Insights

The last few decades saw significant shifts in the global production supply chain with production incrementally shifting from developed countries to emerging countries. The driving factor for the shift being lower costs for factors of production. The continued technological advances have brought to fore another trend, one that has the potential to meaningfully affect the global production supply chains; Factory Automation.

Production processes have been increasingly becoming automated and much less reliant on human inputs. The Coronavirus pandemic acted as a shot in the arm and has given rise to the trend of reshoring of production. It is estimated that every dollar of reshored manufacturing revenue requires about $0.10 in additional automation capex. One of the companies owned within the Global Moats Fund, Keyence, is at the forefront of factory automation trends.

Keyence is a dominant player in the sensors and vision space. It has an estimated 30%+ market share in the overall machine vision systems market and a 50%+ market share in 3D machine vision systems. With vision systems and sensors serving as the “brains and eyes” of controllers used in factory automation, Keyence’s products are mission-critical add-ons to other core automation initiatives of its customers. At the same time, these products account for a modest percentage of the customer’s overall spending on automation. In the event of a breakdown of any of Keyence’s products, the company supplies a replacement within the same day. There are four factors that, in our assessment, make Keyence a great business.

Leading innovator. About a quarter of its sales each year are from new products. Importantly, nearly 70% of these new products feature technologies that are considered to be the ‘industry’s first’.

Engineering driven. As against being driven by salespeople who are trying to sell what the company has, Keyence’s sales force of engineers feed information about customer’s processes to the development team and thus aid new product development efforts. One of the primary reasons why Keyence products are at the forefront of the industry’s innovation.

Distinguished culture. As against the highly hierarchical Japanese corporate system, Keyence has an exclusively merit-based system. Keyence’s average compensation per employee ranks the highest of publicly-listed large companies in Japan with a median salary of JPY 21.1 million.

Supernormal profitability. Keyence is one of the most profitable businesses with operating margins in excess of 50%; numbers that will be envy of most software companies. Fabless manufacturing model, highly innovative products, and the reputation of consistent and prompt customer service allow it to charge higher prices for its products compared to its competition. Importantly, its customers are happy to pay those top-dollars.