Nomura Asia-Pacific Research

Machinery Factory Automation in China

Katsushi SAITO Head of Asia-Pacific Industrials Research Wenjie GE

Yankun HOU Head of Industrials and Autos Research, Asia ex-Japan June 2011

Please read the important disclosures and analyst certifications on pages 41–46 ｇｌ. NOMURA JAPANESE EQUITY RESEARCH Value chain: Japanese/European makers competitive in upstream and downstream

Smile curve : Competitiveness of Japanese/Chinese companies Profitability

Core components Assembly Services (upstream) (midstream) (downstream) Japanese/ European strong Chinese strong Japanese/ European strong SMC (pneumatic machinery) Haitian International Komatsu (construction machinery) Fanuc (NC equipment) (injection molding machinery) Kubota (agricultural machinery) THK (linear guides) Shenyang Machine Tool Daikin Industries (air conditioners) (machine tools) Nabtesco (hydraulic equip.) Kone Elevator (elevators) Sany Heavy Industry Siemens (NC equipment) Schindler Elevator (elevators) (construction machinery)

Source: Nomura Value chain

2 NOMURA JAPANESE EQUITY RESEARCH Global machinery makers: (1) Factory automation Industry Japan Europe/North America China/Taiwan/Korea SMC(6273 JP) Festo(Unlisted) Airtac(1590 TW) Pneumatic equipment CKD(6407 JP) Parker Hannifin(PH US) THK(6481 JP) Bosh Rexroth(Unlisted) Nanjing Technical Equipment(Unlisted) Ball screws NSK(6471 JP) Schneeberger(Unlisted) Hiwin Technologies(Unlisted) Linear guides Nippon Thompson(6480 JP) Schaeffler Technologies(Unlisted) Fanuc(6954 JP) Siemens(SIE GY) Wuhan Huazhong Numerical NC equipment Mitsubishi Electric(6503 JP) Control(300161 CH) GSK CNC Equipment(Unlisted) Mitsubishi Electric(6503 JP) Siemens(SIE GY) Wuhan Huazhong Numerical Yaskawa Electric(6506 JP) Lenze AC-Tech(Unlisted) Control(300161 CH) Servomotors Panasonic(6752 JP) Rockwell Automation(ROK US) GSK CNC Equipment(Unlisted) Fanuc(6954 JP) Delta Electronics(2308 TT) Yaskawa Electric(6506 JP) ABB(ABB SS) Delta Electronics(2308 TT) Fuji Electric(6504 JP) Siemens(SIE GY) Inverters Mitsubishi Electric(6503 JP) Schneider Electric(SU FP) Toshiba(6502 JP) Emerson Electric(EMR US) Omron(6645 JP) Siemens(ABB SS) Small local firms Control equipment Keyence(6861 JP) Schneider Electric(SU FP) Mitsubishi Electric(6503 JP) Rockwell Automation(ROK US) Kawasaki Heavy Industries(7012 JP) Bosh Rexroth(Unlisted) Jiangsu Hengli Highpressure Nabtesco(6282 JP) Oilcylinder(Unlisted) Hydraulic equipment KYB(7242 JP) Dongyang Mechatronics(013570 KS) Toshiba Machine(6104 JP) Fujikoshi(6474 JP) Fanuc(6954 JP) ABB(ABB SS) Siasun(300024 CH) Yaskawa Electric(6506 JP) KUKA(KU2 GY) Robots Kawasaki Heavy Industries(7012 JP) Fujikoshi(6474 JP) 3 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Global machinery makers: (2) Other machinery Industry Japan Europe/North America China/Taiwan/Korea Fuji Machine Mfg(6134 JP) Siemens(SIE GY) Torch(Unlisted) Panasonic(6752 JP) Phillips Topaz(PVH US) Chip mounter Juki(6440 JP) Yamaha Motor(7272 JP) Amada(6113 JP) Trumpf(Unlisted) Jiangsu JinFangYuan CNC Sheet metal processing Machine(Unlisted) machines Jiangsu Yawei Machine Tool(002559 CH) Yamazaki Mazak(Unlisted) Gildemeister(GIL GY) Shenyang Machine Tool(000410 CH) Okuma(6103 JP) MAG(Unlisted) Dalian Machine Tool(Unlisted) Machine tools Moriseiki(6141 JP) Schular(Unlisted) Hyundai Wia(011210 KS) Makino Milling Machine(6135 JP) Haaz(Unlisted) Doosan Infracore(042670 KS) Amada(6113 JP) Heller(Unlisted) Sumitomo Heavy Industries(6302 JP) Arburg(Unlisted) Haitian International(1882 HK) Nissei Plastic Industrial(6284 JP) Husky(HSE CN) Zhenxiong(57 HK) Injection molding Fanuc(6954 JP) machines Japan Stel Works(5631 JP) Toshiba Machine(6104 JP) Komatsu(6301 JP) Caterpillar(CAT US) Doosan Infracore(042670 KS) Hitachi Construction Machinery(6305 JP)Volvo(VOLVB SS) Hyundai Heavy(009540 KS) Construction machinery Kobe Steel(Kobelco Construction Sany Heavy Industry(600031 CH) Machinery, 5406 JP) Lonking(3339 HK) Zoomlion(1157 HK) Kubota(6326 JP) John Deere(DE US) First Tractor(38 HK) Agricultural machinery Iseki(6310 JP) New Holland(Unlisted) Foton Lovol Heavy Industries(Unlisted) Yanmar(Unlisted) Source: Nomura

4 NOMURA JAPANESE EQUITY RESEARCH What drives China FA? Shanghai and Beijing minimum wages(%y-y) (%) 30

Beijing 25 Shanghai 20 15

(RMB/Month) 10 1,600 5 0 1,200 Shanghai and Beijing minimum wages

800 Beijing Shanghai

400

0 94 96 98 00 02 04 06 08 10 (CY) Source: CEIC, Nomura 5 NOMURA JAPANESE EQUITY RESEARCH Machine tools without NC

6 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Machine tools with NC

7 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH FA level in China (NC Ratio)

(%) NC ratio = machine tools China Machine Tools NC ratio (%) 35 100 equipped with NC systems / (Monthly) total machine tools (volume 2010 30 basis) 83% 25 80 20 Japan 15 60 China 10 (kUnit)Non-NC machine tools output(LHS) (kUnit) 60 24 50 20 40 2010 1988 29% 28% 40 16 30 12 20 20 8 10 4 NC machine tools output(RHS) 0 0 0 (CY) 76 80 84 88 92 96 00 04 08 05/1 06/1 07/1 08/1 09/1 10/1 11/1 (CY) Source: Japan Machine Tools Association, CEIC, Nomura 8 NOMURA JAPANESE EQUITY RESEARCH Japan/China NC machine tools output (kUnit) 250 Japan NC Machine Tools Output 200 China NC Machine Tools output

150

100

50

0 70 74 78 82 86 90 94 98 02 06 10 (CY)

Source: Japan Machine Tools Association, CEIC, Nomura

9 NOMURA JAPANESE EQUITY RESEARCH Japan is the leading exporter of machine tools to China

Demand structure Chinese imports of machine Pricing image tools by origin (Made(made in Japanin Japan) =100) (%) Germany/Switzerland High grade/specialized 120-150 40 Japan

30 Japan/Germany High grade/mass 100 production Germany Taiwan South Korea 20

Taiwan Medium grade/mass 50-70 production 10 US

China(Domestic) South Korea Low-priced ～30 0 日本 01 02 03 04 05 06 07 08 09 台湾 (CY) ドイツ Note: Prices are rough estimates. Source:Source: Nomura Nomura based on data from Japan アメリカ Machine Tools Association 韓国 Source:Source: Nomura Nomura based on interviews

10 NOMURA JAPANESE EQUITY RESEARCH Fanuc: Top share for NC equipment in China

Market share for NC equipment Total sales by region (FY10E) Europe Others （％） 10% Fanuc's Major competitors share The Asia Japan Fanuc Americas Japan 70 Mitsubishi Electric 52% 25% clients 12%

North America 30 Siemens

Siemens, Europe 36 Heidenhain(Germany) Others

Korea and Taiwan 80 Mitsubishi Electric Factoring in indirect China 50 Siemens, Mitsubishi Electric Asia Japan Europe The exports 60% 14% 12% Americas by clients 13% India 50 Siemens

World total 50 Siemens

Note: Volume basis. FY08 Nomura estimates. 0% 20% 40% 60% 80% 100% Source: Nomura Source: Nomura 11 NOMURA JAPANESE EQUITY RESEARCH Chinese largest maker: Shenyang Machine Tool

12 Source: Nomura based on company material NOMURA JAPANESE EQUITY RESEARCH Shenyang Machine Tool: Origin of key components

NC equipment Japan Servo motor

Linear guide Germany

Tool chuck Italy

Ball screw Japan

Hydraulic cylinder Taiwan

Bearing Japan

Source: Nomura based on company material 13 NOMURA JAPANESE EQUITY RESEARCH Machine Tools: Fanuc NC

14 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Machine Tools

15 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Machine Tools: GSK NC

16 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Machine Tools

17 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Machine Tools: Fiyang NC

18 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Machine Tools: Pneumatic Equipment (SMC)

19 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Machine Tools: Pneumatic Equipment (AirTac)

20 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH SMC: Top share for pneumatic equipment in China

Market share in China (FY 10) Sales by region (FY11E) Others Others, 32% SMC, 37% North America 13% China Japan Pneumatic 41% Equipment Other Asia Market (2010) 15%

China 12% CKD, 4% Europe 16% Festo, Airtac, 13% 14%

Source: Nomura 21 NOMURA JAPANESE EQUITY RESEARCH FA level in China (Robots)

(Unit) （Unit） 10 Welding robots installed 4 Robots installed of every of every 1,000 automobile produced 1,000 automobile produced 3.4 Unit 8 Japan 8.1Unit3 China Germany 6 6.6Unit South Korea 2 4 5.6Unit North America 1 2 Assuming half of the installments are welding robots 0 0 2002 2003 2004 2005 2006 2007 2008（CY） 2002 2003 2004 2005 2006 2007 2008 （CY）

Source: International Federation of Robotics, Nomura

22 NOMURA JAPANESE EQUITY RESEARCH Automobile Assembly Line

Source: Nomura 23 NOMURA JAPANESE EQUITY RESEARCH Automobile Assembly Line

Source: Nomura 24 NOMURA JAPANESE EQUITY RESEARCH FA level in China (Robots)

Welding robots per line at plants of 100 Japanese/European automakers 100 located in industrialized nations indexed at 100

80

50–70 60

40 10–50

20

0 Japan/US/European Japan/US/European Chinese companies' companies' plants in companies' plants in plants in China industrialized nations China Source: Nomura based on interviews

25 NOMURA JAPANESE EQUITY RESEARCH Collaboration between Machine tools and Robot

26 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Industrial Robot: Pneumatic equipment

27 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Industrial Robot(Siasun): China local brand

28 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Industrial Robot(Siasun): Components are from Japan

29 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Industrial Robot used in Auto industry(1)

30 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Industrial Robot used in Auto industry(2)

31 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Pneumatic equipment used in Auto Parts Assembly

32 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Automation line

33 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Automobile Assembly Line

34 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Zoom up: Pneumatic equipments are from Japan

35 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Appendix: iPad aluminum body is machined by Fanuc machine tool

Source: Nomura

36 NOMURA JAPANESE EQUITY RESEARCH Fanuc: Robo-drill

37 Source: Nomura based on company material NOMURA JAPANESE EQUITY RESEARCH Fanuc: Fist robot

38 Source: Nomura NOMURA JAPANESE EQUITY RESEARCH Excavators in China: Komatsu is #1 with premium prices

Excavator market share in China (over 6t, CY2010)

Other Komatsu Sunward 11% (Japan) (China) 16% 2% Lingong (China) 3%

Volvo (Lingong) Doosan Infracore 2010 (Sweden/China) (Korea) hydraulic 4% 12% excavator Caterpillar (US) market shares 7% Hitachi Construction Machinery (Japan) Sany Heavy 11% (China) 10% Hyundai Heavy Kobelco (Japan) (Korea) 10% 10%

Source: Nomura 39 NOMURA JAPANESE EQUITY RESEARCH Hydraulic equipment controls the movement of hydraulic excavators

Forward / reverse motion

Travel motor (Nabtesco)

Rotary motion

Engine Hydraulic pump Hydraulic valve Swing motor (Komatsu) (Kawasaki) (Kawasaki) (Toshiba) Extension / retraction and digging motion of arm

Cylinder Source: Nomura based on company material (KYB) 40