the current c.200 (index figure in Chart 42) to c.300 in 2100, while Japan is estimated to drop from the current c. 150 to slightly above 100 in 2100, according to the United Nations. The magnitude of decline in Germany seems not as large as in Japan; however, the population growth in Germany over the past half a century was also smaller compared to Japan. This indicates that Japan is likely to face the largest population decline delta amongst these three countries.
page 29 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 42: Population growth to be seen in the US only
Index of population with 1950=100
350 300 250 200 150 100 50
0
1975 1950 1955 1960 1965 1970 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100
Japan US Germany
Source: Jefferies, National Institute of Population and Social Security Research, United Nations
Chart 43: Japan population in net decreasing phase
500,000
400,000
300,000
200,000
100,000
(# of People) 0
-100,000
-200,000
Natural population growth (absolute value)
Source: Jefferies, National Institute of Population and Social Security Research, United Nations
More productive age burdens As in Chart 44, productive-age people’s burden to support the elderly population is set to go up over time, according to the National Institute of Population and Social Security Research. By 2015, the number of productive age people to support one over 65-year-old person is estimated to be 2.3, and that is set to decline, eventually to 1.3 in 2055. In half a century, basically one working-age person will be supporting one elderly person, so the burden is likely to go up.
Even if we include 65-69 year old people in the productive age range, the number of people that is required to support one over-70-year-old person is estimated at 3.6 in 2015 and is expected to drop to 1.7 by 2055. Nursing care support systems will continue to be required over the next several decades given the aging population is assumed to continue.
page 30 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 44: Increased burden on productive age Productive Age 15-64 years as Supporter 15-69 years as Supporter How many people would support over below ages >= 65 >= 70 >= 75 >= 70 >= 75 2005 3.3 4.6 7.3 5.0 7.9 2008 2.9 4.1 6.2 4.5 6.8 2015 2.3 3.2 4.7 3.6 5.3 2025 2.0 2.4 3.3 2.7 3.6 2035 1.7 2.1 2.8 2.4 3.2 2045 1.4 1.7 2.4 2.0 2.7 2055 1.3 1.5 1.9 1.7 2.2 Source: Jefferies, National Institute of Population and Social Security Research
page 31 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 45: Major global nursing care robotics players Country/ Development Institutions Foun Company/ Principal Develop/ Description Remarks Region Venture d Institute products sale Carnegie Mellon ·The elderly's caring robot Pearl Developing ·Nurse robot project (CMU) ·humanoid robot ·two-wheel, uplift arm, web camera eye, liquid crystal MIT uBOT-5 ·The elderly's caring robot Developing screen face _ _ CMU Hug Robot ·The elderly's livelihood support robot Developing ·Capable of message communication
Academic Georgia Tech Cody ·Assistance robot Developing ·Able to help with bath in bed
CMU HERB ·Household livelihood support robot Developing ·HERB: Home Exploring Robot Butler MIT PAMM ·Walk rehabilitation robot Developing ·PAMM: Personal Aid for Monitoring and Mobility
○ ·RP-VITA, a joint development with InTouch Health has 1990 iRobot Ava ·Assistance robot Developing (MIT) received FDA clearance and are in use at 6 hospitals.
·Developing the world's first care robot for the elderly ○ 1997 GeckoSystems CareBot ·Assistance robot Developing ·Starting technology exchange and co-marketing with United ZMP States
·Holding 29 hubs(US(21), Spain(3), Norway(1), Italy(1), Denmark(1), German(1), South Africa(1)) ·In cooperation with UC Berkeley ·In 2008, obtained a research grant from the ○ ExoHiker Commercial 2005 Ekso Bionics ·Walk support robot Available for sale Department of Defense (UC Berkeley) eLEGS ·In 2012, Received FDA clearance and CE mark; Started to sell rehabilitation suits in US and EU ·In 2014, created the world's first personalized 3D- base-printed walk support robot with 3D Systems
PR2 ·Livelihood support robot ·Aimed at popularization of open source based robots ○ 2006 Willow Garage Available for sale ·In 2013, many employees have transferred to Suitable ROS ·OS for robots Technologies
UK Univ. of Reading Hector ·Livelihood support robot Developing ·Origin from CompanionAble project
·Humanoid robot ·Wheelie robot equipped with an omni-directional arm GER Fraunhofer Institute Care-O-Bot Developing ·Household livelihood support robot ·Capable of drink serving _ _ ·Portable robot being able to help eating, drinking, teeth brushing Academic Univ Carlos III de Madrid Asibot ·The elderly's livelihood support robot Developing ·Under demonstration experiments at national Spain hospitals Universidad Politecnica de I-walker ·Walk support robot Developing ·Instructions following intelligent walker Cataluna
·MOBISERV project(8 partners including health-care facilities, universities, institutes etc. from EU countries ) ○ ·Humanoid robot EU 1985 Robosoft Kompai Developing ·Household support for the elderly in a bad shape (INRIA) ·The elderly's livelihood support robot France ·Indicating times for medicine, blood pressure measurement etc. and communicate with doctors
○ 2010 Eos Innovation E-one ·Surveillance sentry robot Developing ·60cm height and 8kg weight ·Holding affiliates in US, SG and Slovenia
Commercial ·Having sales partners in 32 countries Switzerland ○ 1996 Hocoma ARMEO ·Rehabilitation robot Available for sale ·Conducting research with institutes in US, Orland and Switzerland ·In 2010, received CE mark ○ 2004 Bestic Bestic ·Eating support robot Available for sale ·Bestic US, affiliate company in US Sweden
○ 2009 Giraffe-Tech Giraffe ·Surveillance sentry robot for the elderly Available for sale ·Transferred from Silicon Valley
·Under demonstrate experiment in Denmark. Center for Intelligent South Korea _ _ SILBOT ·Communication robot for the elderly Developing ·Already scheduled for installation in Denmark Robotics
rehabilitation facility Academic
·Holding 30 institutions ·In 2011, received FDA for hospital use in US, EU, Israel as rehabilitation robot Israel ○ 2001 Argo Medical Tech ReWalk ·Walk support robot Available for sale ·FDA for personal use in US is under process. Available
Commercial for personal use in EU and Israel ·In 2013, started to cooperate with Yaskawa
·On sale in New Zealand New Zealand ○ 2003 Rex Bionics Rex ·Walk support robot Available for sale ·Developed the first robot leg to help people having ambulation difficulty Commercial Source: OECD "THE ROBOTICS INNOVATION CHALLENGE, June 2012", robotics business review "Top22 Leading Companies for 2013 Health Care Robotics", Jefferies
page 32 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Strength of nursing care robotics development in Japan In order to develop highly sophisticated robotics which utilize highly sophisticated technologies, it is important to have a decent mixture of sensing, driving and controlling/intelligence element technologies. Japan not only has these highly competitive technologies, but also it can utilize technologies developed in the auto or electronics industries. According to the Center for Research and Development Strategy Japan Science and Technology Agency, out of 65 different element technologies in electronics/information communication areas, Japan is ranked No.1 in 8 items. In fact, the number of patents for sensing and drive systems tends to be dominated by Japanese companies with market share of over 50% globally.
For instance, “PARO”, a seal type therapeutic robot which is equipped with artificial intelligence and is approved in the US as medical equipment, is utilized in over 30 countries, and more than 3,000 PARO units are now in use. PARO is equipped with 20 sensors including optical and tactile sensors, and intelligent actuators are built into its neck, feet, and eyes. The actuators are exclusively developed for PARO and since the actuator motion is quiet, PARO is not usually recognized as robotic equipment, and it has a learning capability such as reacting to users’ voices. PARO uses components from 80 different manufacturers, and it uses highly sophisticated technologies used in the auto or electronics industries such as 6 layered high density print circuit boards which are manufactured in the production lines for luxury cars or hybrid vehicles.
“HAL®”, a robotic suit manufactured by CYBERDYNE, captures subtle signals that appear on the surface of skin when human beings are about to move their body parts and this is known as a vital electric sensor. HAL® also is equipped with joint sensors that measures joint angles, ground reaction sensors that capture the gravity balance, a cybernic optional control system that moves as users’ will and a cyebernic independency control system that realizes human-like movements.
The above two products already have CE certifications and are to be sold as medical equipment in EU countries. Germany even applies nursing care insurance or worker injuries insurance. HAL® (for welfare use) was the first in the world that obtained ISO/DIS 13482 (an international safety standard for service robotics). Late in Feb 2014, Panasonic’s nursing care equipment received ISO13482 after it was officially released.
Chart 46: Nursing care robotics growth is robust in Japan
250.0 220.6
200.0 183.7
150.0
(bnyen) 100.0 82.5
39.7 41.4 50.0 13.4 14.6 0.6 0.35 3.3 0.0 Current 2015 2020 2025 2035
Independence Support Nursing Care Support
Source: Jefferies, METI
“Robot Suit” A Robot Suit is the first cyborg type robotics that supports users to improve/assist/develop body functions through actuators along with the will of the user. In Japan, it has been put into practice as a cutting edge technology that supports people. The research and development of the Robot Suit began in 1991, and after 20 years, Robot Suit HAL® started to be utilized for welfare purposes in the spring of 2010 in nursing care/welfare facilities in Japan. CYBERDYNE led the movement and they obtained quality management system,
page 33 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
ISO 13485, which is required for companies that manufacture medical equipment, so they have started to expand their business as a medical equipment provider both inside/outside of Japan.
The Robot Suit HAL® started to be introduced in 2010 for welfare purposes in domestic medical welfare facilities, and the number of facilities that introduced HAL has surpassed 170, and shipments reached 470 units. The medical purpose HAL® received medical equipment certification in Europe in August 2013, and it is already in use in Germany where public workers’ compensation is applied for the functional improvement of users’ brain/nerves/muscles. Spinal cord injury participants are also already using this equipment.
CE certification as a treatment type robot medical equipment was marked for the first time in the world for HAL®, and thanks to this certification, HAL is allowed to be shipped to European countries.
On Feb 2nd, 2014, ISO 13482, an internationally standardized specification concerning the safety of life supporting robots, was released. The Japanese specification that NEDO was proposing was chosen for the specification. HAL® for welfare purposes already received certification for ISO/DIS 13482 when it was only a proposal on Feb 27th, 2013.
A major Japanese company moving into the industry? Toyota Motor will open up the development environment for service robotics within one year according to the Nikkan Industrial dated September 2nd. They are delivering platform equipment by 2015 and are planning to establish a development structure for applications by including outside skilled workers or users. It is important for them to assemble as much knowledge as possible in order to put multipurpose robotics into practice to meet the demand in industry, as seen in cloud sourcing. Softbank and Intel are also shifting to open source orientation in the service robotics industry and competition may intensify in platforms.
Toyota Motor is planning to develop an advanced version of HSR, a life supporting robot and deliver it to research institutes, including university laboratories. The service robot for home use provides a wide range of functions such as cleaning, washing, etc. Toyota Motor developed HSR for elderly or disabled people who have difficulties moving their hands/legs so that the robot can pick up things or bring things from different locations.
Recent talk in the stock market The following companies have received a lot of attention from the stock market YTD. We believe those companies will continue to benefit given the large growth potential in the human assisting robotics industry.
CYBERDYNE (7779 JP, NC): CYBERDYNE Inc. was established in June, 2004, in order to disseminate the research result of Professor Yoshiyuki Sankai, University of Tsukuba, for the benefit of the public interest. CYBERDYNE is not only materializing technology for practical use but also building up strong research and development systems to hear end users’ authentic voices and thus make a further leap. Consequently, CYBERDYNE will launch creative products. CYBERDYNE was listed on the Tokyo Stock Exchange (Mothers section) in March 2014, and it has received a lot of attention from investors with expectations for increased demand for human assisting robotics, widely known as HAL (Hybrid Assistive Limb). HAL is the world‘s first cyborg-type robotic equipment, by which a wearer‘s bodily functions can be improved, supported and enhanced. By putting on HAL® we can see a fusion of “man”, “machine” and “information”, according to CYBERDYNE. HAL® assists a physically challenged person to move and enables him/her to exert greater motor energy than usual. HAL® is also considered a system that accelerates the motor learning of cerebral nerves. As of June 2014, there are 86 units of HAL (medical use) operating in 5 facilities in Europe. As for nursing welfare and life support areas, the number of HAL (welfare use) in operation was 356 units in 155 facilities in Japan including welfare facilities, hospitals, etc. HAL uses disposal electrodes called “Vitrode” manufactured by Nihon Kohden (6849 JP, NC).
page 34 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Table 10: List of local government projects around robot suit HAL® Local government Projects Divisions / Departments In Charge Kanagawa Prefecture Promotion of expansion of nursing and medical robots Aging Society Division Industry Promotion Technology Division Kanagawa Welfare Service Association Kanagawa Prefecture Robot Town Sagami Aging Society Division Industry Promotion Division Okayama Prefecture Assessment of rehabilitation using robot suit HAL Medical Promotion Division, Department of Public Health and Welfare Okinawa Prefecture Promotion of creating health-care services using advanced welfare Industrial Policy Division, Department of Commerce, robotics technology Industry and Labor Niigata Prefecture Niigata Dream Project Industry Promotion Division Mie Prefecture Mie Life Innovation Promotion Center Diseases Control Division, Department of Health and Welfare Source: Jefferies, company data Harmonic Drive Systems (6324 JP, NC): Harmonic Drive Systems is a major supplier of precision reduction gears used in human assisting robotics. They sell their products to global human assisting robotics manufacturers and are known to be one of the names that have exposure to this growing nursing care robotics industry.
Kikuchi Seisakusho (3444 JP, NC): Kikuchi Seisakusho manufactures “Muscle Suits” used to reduce burdens to the back of our body in the nursing care and logistics industries. Backache issues have been widespread in various industries such as nursing care, logistics, plant working places and agricultural environments as one of the major health issues globally. The muscle suits helps users carry around heavy objects through its supportive systems. Kikuchi Seisakusho believes revenue contributions from new businesses such as muscle suits or microfluidic devices are set to increase. In FY4/14, the overall revenue contribution was only 1.4% from new businesses, but the company guides for a 10% revenue contribution in FY4/15. That implies new business revenues would be up 687% YoY. The company also announced the introduction of nursing care robot production facilities in Fukushima Prefecture.
Daiwa House Industry (1925 JP, NC): Daiwa House Industry is a major sales dealer of human assisting robotics in Japan. We visited their Human Care Business Promotion Department’s Robotics Business Promotion Room in Tokyo. They sell various different types of nursing care robotics such as HAL, MOOGLE, POPO, PARO, MINELET, etc. The company expects overall revenues from the robotics business to be ¥350mn in FY3/15, and they continue to expand the business given the outlook for the need of these robotics in Japan is bright.
Table 11: Major Japanese players in nursing care robotics industry Product Name Manufacturer Product Description PaperoR500 NEC Greet in different languages, and reply back to you. Recognize faces of 30 different people PALRO Fuji Soft Humanoid robotics equipped with artificial intelligence Motions similar to human being Network functions connecting to internet or cloud PARO Intelligent System/AIST (Sales dealers: Seal type therapeutic robot Daiwa House, etc.) Mental treatment oriented effects MySpoon Secom Support hand disabled to eat. The user can move food to his/her mouth by controlling the robotics. Rodem Tmsuk Universal vehicle. Without changing body direction, move between bed and toilet. HAL CYBERDYNE (Sales dealer: Daiwa House) Leg/walking support for those who are disabled. When people are to move, their brain transmits bioelectric signal to muscles, and skin surface sensors capture the signal. By moving the robotic arms along with the signals, it supports users to move. (Rhythm) Walking Honda Through information sensor information, controlling computer drives motors and Assistance improves the timing of both legs' motion, leading to better/easier walking. Source: Jefferies, DBJ
page 35 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 47: Japan has a number of technological advantages in robotics
47 50 Number of technologies where Japan has relative advantages 45 40 35 30 25 20 15 12 8 10 3 5 2 1 0 US Europe Japan Koera Taiwan China
Japan's strength: Memory, Measurement, Photonic Crystal, Super Computer, Quantum Information Security, Digital Image Compression Technologies/Multi-media Application Technologies, Sensing/Recognition, Actuator
Source: Jefferies, company data
Chart 48: US patent ownership share in robotics element technologies: Sensors
Image sensor
Encoder
Force sensor
Magnetic sensor
Accelerometer sensor
Gyro sensor
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Japan US EU Korea Others
Source: Intellectual Property Information Services, Jefferies
Chart 49: US patent ownership share in robotics element technologies: Drive Systems
Harmonic drive speed reducer
Servo motor
Brushless DC Motor
0% 20% 40% 60% 80% 100%
Japan US EU Korea Others
Source: Intellectual Property Information Services, Jefferies
page 36 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 50: US patent ownership share in robotics element technologies: Intellectual Control
Phonetic recognition
Image recognition
Artificial intelligence
0% 20% 40% 60% 80% 100%
Japan US EU Korea
Source: Intellectual Property Information Services, Jefferies
Chart 51: US patent ownership share in robotics element technologies: Overall Robotics Control
Robotics Overall
0% 20% 40% 60% 80% 100%
Japan US EU Korea
Source: Jefferies, company data
Outlook on Japanese nursing care robotics industry The Development Bank of Japan (DBJ) asserts that it is important to develop robots that are practical and are well received by the end users by developing robotics as seen in Northern European countries like “User Driven Innovation”, so that Japan can expand its nursing robotics market industry and utilize the potential strength behind element technologies in the auto and electronics industries. It is essential to prepare for testing environments for actual experiments; however, there is friction against robotics industry and concerns on safety measures. The number of employees with enough knowledge is limited as well; thus, the number of facilities that understand and support these experiments is quite limited.
On the other hand, in order to expand nursing care robotics development, it is essential to obtain the understanding/support of facility operators regarding the introduction of robotics, and it is required to proceed with standardization along with the support from government and other people regarding safety measures, price setting that is reasonable for users and support for introduction costs, visualization of the advantages for end users and nursing care employees in terms of economics, and preparation for education/training systems for their introduction.
Due to the policies introduced by the government and autonomously, we are seeing support for experiments and the introduction of nursing care robotics, and we see page 37 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
attempts to secure testing environments for experiments partnering with robotics development corporations and nursing care/welfare facility operators. However, the number of these activities carried out is still quite limited.
While North America and South Korea are proceeding with the development of nursing robotics assuming that they will go into global markets, it is important to determine a path for sales pipeline expansion in the US and European markets in addition to domestic expansion. It might be ideal to consider the open innovations as seen in Denmark or Sweden based on “User Driven Innovations” environment, and Japan might be able to expand its revenue pipeline into US and European markets. On the other hand, there are a few possible issues regarding the introduction of US/European made products into Japan market due to differences in the residential environment and culture. Then, DBJ advises that “Design Driven Innovation” will work because it monitors what Japanese users are in need of, and it can possibly recognize essential/imminent needs and factors, and it also should add innovative value to the product.
Table 12: For the introduction of nursing care robotics, there are certain issues and required actions for them Propositions/Issues Required Actions Taken Since there are not enough testing environments for experiments in nursing Provide experiment locations by cooperating with nursing homes, care facilities, there are not enough robotics designs that are user friendly. government and autonomously. Skilled labor development that can connect developers and users as promoter or coordinator. Measurement method and information sharing has not taken place, so there Establish measurement methods, and enhance information sharing. are no visible advantages in terms of economics for employees and end Introduce measurement system platforms utilizing IT. users. Thus, there are no major incentives to introduce robotics from the facility side. No confirmation regarding safety measures of nursing care robotics is made. Set up safety measurements and laws related to nursing care robotics. Promote to obtain CE certification and ISOs. Prepare for the insurance systems in private sector. Lack of work force who can operate nursing care robotics in actual facilities. Foster skilled labor by providing career path systems in nursing care industry. Prepare for training related to nursing care robotics and establish training locations. Expensive. Support introduction cost or set up a reasonable price. Expand insurance limits in nursing care robotics market. Source: Jefferies, DBJ
Trends in Regulations Global standardization of service robotics ISO/TC184/SC2 is one of the key regulation workings groups to watch. Ever since the first SC2 Frankfurt conference in May 1984, there has been 10 ISOs and 4 TRs issued until the international standardization of service robots began including the ones that were already abolished. In 2005, reflecting the sign of effective practice of service robots, an advisory group was formed, and they had held 6 conferences by May 2006 when they submitted the report to SC2. In the SC2 Paris conference in June 2006, it was determined to start considering officially setting up internationally standardized measures on safety issues for personal care applications based on the advice from the advisory group. Simultaneously, an advisory group (AG1) was set up for the purpose of reporting to SC2 with research regarding standardization of the service robot industry. In order to carry out standardization processes in the service robot industry at SC2, the names and areas which had been specified for industrial usage were also changed to “robot and robotic device” and “standardization of automatically controlled and reprogrammable manipulating robot and robotic device industry”, respectively.
At the SC2 Gaithersburg conference in June 2007, AG1 recommended launching wording standardization processes to SC2, and SC2 revised industrial robot standard, ISO 8373, followed by a decision to set up wording standardization. Wording standardization began with a new project team at the Tokyo conference in November 2007. As for the safety measures of medical robots, a joint working group was set up with ISO and IEC since medical machinery related people’s participation was necessary in addition to robot industry exports.
page 38 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
After various discussions in the working group, at the San Francisco conference in January 2013, a proposal and explanations were made regarding data statistics on injury (Germany), method of experiment (Japan), border line between service robot and medical robot (UK), guidelines of ISO131482 (UK), etc. With various countries’ input, working items were determined for the Beijing conference in October 2013.
Three conferences were held in FY3/14: Bristol in June, Beijing in October, and San Sebastian in February 2014. At the Bristol conference, detailed explanations were given for guidelines for ISO13482 and method of experiments. At the- Beijing conference, they deliberated the guidelines of ISO13482 and experiment method drafts, and discussed scheduling of standardization. At the San Sebastian conference, the same matters as the Beijing conference were deliberated. Voting closed in December 2013, and FDIS13482 was approved, followed by a released of ISO13482 in February 2014.
Note: ISO is the International Organization for Standardization, TC is Technical Committee, SC is Sub Committee, TR is Technical Report, and FDIS is Final Draft International Standards.
Explosive Growth in China Robotics To Become a Robot Empire China is the fastest growing market in the world with a decent long term outlook in industry The China robotics market has the largest potential for growth in the long run. METI and IFR are looking at the growth in the robotics industry in the next c.20 years with major growth in China. Japanese robotics manufacturers are considering increasing revenues from China market in key industries such as auto and other general manufacturing sectors.
Chart 52: China robot shipments to show sustainable rapid growth
120,000 +25% CAGR 100,000
80,000
60,000 (units)
40,000
20,000
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e 2015e 2016e 2017e
Source: Jefferies, IFR
Depending upon the usage of robotics, different companies have strengths and high market share in China. In arc welding robotics, Japanese companies such as Daihen, Yaskawa Electric, Panasonic and Fanuc have higher market share than European companies such as ABB and KUKA. When it comes to spot welding robotics, European companies are relatively strong in the China market, and KUKA has the highest market share there, followed by Fanuc and ABB. In painting robotics, European manufacturer ABB is strong with the highest market share, while the 2nd to 4th players are Japanese. Assembling robotics are dominated by Japanese makers and Seiko Epson has the highest market share in China, followed by ABB and Fanuc. Lastly, regarding palletizing robotics, KUKA has the highest market share, followed by Japanese makers (refer to Chart 63).
page 39 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
China Industrial Robot Market First Look
China biggest and fastest growing industrial robot market A great change emerged in the global industrial robot market. China, once the manual labour “workshop of the world” is exhibiting strong demand for industrial robots. In 2013, China purchased c37,000 robots to surpass Japan as the top buyer of industrial robots. For the first time ever, China became the biggest industrial robotics market in the world in terms of annual sales. Since 179,000 industrial robots were sold last year globally, it indicates that China bought one in five robots sold.
Chart 53: China is expanding its share in global supply of industrial robots
2010 2013 China Others China 12% 26% Others 20% 30% Japan 18%
Japan 15% Germany 12% Germany United 10% Rep. of States Rep. of United Korea 12% Korea States 20% 12% 13% Source: IFR, Jefferies
China has become the fastest growing industrial robot market in the world. On the back of the remarkable economic growth and strong needs for manufacturing automation, the industrial robot market achieved a CAGR of 34% from 1999 to 2008. Despite of its slowdown in 2009 due to the world economic crisis, it accelerated again from 2010. Over the last five years, supply of industrial robots increased at an impressive CAGR of 60%.
Chart 54: Annual shipments of industrial robots in China
40,000
35,000 30,000 +60% CAGR 25,000
20,000 (units) 15,000 +34% CAGR 10,000
5,000
0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: IFR, Jefferies
Rising wage cost and workforce shortage boost industrial robot installations The working profile in China is changing dramatically as the country’s manufacturing industries are facing rising labour costs. According to the World Bank, China’s per capital GDP increased to $6,807 in 2013, thus rising wages are becoming a heavy burden on factories. In Chart 55, we can see that the average wage of employed persons in manufacturing industry reached RMB46,431 in 2013, roughly 2.5 times that of 2006. On the other hand, China’s one-child policy, which restricts the number of young dependants, has begun to show its impact on the flow of new entrants into the workforce.
page 40 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
According to the latest release from the National Bureau of Statistics of China, the working-age population, defined as 15-64 years old, began to decline from 2011 and came down to 920 million in 2013. There is no doubt that China is facing a workforce shortage and rising human cost issues.
Chart 55: Average Wage of Employed Persons in Manufacturing Industry
50,000 Average wage in manufacturing industry 46,431 41,650 40,000 36,665
26,810 30,916 30,000 24,404 21,144
(RMB) 18,225 20,000
10,000
0 2006 2007 2008 2009 2010 2011 2012 2013
Source: National Bureau of Statistics of China, Jefferies
Beset by rising wage costs and a labor shortage, together with growing competition from other emerging countries, Chinese local manufacturing factories are turning to intelligent technological innovations to boost profits by installing a wide range of robots. Although the application of industrial robots has been widespread among developed countries like Japan, local manufacturers are stepping up and began making efforts to introduce robots to replace workers. Shipments of industrial robots grew at a 60% CAGR between 2009 and 2013. The cumulative installation number reached over 132,784 units at the end of 2013, accounting for 10% of global instalments.
Chart 56: Newly installed industrial robots in the world and China’s share
200,000 25% 180,000 160,000 20% 140,000 120,000 15% 100,000
(units) 80,000 10% 60,000 40,000 5% 20,000 0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
New installations worldwide (LHS) Share of China's installations (RHS)
Source: IFR Jefferies
Industrial robot – a high-growth potential industry According to IFR, the average robot density in the world was about 58 robots per 10,000 employees in 2012. Developed countries have installed a large volume of robots in recent years. South Korea again reached the highest robot density of 396 industrial robots per 10,000 employees. The robot density in Japan has stagnated at 332 units and in Germany it continued to increase to 273 units. On the other hand, the robot density in many emerging markets is below the world average level.
Although robotics installation in China is growing significantly, Chinese factories are far from well automated. It had only 23 industrial robots per 10,000 people employed in the page 41 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
manufacturing industry in 2012, well below the world average. China has about 40mn employees in manufacturing industries, so China will have 232,000 units when it reaches the world average density. Since China had already installed over 132,784 units by 2013, we expect there will be installation demand of c.100,000 units in China.
Considering that China will continue to increase the huge amount of robot investment in manufacturing industry, we think the potential for robot installation in China is tremendous and there will be a substantial increase in the robot density of the automotive, electrical/electronics and other industries.
Chart 57: Average robot density in major markets (units/10,000 employees) 450 396 400 332 350 300 273 250 200 164 150 103 84 100 60 58
50 23 (units/per 10,000 employees) 0
Source: IFR, Jefferies
Applications for industrial robot in China Rapidly growing demand for industrial robots shows the trend in China’s manufacturing sector. Currently automotive and Electrical/Electronic sectors are two major fields that have the largest applications. A wide range of applications in the automotive sector benefit from various deals with the world’s largest vehicle production center, China, as many international auto industry giants have established production bases in China. As for the Electrical/Electronic sector, applications for industrial robotics increased as Chinese smartphone and tablet contract manufacturers have won orders from Apple, Samsung Electronics, Taiwanese smartphone makers and the local makers. In Chart 58, we can see that applications in the automotive and Electrical/Electronic sectors account for c70% of all applications. The applications mainly include welding, handling, assembly and other types of industrial robotics. There are also some applications that are rare in developed countries, such as carrying tiles and bricks.
Chart 58: Application of industrial robots in China by sector (2010-2012)
Plastic and Others, 5% chemical, 8%
Metal, 13%
Automotive, 57%
Electrical/electronic s, 17%
Source: IFR, Jefferies
page 42 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Robotics introduction in the automotive and Electrical/Electronic sectors has been mainly led by foreign companies, but a trend to utilize robots by local manufacturers is becoming apparent. Generally, robot applications can be divided into three stages based on the levels of manufacturing development: 1) low-value activities requiring little skill, e.g. simple assembling, or carrying light-weight things, 2) activities where a substitute to human hands is preferred like welding, moving heavy objects or other dangerous tasks, and 3) complicated activities that require mastery of skills like highly precise assembling and visual inspections. Chart 59 shows shares of major application areas for local made robots. Although handling applications still comprises about 60%, the total share of welding and assembling/dissembling areas grew to 20%. We think that application of robotics in China is moving to the second stage.
Chart 59: Application areas of Chinese local robots
Processing, 2% Unspecified, 2% Cleanroom, 3% Assembling/disasse mbling, 8%
Welding, 9%
handling, 59%
Dispensing , 17%
Source: China Robot Industry Alliance, Jefferies
Non-local manufacturers’ robots dominate the industrial robot market in China Although China is now the world’s largest market for industrial robots, only a few Chinese manufacturers seem to be enjoying the expansion of the market. The fastest growing market is dominated by Japan-based and Europe-based international giants. In 2013, 26% of industrial robots were purchased from China’s domestic robot manufacturers while 74% came from foreign manufacturers.
Chart 60: China robotics market is dominated by non-local companies 2012 2013 Domestic , 12.2% Domestic , 26.2%
Foreign, Foreign, 73.8% 87.8%
Source: China Robot Industry Alliance, Jefferies
page 43 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
The China industrial robotics market has long been dominated by Japanese, Swiss, German, Italian and American manufacturers. Chart 61 indicates that only one local manufacturer managed to edge into the Top 10 players – Siasun, selling c.1,200 robots in 2012. As European automotive makers penetrated the China market at the earliest stage, European robot manufacturers had the highest market share initially. With the increased expansion of Japanese automotive makers in China, Japanese robot manufacturers have been consistently growing in strength in recent years and surpassed the European players in 2009-2010. In 2012 half of the robots purchased by China came from six Japanese robot firms.
Chart 61: Top 10 robot players in China (based on annual sales in 2012)
Hyundai Naichi Fanuc Kawasaki
Siasun
Panasonic
Yaskawa
DAIHEN
ABB KUKA
Source: China Robot Net, Jefferies
Table 13: Non-local and local manufacturers in China Industrial Robotics Manufacturers Non-local Name Nationality Entrance to China Headquarters in China Plant in China Market 1 Fanuc Japan 1997 Shanghai Shanghai plant 2 Yaskawa Japan 1996 Shanghai Changzhou plant 3 OTC Japan 2002 Shanghai N/A 4 Panasonic Japan 2005 Tangshan N/A 5 Nachi Japan 2008 Shanghai Zhangjiagang plant 6 Kawasaki Japan 2006 Tianjin Suzhou plant 7 Kobelco Japan 1995 Shanghai N/A 8 Fuji-Yuso Japan 2003 Shanghai N/A 9 Denso Japan 2008 Beijing N/A 10 Epson Japan 2009 Beijing Shenzhen plant 11 Mitsubishi Japan 2008 Shanghai N/A 12 ABB Sweden 1994 Shanghai Shanghai plant 13 KUKA Germany 1994 Shanghai Shanghai plant 14 Comau Italy 2006 Shanghai Kunshan plant 15 Stäubli Switzerland 2008 Hangzhou Planned 16 Hyundai Korea 2003 Shanghai N/A
Chinese Local Name Nationality Entrance to China Headquarters in China Plant in China Market 17 Siasun China 2000 Shenyang Shenyang plant 18 GSK China 2006 Guangzhou Guangzhou plant 19 Efort China 2007 Wuhu Wuhu plant 20 Estun China 2006 Nanjing Nanjing plant 21 Adtech China 2007 Shenzhen Shenzhen plant 22 Boshi China 2009 Suzhou Suzhou plant 23 Boxin China 2004 Zhuhai Zhuhai plant 24 Naerjie China 2007 Jiangyin Jiangyin plant Source: Jefferies, Factory Network Asia Group
page 44 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
As we can see in Chart 61, among foreign manufacturers the big 4 – Fanuc, Yaskawa, KUKA and ABB – have an absolute advantage over the others. Currently Fanuc, Yaskawa and KUKA, ABB are largely equally positioned in the China robotics market. Between 2009 and 2012, total sales of the big 4 grew at a 145% CAGR and they together sold 14,470 robots in 2012, an over 50% share of the China market. Fanuc sold 3,900 units of industrial robots in China in 2012 and it is currently the largest supplier in the China market. Fanuc has a sales location in Shanghai to cope with the demand expansion in China.
Chart 62: Sales of big 4 in China between 2009 and 2012
4,500 Fanuc Yaskawa KUKA ABB 4,000
3,500
3,000
2,500
2,000 (units)
1,500
1,000
500
0 2009 2010 2011 2012
Source: China Robot Net, Jefferies
If we look at the market shares for major applications as shown in Chart 63, there is still little competition between Japan-based manufacturers and those from other Asian countries like South Korea, while competition is mainly between Europe-based and Japan- based companies.
Arc welding: Japanese 80% vs. European 15%.
Spot welding: Japanese >50% vs. European 40%
Painting: Both have almost equal market shares
Palletizing: Japanese 50% vs. European >30%
Assembling: Both have almost equal market shares
Also we can see that Japanese manufacturers have a strong advantage in many application areas, especially arc welding and spot welding.
page 45 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Chart 63: Competition status among robot manufacturers by industrial application in 2012
Arc welding Spot welding Others Comau Painting Hyundai Others Kawasaki Staubli Others KUKA Daihen Kawasaki
ABB KUKA Yaskawa ABB
Fanuc Yaskawa
NACHI Fanuc Yaskawa Panasonic ABB Fanuc
Palletizing Assembling Others EPSON KUKA Others
ABB
ABB
NACHI Mitsubishi
Fujiyusoki
Denso Okura Wave Fanuc
Source: Factory Network Asia, Jefferies
Chinese robot products concentrate on simple-task robots. Compared with their international rivals, Chinese robotics manufacturers are having a hard time because of their lack of cutting-edge technology. The high-value robotics market is dominated by non-local manufacturers, while local manufacturers’ most robotics products are concentrated on simple-task designed robots. In 2013, c.40% of Chinese robots are Linear/Cartesian/Gantry types and 25% are Selective Compliance Assembly Robot Arm (SCARA) type. A Cartesian robot is an industrial robot with three main linear axes that are at right angles to each other (i.e. moving in a straight line rather than rotating such as up- down, in-out and back-forth). A SCARA robot’s arms are consistent in a unique 4-axis motion and designed to pick up industrial components from one location and place them in another. Motions of such two types of robots are simple and Chinese manufacturers have relatively high market share. On the other hand, only 20% of Chinese robots are articulated robots, which have rotary joints allowing a full range of motion. As for the articulated robotics market, non-local manufacturers have over 80% share and create high margins.
Application areas of non-Chinese and Chinese robots have different emphasis. With regard to application areas of Chinese robots, in Chart 64 we can see that nearly 60% of them are for handling operations and 20% for dispensing operations. As for welding and assembling operations which require complicated motion controlling technology, over 90% of the market is dominated by non-local rivals.
Electrical and Electronics sectors are main market for local players. Although the automotive sector is the largest field for industrial robots, Chinese robots only have less than a 10% market share. Chinese industrial robot usages are classified into 25
page 46 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
different sectors and the electrical and electronics sectors were the main market that purchased 17% and 15% of local-based robots, respectively, in 2013.
Chart 64: Major types, application areas and sectors for Chinese industrial robots as of the end of 2013
Types of Domestic Robots Application areas of Chinese robots Industrial sectors of Chinese robots
Unspecified Linear/cartesia Unspecified Cylindrical n/gantry handling Electrical/Electr Processing Parallel onics Cleanroom Automotive others guide vehicle Assembling
Welding Articulated Plastic and Food chemical SCARA Automotive Dispensing Metal
Source: China Robot Industry Alliance, Jefferies
Why Japanese manufacturers are leading the China market Japan-based manufacturers have expanded their market share in China year by year. In 2007, 42.0% of industrial robots were produced by Japanese makers but in 2011 the number became 70.6%, up 68.1% from 2007. It is not only the superiority of Japanese leading technology but also their supply chain and the environmental perspectives that can justify their technological advantages.
First of all, Japanese robot manufacturers have an excellent domestic supply chain of robot components. As we know, in order to complete high-speed and precise motion, fully equipped controllers of control systems and drive systems are essential in industrial robots. In Japan many parts suppliers exist with advanced technology across the world, and they produce key components to be installed onto the drive system like speed reducers, servo motors and sensors. To achieve a wide range of complicated motions with high speed and precision, not only the innovations of the robot technology but also the improvements and optimal designs of the main components are important. With the powerful support of component manufacturers, Japanese robotics manufacturers have a leading advantage in terms of manufacturing, procurement and development.
Secondly, the growth of the China robot market has been driven by the automotive industry, especially by international automotive manufacturers so far. Because highly precise positioning and uniform/stable quality are required for welding and painting robots used in automotive production lines, Japanese robots with superiority in precision and stability are likely to be adopted. In addition, Japanese robot makers have built up a track record with major automotive manufacturers in Japan, Europe and the United States, which is also a major advantage as pioneers in the market.
Lastly, the import tariff rate for Japanese high-end industrial robots is set at zero. As Japan is one of the countries that have signed the “Most Favored Nation Treatment” with China in the business environment, Japanese robot makers are enjoying a tariff rate benefit on exporting industrial robots to China, such as articulated robots and painting robots. However, for the purpose of industry protection by the Chinese government, concerns on imposing tariffs are spreading so that some international players already started robot production in China prior to the possible tariff introduction.
page 47 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Table 14: Import tariff rate for industrial robots Robot type MFN tariff rate (%) Ordinary tariff rate (%) Multi-function industrial robot 0 20 Painting robot 0 30 Handling 5 30 Laser-welding robot 8 30 Source: General Administration of Customs of China, Jefferies
Chart 65: Imports of Industrial Robots in China
100% 90% 80%
70% Sweden 60% ROK 50% Germany 40% 66.3% 72.9% 70.6% Taiwan 30% 55.7% Japan 20% 42.0% 10% 0% 2007 2008 2009 2010 2011
Source: Global Trade Atlas, Jefferies
Industry chain of industrial robots Industry supply chain of industrial robots comprises component manufacturers, robotics manufacturers, agents, system integrators and end users. Normally, the robotics manufacturers are in charge of designing the unit body, software programming and selling robots through sales agents to system integrators, who are directly face end users. Some robot manufacturers or agents are serving as system integrators as well. Robot manufacturing is the core of the robot industry supply chain and needs high levels of technology. System integrators play their roles based on the needs of end users, composing robot units into a product system. Obviously integrators play the role of a bridge between makers and users.
Robot unit production is the basis of the development of the robot industry while system integrators are the key to robot commercialization. In terms of the China robot industry supply chain, robot unit producers are set at the top of the pyramid because of the high technology barriers. Usually the manufacturers have higher pricing power. Barriers to entering the system integrator market are relatively low so that system integrators do not have strong bargaining power either upstream or downstream.
There is still a wide gap between local brands of robot cell products and non-local brands in terms of competitiveness. Local enterprises in the industrial robot market are still mainly system integrators downstream, while non-local brands sell products by cooperating with system integrators, that is there is a certain reliance on the integrators.
Chart 66: Distribution Channel of Industry Robots in China
Component Robot System Agent User manufacturer manufacturer Integrator
Source: Jefferies
page 48 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Techonology barriers and high prices constrain local component makers from mass production As for the cost of an industrial robot, the mechanical structure of the body accounts for c.30% while more than 50% is the cost of the key components. For example, speed reducers account for over 30% and servo systems account for over 20%. Key components determine the product's performance, quality and price; thus they play an integral and essential part of robot industry.
Chart 67: Cost structure of an industrial robot
Controllor
Speed reducer
Servo motor
Body
Source: China Robot Net, Jefferies
Key components include precision speed reducers, high-performance servo motors and controllers. As robot products have high technical requirements for key components and Chinese component makers are behind in terms of precision, stability, cost and other aspects, there is a certain gap with international manufacturers. In order to produce conforming robots, local robot makers have to import key components from non-local companies. For example, the speed reducer market is highly dominated by two Japanese makers, Nabtesco and Harmonic Drive Systems, and they have very strong pricing power.
Table 15: Technology Gap in major components between local and non-local makers in China Key components Market Share Non-local suppliers Local suppliers Technology gap Speed reducers Over 75% is dominated Nabtesco, Harmonic Hengfengtai, Few local makers have mature products in by Nabtesco and Drive, Sumitomo Zhenkang, Beijing RV speed reducers Harmonic Drive. Heavy Industries CTKM Harmonic Speed and precision gap is big in Drive harmonic wave speed reducers Servo motors In 2012, Japan 45%, EU Panasonic, Yaskawa, Huichuan, INVT, Local makers are inferior in dynamic and US 30%, Taiwan BECKHOFF, Huazhong NC, performance and reliability and Korea 10%. SiegfriedLenz Stepelectric Controllers Most applications are Fanuc, Panasonic, SIASUN, CIXING, Local makers have few controller based on PLC systems Mitsubishi, Naichi, Stepelectric, Leisai applications of Delta Tau PMAC and Yaskawa, KUKA, ABB Beckhoff TwinCAT. Source: Jefferies
The history of local robot manufacturers China began industrial robotics research in the 1970s but mainly focused on theoretical research until the early 1980s. It was in the mid-1980s when China began to make the most of the robot industry as a part of a technological development project when developed countries started the large-scale application of industrial robots. In the 1990s the state-owned enterprises succeeded in developing several kinds of industrial robots: SCARA, Cartesian, arc welding, spot welding robots and automatic guided vehicles. In the
page 49 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
late 1990s, China built up nine industrial robot clusters and seven robot research institutes, including SIASUN owned by Shenyang Institute of Automation, Harbin Boshi Automation Equipment Co., Ltd., Beijing Institute of Machinery Industry Automation Robot Development Center, etc. After 20 years of development, China currently has the capacity to produce some types of key components and industrial robots like arc welding, spot welding, palletizing, assembling, injection molding, stamping and painting robots. Also China has formed a group of manufacturers with a certain degree of R&D and production capacity.
However, the small scalability, lack of high-end technology and weak brand led to a serious disadvantage in competing with the big 4. In April 2012, the Ministry of Science and Technology issued the "The 12th Five Year Development Plan of Intelligent Manufacturing Technology", pointing out that China will solve a number of high-end technical problems, and develop a group of robot manufacturers with a production volume over RMB10bn.
Table 16: Industrial robot manufacturers in China market Top market share with Major players with Local makers with leading technology leading technology limited technology Fanuc Kawasaki SIASUN Yaskawa Hyundai Boshi KUKA Comau EFORT ABB Naichi Triowin Panasonic GSK Yaskawa Shougang Kunming Shipbuilding Source: Jefferies
Chart 68: Top 5 local robot manufacturers (based on sales number of 2012)
1,400 1220 1,200
1,000
800
(units) 600 400 400 200 200 170 200
0 Siasun Qifan EFFORT Triowin GSK
Source: China Robot Net, Jefferies
page 50 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Table 17: Large public Chinese robot manufacturers Public Companies Company Profile Siasun Siasun Robot & Automation Co., Ltd, affiliated to the Chinese Academy of Sciences, is a high-tech enterprise that (300024 CH) holds the advanced manufacturing technologies as its core, possesses independent intellectual property rights and key technology. Presently, it operates in four major leading industries, namely advanced manufacturing equipment, rail transit automation industry, energy equipment industry, and advanced robot industry. Siasun is the only certified military robot supplier in China and sold 1,200 units in 2012, the highest sales number among domestic manufacturers. BOSHI HARBIN BOSHI AUTOMATION EQUIPMENT CO., LTD. is a high-tech enterprise established and held by the Harbin (002698 CH) Institute of Technology (HIT) with the core staff as shareholders. The company was established in September 1997 and has been focusing on electromechanical control and automation products. Relying on the advanced technology HIT, BOSHI develops factory automation equipment in the petrochemical, chemical, grains and pharmaceutical industries. BOSHI offers the following high-tech products: Automatic weighing, packaging, robot palletizer production lines. BOSHI headquarters is located in Harbin, a central city in the northeast of China. In addition, BOSHI have established several branches in other regions of China: Beijing, Shanghai, Shandong, Lanzhou, Xinjiang, etc. STEP Electric STEP Electric Corporation was founded in 1995. As an elevator control system product manufacturer in China, the (002527 CH) company offers a wide range of products, including servo drives, elevator inverters, general vector inverters, elevator main controller boards, car controller boards, and indicator boards. On Sep 17, 2013, Step electric announced that it planned to raise RMB50mn to found its robot-related affiliates. On Jan 28, 2014, the company acquired a 100% share of Adtech, which mainly manufactures controller systems for robots. Source: Company data, Jefferies
Table 18: Large private Chinese robot manufacturers Private Companies Company Profile Qifan Industrial Qifan Industrial Robots Co., Ltd. (STSrobotics) produces Cartesian coordinates and multi-joint robots. Their robots have been distributed abroad. At the beginning, the company specialized in the automatic spray painting area through the Huachen brand. Their traditional product range from single axis to 6 axis, from independent to on- line, from stepping to tracking. From 2010 the company accessed the joint robots industry after years of accumulation of experience and applied this in painting, assembling, handling, palletizing and welding. Qifan sold about 400 robot units in 2012, the second highest among local makers. Yaskawa Shougang Yaskawa Shougang Robot Co.,Ltd. (the former is Shougang Motoman Robot Co.,LTD), owned by Yaskawa and China Shougang, is engaging in robot’s design, manufacturing, selling and after-sales service, with business centers in Beijing and Shanghai. Their robots have been widely used for arc welding, spot welding, sealing, cutting, handling and palletizing, and painting. The company has a production capacity of 800 units per year. Kunming China Shipbuilding Trading (Kunming) Co., Ltd. (CSTCKM) was founded in 1996 as a subsidiary of its holding Shipbuilding company Kunming Shipbuilding Equipment Co. Ltd. (KSEC) for international trade and cooperation. The main business of CSTCKM is divided into two sections. The first is export business focusing on products manufactured by KSEC such as tobacco machinery, automatic logistics systems, herb processing machinery, etc. The second section is import business focusing on importing various parts and machines from a number of global companies. With years of experience in tobacco logistics system, KSEC has expanded into electrical appliances, food, pharmacy, banking, the power industry and other commercial areas. GSK GSK based in South China is a professional supplier of advanced sets of machine tool CNC equipment. GSK offers customers the full range of GSK series: machining centers, CNC systems for milling, turning and grinding machines, spindle servo motors, feed servo drive devices, feed servo motors, and integration solutions as well. Source: Company Data, Jefferies
page 51 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Prospects for the China robot market
After three decades of development, Chinese manufacturing industry already has the advantage of scalability and technology, with relatively abundant capital. Some internationally competitive industries have emerged, such as the telecommunications industry. But it should be noted that the manufacturing industry is "big but not strong". In order to upgrade from the inevitable economic restructuring, industrial robots aim to improve manufacturing efficiency and product quality while reducing overall costs. Therefore, economic restructuring is the basis of industrial robot market development.
The proportion of the labor force aged 15-65 reached a historic peak in 2011, followed by two consecutive years of declining trends, which illustrates the miracle of China’s economic growth has exhausted the advantage of its population stock. The government loosened its one-child policy in 2013 to allow couples in which at least one spouse is an only-child to have two children. However, we estimate that it will take at least 15 years before these second child enter the labor market. Therefore, China’s labor market is facing a labor shortage and population aging problems.
In the "12th Five Year" period, industrial robots for the first time officially became one of the key development targets. From the beginning of 2013, specific content regarding industrial robots has been put in a series of policies of the General Office of the State Council, Ministry of Industry, Ministry of Science and Technology, and Ministry of Finance. The policies all stressed the need to boost the technological development of industrial robots and related key components, such as servo systems and speed reducers. The government is pointing in a clear direction to help improve the robot industry chain and promote the growth of local robot manufacturers, thereby upgrading and restructuring the manufacturing sector.
Table 19: Government policies and laws on industrial robots in the “12th Five Year” period Year Government Agency Policies and Laws Details
2012 General Office of the The "Twelfth Five" National To achieve substantial technological advances on key components State Council Strategic Emerging Industry like sensors, automatic control systems, serve motors, etc., and Development Planning strengthen capacity of integrated systems. 2012 Ministry of Industry and 12th Five-Year Development Giving priority to develop intelligent control systems, servo motors, Information Plan for High-end Equipment industrial robots and other sensing components. Manufacturing Sector
2012 Ministry of Science and The 12th Five Year Plan of To surmount the technological problems of robotic bodies, speed Technology Development of Intelligent reducers, serve motors and controllers. Strengthen self- Manufacturing Technology development capacity for industrial robots and realize massproduction. 2012 Ministry of Finance Financial subsidies Issued financial subsidy list of intelligent machine manufacturers, including tire producing robot manufacturers like MESNAC (002073) and Sailun (601058), handling robots manufacturers in the logistics area, makers of intelligent integrated systems.
2013 China Robot Industry Alliance To accelerate the sound and orderly development of the robot emerged industry, to enhance closer cooperation between the industry, universities, research institutes and application sectors, and to promote the widely application of robots in various fields. Source: Jefferies
page 52 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
In December 2013, the Ministry of Industry and Information Technology issued guidance on promoting the industry: an integrated industrial robot system, that is 3-5 leading manufacturers with international competence and 8-10 industrial clusters should be established by 2020. Meanwhile, the market share of high-end products should exceed 45% while the density of industrial robots per 10,000 employed in the manufacturing industry should exceed 100. What’s more, the government has announced a target to boost market volumes in the robot industry to RMB3 trillion by 2020 in “The 12th Five Year Plan of Development of Intelligent Manufacturing Technology”.
page 53 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.
Industrials
9 October 2014
Analyst Certification: I, Yukihiro Kumagai, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Hongguang Zheng, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Registration of non-US analysts: Yukihiro Kumagai is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst.
Registration of non-US analysts: Hongguang Zheng is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst.
As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement. Company Specific Disclosures For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/ Disclosures.action or call 212.284.2300.
Meanings of Jefferies Ratings Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-month period. The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform rated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12- month period. NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/ or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided. Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.
Jefferies Franchise Picks Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it underperforms the S&P by 15% or more since inclusion. Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment style such as growth or value.
Risk which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial page 54 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report. Industrials
9 October 2014 and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. Other Companies Mentioned in This Report • Denso (6902 JP: ¥4,858, BUY) • FANUC Corp. (6954 JP: ¥18,830, HOLD) • Honda Motor (7267 JP: ¥3,541, BUY) • Intel Corporation (INTC: $34.27, BUY) • Kawasaki Heavy Industries (7012 JP: ¥413, HOLD) • Nabtesco Corp. (6268 JP: ¥2,583, HOLD) • Panasonic (6752 JP: ¥1,261, BUY) • SoftBank Corp. (9984 JP: ¥7,311, BUY) • Sumitomo Heavy Industries (6302 JP: ¥580, HOLD) • THK Co. (6481 JP: ¥2,619, HOLD) • Toyota Motor (7203 JP: ¥6,252, BUY) • Yamaha Motor (7272 JP: ¥2,018, BUY) Distribution of Ratings IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY 987 51.95% 260 26.34% HOLD 772 40.63% 136 17.62% UNDERPERFORM 141 7.42% 5 3.55%
page 55 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report. Industrials
9 October 2014
Other Important Disclosures
Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) group companies: United States: Jefferies LLC which is an SEC registered firm and a member of FINRA. United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England and Wales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)20 7029 8010. Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; located at Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong. Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +65 6551 3950. Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a member of the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 5251 6100; facsimile +813 5251 6101. India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), which is licensed by the Securities and Exchange Board of India as a Merchant Banker (INM000011443) and a Stock Broker with Bombay Stock Exchange Limited (INB011491033) and National Stock Exchange of India Limited (INB231491037) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-Kurla Complex, Bandra (East) Mumbai 400 051, India; Tel +91 22 4356 6000. This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information set forth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligation under applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by the provisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European Economic Area this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or have been assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. Jefferies International Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of which are available upon request in writing to the Compliance Officer. Jefferies International Limited may allow its analysts to undertake private consultancy work. Jefferies International Limited’s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage any potential conflicts of interest that may arise as a result of such consultancy work. For Canadian investors, this material is intended for use only by professional or institutional investors. None of the investments or investment services mentioned or described herein is available to other persons or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies Singapore Limited is regulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limited pursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert or institutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connection with this material, please contact Jefferies Singapore Limited, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +65 6551 3950. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report is issued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities and Futures Ordinance and its subsidiary legislation. In the Republic of China (Taiwan), this report should not be distributed. The research in relation to this report is conducted outside the PRC. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. In India this report is made available by Jefferies India Private Limited. In Australia this information is issued solely by Jefferies International Limited and is directed solely at wholesale clients within the meaning of the Corporations Act 2001 of Australia (the "Act") in connection with their consideration of any investment or investment service that is the subject of this document. Any offer or issue that is the subject of this document does not require, and this document is not, a disclosure document or product disclosure statement within the meaning of the Act. Jefferies International Limited is authorised and regulated by the Financial Conduct Authority under the laws of the United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief under Australian Securities and Investments Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial services licence under the Act in respect of the provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictions should inform themselves about and observe any applicable legal requirements in relation to the receipt of this document. This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion or estimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligation to maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors, and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned or described herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or services to certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons or under differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term views expressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. None of Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s). Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior
page 56 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report. Industrials
9 October 2014 to the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein are those of the author(s) and may differ from the views of Jefferies. This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research is simultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Jefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES
© 2014 Jefferies Group LLC
page 57 of 57 Yukihiro Kumagai, Equity Analyst, +813 5251 6184, [email protected]
Please see important disclosure information on pages 54 - 57 of this report.