Financial Services Association, March 20 (Editor Liu Rui) As Japanese stocks continue to hit new highs recently, the Japanese stock “Seven Samurai” has also begun to enter the eyes of more and more investors. The Japanese stock “Seven Samurai” is similar to the US stock “Big Seven”. It refers to the seven giant companies that have led the recent rise in Japanese stocks.

However, in the “Seven Samurai” list, compared to many well-known Chinese names such as SoftBank, Sony, Nintendo, and Toyota, having such a company is an unfamiliar name for the vast majority of domestic investors —$Keyence (6861.JP)$.

Although many people haven't heard of it, Jienshi is currently the fifth largest company by market capitalization in Japan, with a market capitalization of 114.13 billion US dollars (approximately RMB 821.6 billion), which is higher than many well-known Japanese companies such as Sony, Mitsubishi Corporation, SoftBank, Nintendo, and Express Sales.

What's even more surprising is that the company's stock price has continued to rise steadily in recent years, and has risen more than ten times since 2013, so it can be called an “invisible dragon.”

What is the origin of this company? Also, what made its stock price continue to be bullish, so that it became the fifth largest Japanese company by market capitalization?

The “invisible champion” with a high operating profit margin

KEYENCE is an established Japanese manufacturing company founded in 1974. Its name Keyence comes from “Key of Science”. The company's main products include factory automation equipment such as sensors, vision systems, code scanners, laser marking machines, measuring instruments, digital microscopes, etc. Among them, it can be called an ace company in terms of sensors and vision systems.

Although it is not well known to the public, in fact, Jienshi has more than 300,000 global customers, covering giants in almost all industries around the world.

Whether it's Boeing in the aerospace industry, Samsung and TSMC in the semiconductor industry, or Japan's Toyota or General Motors in the automotive industry, you can see Jienshi products in their factories.

Although in the impression of many people, the technological threshold for automation equipment such as sensors and marking machines is not very high, and the profit margin is not very rich, Jienshi is a notable exception: in fiscal year 2023, the company's operating profit margin was as high as 54.08%, while the figure for FY2022 was 55.3%.

In fact, in the past ten years, the company's operating profit margin has hardly been less than 50%. Longer, since 2000, Jienshi's operating profit margin has not fallen below 40%.

In contrast, Bank of Japan data shows that the overall average operating profit margin of large Japanese manufacturing companies in recent years is only about 7%, and when it reaches a level of slightly over 10% in 2023, it is already at an all-time high.

Even Fanuc, the industrial robot giant with the second-highest operating margin in the industry, has an operating profit margin of only around 26%. Meanwhile, Kyoto-based competitor Omron, which has the closest product portfolio to Jienz, had an operating profit margin of only 9%.

As a large company, how did Jienshi achieve such a high profit margin?

The company's founder Takizaki Takimitsu's management secret is “doing subtraction.”

Step 1: Minus Dealers

Takemitsu Takizaki was born in 1945. When he founded the company in the 1970s, he boldly adopted a novel business model — direct sales.

Instead of going through agents, Keynes lets the company's business personnel sell directly to the factory. The benefit of this model is not only that it saves dealer costs, but more importantly, it allows the company's sales to directly communicate with customers, so as to more keenly and quickly understand user needs, put forward suggestions and solutions, and help customers solve problems. At the same time, it can also discover potential needs and promote the upgrading of the company's products.

Under this model, the ability of the company's sales staff is extremely high. There is even an opinion in the industry that the experience of working for two years at Jienshi is better than spending 10 years at other companies.

Jienshi sales staff can almost reach the level of engineers. At the same time, they need to frequently visit tens of thousands of customers' enterprise sites, not only to recommend the most suitable products to customers, but also to obtain extensive demand information and propose solutions from many customers — when necessary, these sales staff will even work at the customer's factory for a period of time to understand customer needs.

What people enjoy most is the KEYENCE “Demand Card”: the sales team at KEYENCE will use the “Demand Card” to specifically record the customer's unmet needs, and then propose solutions to the customer's needs — more than 1,000 such demand cards can be collected every month.

To paraphrase a comment from the Japanese media: “The level of understanding of customer needs and pain points far exceeds that of other rivals in the industry, and even surpasses that of customers themselves.”

Step 2: Subtract the factory

Jienshi uses a “fabless model” (Fabless) for production, that is, 90% of orders are handed over to foundries. Their own factory only produces 10% of orders — this part of the order is usually an innovative product.

This method can not only save fixed costs, but also flexibly adjust production capacity, select factory production with the most suitable equipment and technology according to product characteristics, or increase or decrease orders to foundries according to product supply and demand conditions.

According to industry sources, in order to reduce OEM costs, Jienshi also often allows multiple suppliers to produce the same parts, which makes it impossible for a single supplier to raise prices because they are worried that orders will be taken away by competitors.

Furthermore, it also allows the company to focus on improving design and product innovation to obtain higher product added value — in this respect, Jienshi's business philosophy is quite similar to Apple's.

Since there are no restrictions on factory equipment and labor costs, and first-hand information on the needs of downstream customers, Jienshi can efficiently innovate products to meet downstream needs: more than 70% of the company's products are world firsts or industry firsts, and as a result, Jienshi has become a regular customer on the “Forbes” list of the top 100 innovative companies in the world.

For example, in 2000, Jienshi developed the world's first microscope with a digital focus function; in 2006, it invented the world's first 3D laser printer; in 2007, it launched the world's first CMOS laser sensor, etc.

At the entrance of Jienshi's headquarters in Japan, a 350,000-year-old chrysanthemum fossil is displayed, and other biological fossils that have long died are also placed in the company's hallways and conference rooms. These artifacts all convey the core of the company's corporate culture: if you don't innovate, the company will go to a dead end.

Osaka University professor Nobeoka Kentaro commented in his book “Keyence's High Value-Added Management” that the “factory-free model” is a major measure to “increase maximum added value with minimal capital and manpower.”

Step 3: Minus underdeveloped businesses with low profits

This is one of the core ideas of the company that founder Takemitsu Takizaki manages.

In fact, when Takemitsu Takizaki started his business in 1974, the predecessor of KEYENCE at the time, Lead Electric, was a company that manufactured automatic wire cutting equipment. However, the company started later because Takizaki Takemitsu made a pressure sensor that was tailor-made at the time to deal with Toyota's frequent breakage problems when compressing metal molds. As this sensor later received great acclaim in the market, it also rapidly expanded the size of the company.

At this point when the company expanded, Takemitsu Takizaki immediately decided to sell the factory that originally produced automatic wire cutting machines. Although the automatic wire cutting machine business still contributed 20% of the company's profit at the time, its profit margin was far lower than the sensor business, so Takemitsu Takizaki resolutely chose to endure pain and give up.

In the decades since then, Jienshi has adhered to this business philosophy of only doing high-end production lines. However, ensuring that the product's positioning is advanced and that it can solve users' pain points is the focus of guaranteeing the company's product pricing rights and profit margins.

Although Jienshi currently has a broad product line, almost all of its products are at the cutting edge of key trends in factory automation, such as sensors that can detect extremely small assembly line errors. Morten Paulson, head of research in Japan at Lyon Securities, said that customers such as the Jienz automaker (automakers account for about 25% of its sales) are happy to spend a high price on Jienz products because these products can pay for themselves within two years.

Jienshi executives have previously raised similar views in interviews:

“The reason for achieving high profitability is to maximize customer evaluations of high value-added products — that is, for customers, 'I don't think it's expensive' and 'if it solves the problem, I think it's cheap. '”

Super-paid treatment and ultra-high-intensity work

Under the requirements of the above business philosophy, Jienshi is extremely demanding on the abilities of its engineers and sales teams. As a result, the other two labels that are often mentioned by the outside world are “high-paying treatment” and “high-intensity work.”

According to Japanese media reports, Jienshi has been one of the highest paid companies in Japan for the past 30 years: the company's average annual salary in fiscal year 2023 was over 22 million yen (about 1.04 million yuan at the latest exchange rate), which is not only 4 times the average employee salary in Japan, but even exceeds the salary level of employees in some financial institutions.

But at the same time, Jienshi is also the most stressed company in Japan. The average age of its employees is 35.9, far below the median age of 49 in Japan, and 996 is operating normally every day — however, under the temptation of high salaries, there are still countless young people submitting job applications to Jienshi every year: the Jienshi headquarters only recruits 200 people a year, but it usually receives more than 50,000 job applications.

During the COVID-19 pandemic in 2021, as companies' demand for factory automation soared, Jienshi's stock price also soared rapidly.

Coinciding with the stock price of Uniqlo's parent company Express Sales falling due to falling demand for products during the pandemic, SoftBank's market capitalization also declined due to losses in investing in Wework and other projects. The personal assets of the founders of both companies, Tadashi Yanai and Masayoshi Sun, have shrunk, and Takemitsu Takizaki, founder of Jiens, once became the richest man in Japan.

Despite the overall decline in the industrial automation industry in the past two years due to global macroeconomic headwinds, Jienshi is still a well-deserved leader in the industry, and its stock price has continued to rise for nearly half a year, returning to a record high.

Takizaki Takemitsu, who is nearly 79 years old, still occupies the third place in the Forbes list of Japan's richest people.

Editor/Somer