TT-532 -- De-ICEing Tsubakimoto, ebiz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, September 6, 2009 Issue No. 532

+++ INDEX

- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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+++ WHAT'S NEW

Some weeks ago we attended the inauguration ceremony for
the new CEO of Honda, Mr. Takanobu Ito. The room was
surprisingly full, given the state of the auto industry,
with suppliers from all over the country present to pay
their respects to what for many is their biggest customer.
It was an ideal opportunity for us to take the pulse of
players in the industry and speculate about what lies
ahead.

Probably one of the more interesting conversations we had
was with the owner of a second-tier 200-person air filter
manufacturing company located in the middle of Honshu. He
shared with us how he started the business 30 years
earlier and that things are about as bad as they have ever
been. Over the years he has jumped through all sorts of
hoops to make the grade with Honda, even to the extent of
opening multiple overseas factories near Honda
manufacturing centers, so as to ensure quick delivery and
troubleshooting. Each location has required significant
amounts of cash investment, but he believes that if you
do your best you'll get the business.

But despite his obvious dedication to quality, price, and
support, there is one problem that he told us he wasn't
going to be able to overcome, and it wasn't related to
outlasting the current auto industry downturn -- indeed,
he has sufficient capital to see the company through for
several years. No, his biggest challenge is that of the
eventual demise of gasoline-driven Internal Combustion
Engines (ICE) as a means of propulsion for consumer
vehicles. As Electric Vehicles (EVs) like the Mitsubishi
iMiEV roll off the factory lines, his market starts to
disappear.

[Continued below...]

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[...Article continues]

His pessimism surprised us, because while electric vehicles
are definitely going to be part of our future, the rate of
development is being hobbled by battery technology, meaning
that any major shift from ICE to EVs is at least five years
away and possibly longer. Granted, someone could come up
with a fantastic new battery technology, in which case the
mass conversion to electric could happen, maybe, one year
earlier. But designing cars and building factories is a
slow business, and even an extreme optimist would be
challenged to imagine the ICE market and all its attendant
technologies being replaced in any less than 10 years.

The problem for our gloomy air filter shacho was that: a)
he doesn't need the ICE industry to collapse to fatally
damage his business. A sustained 10%-15% drop would do it
-- because of his razor-thin profit margins. And b) his
firm is too small to simply go out and create something in
a completely new sector, or to buy out someone else who
has a better future. Whatever he is going to try to do
needs to be incremental and related to his team's core
skills.

This is the reality for many second-tier and smaller ICE
parts suppliers. Companies that are threatened in this way
number in the thousands in Japan, especially if you
include the down-lines of subcontractors, and will
constitute a major industrial change. As we think about it,
those likely to be affected will be anyone manufacturing
engine blocks, timing chains, spark plugs, fuel distribution
and pump systems, fuel tanks, clutches, and even steel
body sheets. This list is a pretty broad slice of the auto
making industry.

We started looking at companies that are active in this
space and which would epitomize the challenge, and came up
with one, called Tsubakimoto Chain. We'd never heard of
Tsubakimoto before, but they are the world's largest
supplier of power transmission systems for autos (37% of
the world market). They are a listed company (6371).

This quite massive and market leading company is a prime
candidate for the EV shock which is likely to hit the
auto industry around 2012, after Nissan and Toyota start
producing mainstream, value-priced EVs.

Actually, Tsubakimoto has already been having a hard time
of it recently. The company lost JPY207MM in Q1 (Apr-Jun)
this fiscal year, versus a JPY2.83bn profit for the same
period last year. The company is further projecting a
loss for the Q2 quarter. So it is surprising then, that
the firm feels ambitious enough to announce that it is
building an JPY800m timing chain plant in South Korea to
supply Hyundai Motor. We understand they're on a global
expansion effort, but if the timing chain market is due to
all but disappear in the next two generations of cars,
we wonder if they wouldn't be better served continuing to
import chains from the Japanese factories.

Anyway, Tsubakimoto appears to us to be a prime candidate
for some preemptive action before EVs become mainstream.
We searched through the company's literature and financial
reports for any hints of new divisions, and to our
surprise found that management is planning to stick pretty
much to the chain making business. True, they have branched
out heavily into conveyor systems for factories, where
their chain systems are highly competitive, and they've
gone international. But in their core market of autos, there
is no sign of any master plan. Accordingly, if we were the
Japanese government (e.g., METI), we'd be out targeting firms
like this and educating them on the technology tsunami that
is about to hit them.

As for our depressed air filter CEO, he shared that he has
told his R&D engineers to start working on ways to take
their air filter technology and use it to make water
filtration products. ICE vehicles may be on the way out,
but he reasons that the clean-up of polluted water and
making fresh water out of saline sources are growth
industries of the future.

We hope he is right, it's a big bet and he was a nice guy.

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+++ NEWS

- FDI plummets 63%
- Alico credit card leaks could be due to internal culprit
- Couple wins major tango competition
- Sampling at LCAFE
- Dainippon to buy Sepracor

-> FDI plummets 63%

The Nikkei says that new balance of payments statistics
indicate that foreign direct investment (FDI) into Japan
fell by a massive 63% in the first half of this year.
Purchases of companies, land, and other fixed assets by
foreigners came to JPY1.71trn, about 1/3 of the same
period in 2008. The government's target for FDI is 5% of
GDP by the end of 2010, and at the current level the
amount is 3.6%. ***Ed: As we keep telling local government
heads, they need to set up M&A education centers in their
local cities, so that companies in trouble seek buyers
long BEFORE they have to close their doors. Japanese
company owners may be xenophobic, but having a foreign
owner is infinitely better than having to throw everyone
out on the street because of a bankruptcy.** (Source: TT
commentary from nikkei.co.jp, Sep 5, 2009)

http://www.nni.nikkei.co.jp/e/ac/tnks/Nni20090904D04JFF03.htm

-> Alico credit card leaks could be due to internal culprit

Alico Japan, part of the AIG insurance group, has revealed
that it believe the recent leaking of the credit card and
other details of 130,000 policy holders may be due to
someone inside the company stealing the data and selling it
to organized crime groups, rather than an external hacker
breech. Alico started receiving fraudulent usage claims
from credit card companies in July, and so far about 4,000
illegal transactions have occurred. (Source: TT commentary
from nikkei.co.jp, Sep 4, 2009)

http://www.nni.nikkei.co.jp/e/ac/tnks/Nni20090903D03JFA14.htm

-> Couple wins major tango competition

When the Japanese put their minds to it, there isn't any
human pursuit they can't be best at, be it hamburger eating
world records, the number of contiguous mountain ascents for
a 70-year old, or tango dancing. In the last category, a
Japanese married couple have just taken top honors, to the
surprise of the local contestants, for the 7th World Tango
Championship held in Argentina. The south americans
consider the dance to be their own, and Argentinian
couples have held the world title for years -- until
Saturday, when it was lifted by 33-year old Kyoko and
36-year old Hiroshi Yamao. (Source: TT commentary from
google.com, Sep 2, 2009)

http://tinyurl.com/kqvzhn

-> Sampling at LCAFE

We can't find it referred to in the local press, but
according to inventorspot and several other online reports,
a new cafe is starting a free sampling service at their
stores for qualified customers. Following the footsteps of
Sample Lab! and Club-c, LCAFE allows young women in their
20's and 30's to pre-register by cell phone, then go try
out various cosmetics and other products whenever they
visit the cafe. ***Ed: Dubbed "Tryvertising" by U.S. trend
magazines, the idea is for consumer products makers to
provide the samples free of charge to the desired
demographic (in Japan, usually young and middle-aged women)
and to get their feedback in lieu of conventional market
research.** (Source: inventorspot.com, Sep 5, 2009)

http://tinyurl.com/n395s3

-> Dainippon to buy Sepracor

Prodded by soon-to-expire patents and falling government
reimbursements for drugs at home, the M&A push by
Japanese pharma firms continues. This time it is
conservative Dainippon Sumitomo Pharma, which agreed on
Thursday to buy out Sepracor of the U.S. for US$2.6bn. The
acquisition will give Dainippon a 1,200-person sales
footprint in the key U.S. market. ***Ed: Dainippon will pay
a premium of 27.6% over the previous day's share price --
a much better deal than some of its counterparts who have
made acquisitions over the last 18 months.** (Source: TT
commentary from reuters.com, Sep 3, 2009)

http://tinyurl.com/npjuzk

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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Newsletter:

Comments

I am the Webmaster for the Tsubakimoto Chain Co., and so I read with great interest this week's edition #532 “De-ICEing Tsubakimoto”. You made some interesting comments about the shift from ICE to EVs in relation to my company's product lines. However, our research shows a much more long-term and gradual adoption of EVs. What you left out of your observations is the newest and quickest growing segment, the hybrid (HEV), which is being much more aggressively pursued by every major Japanese auto manufacturer, with the exception of Nissan.

The reality of the situation is that EV batteries require large amounts of expensive and difficult to source metals. The scarcity of these metals will limit the number of EV units that can be produced even in a best case scenario. Barring a heretofore unforeseen revolutionary battery technology being introduced, the EV market will remain relatively small for at least the next 10 years. Our studies predict a 2% market share for EVs by 2020, while autos that use our timing chain drive systems, like HEV, gasoline and diesel engines will still hold over 90% of the market. Your gloomy air filter shacho may be seeing the HEV and EV markets as one market if his company's products are not needed for that category of vehicle. We see the HEV market expanding to over 20% (from a current 2%) by 2020.

HEV models hold a lot of appeal for both users and manufacturers alike. They work with the existing infrastructure of most developed nations and you can drive them much farther than any comparably sized EV. They also use a lot of the same internal parts as their gasoline/diesel models, so parts such as Tsubakimoto's timing chain will still be in demand for years to come.

As for Tsubakimoto Chain, we started out as an industrial roller chain and conveyor chain manufacturer over 90 years ago, so as you noted, we will stick with that business segment. That is our original core business. In addition to chains, Tsubakimoto also makes motors, actuators, gears, clutches, and a number of other power transmission products. Automotive timing drive systems are another core area of our business, but it is a newer business segment for us. Yet another core area of the company is Materials Handling Systems which makes complete factory automation systems. The company does recognize the impact that EVs will have on its timing chain products, but the automotive industry is not the sole industry we deal with.

You mentioned the Japanese government (e.g., METI) educating Tsubakimoto about this technology, but I'm not sure that is really necessary. As a major supplier to the Japanese auto industry, Tsubakimoto works very closely with the manufacturers several years in advance of new models. We are often privy to industry information well in advance of the public, or government. The coming of the HEV and EV models was well known to us, but none of us, the Japanese auto makers included, were expecting the scale of the current economic downturn. If the government could have given us a heads up about that economic tsunami it would have been preferable to them getting after us about this technology of which they themselves may not be as fully aware.

A few years on and we can see that Terrie got this one completely wrong.

Today's headline in the Washington Post,
"Japanese carmakers drop battery electric-car development"
http://www.washingtontimes.com/news/2013/feb/4/goodbye-prius-japan-carma...

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