Fanuc Corp's road to redemption runs through India and the US Fed

By Tim Culpan
 

Fanuc Corp.’s investors are a harsh bunch. The Japanese factory automation and robot maker last month lowered its full-year operating income forecast by 24 per cent because of a sharp slowdown in China and high inventories that could linger into next year. Its shares were quickly dumped and have continued to slide. But a turnaround could be in sight if it embraces new markets and is ready to take advantage of a rebound in the US.
 

The news of a cut in outlook ought not to have been a surprise. China’s electric vehicle market is struggling with oversupply and a brutal price war, the global electronics sector has looked weak since the start of the year, and US manufacturing is in the doldrums. 

India is looking hot, though. Revenue growth at its wholly owned Fanuc India Private Ltd. doubled over the past two years, according to data filed with the Ministry of Corporate Affairs. By contrast, Fanuc’s global sales climbed 16 per cent while China revenue expanded 8 per cent. Those figures were boosted by a slide in the yen; in US dollar terms revenue dropped for the period.

While coming from a small base, and accounting for a low single-digit percentage of total sales, the world’s most-populous nation shows promise with its burgeoning industrial sector that includes autos, electronics, and aerospace. “We are fully convinced that India will eventually become the most important market next to China,” Fanuc said in April.

Tata Motors Ltd., Mahindra & Mahindra Ltd. and Ola Electric are among those moving quickly to ramp up EV output in the South Asian nation, which by one estimate is the fastest-growing market in the world. Meanwhile, Apple Inc. — with its supply-chain partners including Foxconn Technology Group and Pegatron Corp. — is also boosting output in the country and the next iPhone is already in production ahead of a September launch. 

Prime Minister Narendra Modi’s Make in India strategy, and the government’s Production-Linked Incentive program are part of the impetus for autos, joined by the EV-specific “Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India” scheme (FAME India). 

Yet a key challenge for Fanuc is the extreme price sensitivity among local buyers, who tend to focus initial investment on cheaper robots and automated machines. Eventually, those manufacturers will upgrade to better equipment, which may be an opportunity for the Japanese supplier to step in and sell its more expensive alternatives.

Any rebound will still need to include China. The factory to the world accounted for 29 per cent of revenue last year, with the US its second-largest market at 19 per cent. A boom in demand, especially from makers of EV batteries, meant a rush of orders. But that’s now passed and suppliers like Fanuc are left dealing with the hangover. It’s also caught by a wait-and-see attitude by factory managers unclear about China’s outlook for both exports and domestic demand.

Back in April, Fanuc, like the rest of the world, was hopeful that some kind of fiscal pump priming by Beijing would get the industrial sector back on track. “If an economic stimulus package is issued in China… there is a possibility that demands may double or increase even more,” it said at the time. It’s increasingly unlikely that such spending will be forthcoming. Now the company is sitting on record high inventories across China, the US and Japan with few signs of growth in any of these places. 

While it waits for India’s rise and a recovery in China, Fanuc is also relying on a rebound in the US, which may come sooner. In July, a key predictor of equipment purchases, the US Institute for Supply Management New Orders Index, logged an 11th consecutive month of contraction, though the figure was better than June. 

“Declines in Japanese machine tool orders, which correlate with the US ISM new orders index, may start to level off,” Bloomberg Intelligence analysts Takeshi Kitauru and Ian Ma wrote on Aug. 14. This early indictor of an improvement is “a good sign for Japan machinery firms.”

For US manufacturers to be confident enough to increase their spending on equipment, they’ll need clearer signs that the economy is on the rebound and borrowing costs are falling, or at least not rising. With US inflation easing, economists are increasingly predicting that the first US Federal Reserve rate cut will come within a year. But such a move could be taken either way: proof that consumer prices are stable, or that financial markets are shaky enough to warrant the action. 

There’s not a lot Fanuc can do as it waits for a Chinese stimulus that might never come, an Indian ascendency whose timing is unclear, and a US rebound that may be in the hands of a few Fed policymakers. The road to investor redemption may be long and bumpy, but it’s path is known.

Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper