Kanamoto, the “machinery convenience store” of Japan

From your point of view, could you tell us how you see the Japanese economy up to 2020, and what are the key challenges it will face?

Fiscal revitalization, a central aspect of Abenomics, has been used in past years with a common mistake: once the Japanese economy was placed on a recovery track, the government developed financial revitalization plans that implemented stringent fiscal policies. When these fiscal policies were introduced, they negatively affected the economy’s recovery process. The same mistake should not be repeated. 

Another important issue that must be fixed is the negative interest rates decided by Japan’s Central Bank. The banking sector plays a crucial role in revitalizing the economy. In my personal opinion, the negative rates are a threat to the banks in Japan and should be lifted as early as possible if we want to see money flowing more easily.

Beyond the banking sector, what role does the construction sector play in the economic revitalization that Japan needs?

The Japanese construction sector operates under a two-tier system: super-contractors at the top, and regional contractors forming the lower tier. All the big construction companies usually have their equipment busy in ongoing mega-projects. This is why contractors in the regional areas are critical, because they provide the required flexibility that different kinds of construction projects require. In addition, during times of disaster, regional construction companies play an important role due, again, to their flexibility, and to the fact they are closer to the affected areas. However, even if regional contractors have the required resources, they usually lack the necessary machinery. Machinery and equipment needed at the local sites are normally provided by rental companies.  This is the moment when we, as Kanamoto, enter in the scene.  

Prime Minister Abe announced that Japan will spend 6.2 trillion yen ($61 billion) on infrastructure to help double the number of tourists visiting the country, speed up construction of a magnetic levitation rail line, and aid building projects overseas. The Tokyo Olympics will certainly boost the construction sector too. Beyond Tokyo, where are the regions from which you expect the biggest growth regarding the construction sector? How is Kanamoto working to capitalize on this massive public expenditure?

The investment plan for 2020 will be heavily invested in major projects taking place in Tokyo. Because of the elections, however, politically the government has expressed its ambitions to allocate part of the infrastructure budget to local regions.

Other than these social infrastructure projects in regional areas, by 2020 onwards, there are some important issues that need to be addressed. The most important one is how we will respond to obsolescent infrastructure, especially iron bridges and tunnels that are in great need of maintenance. Large contactors cannot handle these needs alone. Here is where regional contractors’ contribution becomes essential. Regional contractors are Kanamoto’s main customers.

In distant local areas, we have to transport heavy machinery the entire way, traveling long distances and assuming high costs. It would be wiser to have more business offices around the country, not just in the central urban metropolitan areas. The best strategy for machinery providers is to be present in places where maintenance is extensively needed.  At Kanamoto, we want to be perceived as a “machinery convenience store”. Convenience stores are convenient because they are accessible anywhere and you can get what you want without traveling long distances. We apply this idea of convenience to the construction equipment business.  We rent parcels of land, establish small offices, and then allocate our rental equipment.  We believe it is important to remain flexible, to address what needs to be done. Our greatest success is attributed to this convenience and to the flexibility we offer regarding the rental of heavy machinery. We are continuously working to identify which areas have the largest potential, and demands that can be better served. We are always on the move, finding particular rural areas to invest on. Once the demand starts to drop, we decrease our local offices in size, or we simply close them. 

You are not alone in the construction equipment rental business. Some of your competitors are AKTIO Corp., Nishio Rent All Co. or Nikken Corp. Where do you consider your competitive advantages lie? How are you differentiating your services from those of your competition?

Regarding the Japanese business in equipment rental, there are the so-called big four namely AKTIO, KANAMOTO, NISHIO and NIKKEN which account for 33% of the marketplace. The other 67% is composed of multiple small companies (45 mid-size companies make up for 27% and the other 40% is composed of 1950 companies)

Kanamoto’s competitive advantage lies in the fact we are in between. Compared with the 67% of small companies, we are able to offer a larger portfolio of equipment. In addition, our maintenance of the assets used by construction companies is second to none. We repair and maintain our equipment quickly, always keeping it in the best condition. We have a strong belief that we should handle our own maintenance to ensure quality. 

In fact, we regularly replace equipment with more recent models and sell off our older assets. This is another advantage we have over smaller companies. This faster machinery replacement is an investment they cannot afford. Our equipment is newer and in better condition compared with our competitors. We replace, sell and export our older machinery to overseas regions such as Africa. Because of our excellent maintenance services, the prices we receive on our used equipment are normally higher than prices on comparable units.

Kanamoto has just approved a new long-term vision under the name of “BULL55” - Build Up a Legendary Leading company plan for the 55th -. This vision takes a future perspective, positioning 2019 as a target year to serve as a guidepost for establishing the Kanamoto brand. What are the main strategies of the vision to build up a legendary company by 2019?

The successful results from all our operations are due mainly to our various M&A. We anticipate more and more companies will work with us through M&A. The equipment rental business in Japan is only 60 years old, and this opens up more opportunities for future consolidations. We are taking advantage of these opportunities.

Mergers and acquisitions are not a common practice in Japan. However, over the past 5 to 6 years, changes in mindset have been ongoing. We do understand the traditional Japanese feelings of loyalty to the company. This is why, at Kanamoto, we respect the original names of the companies we have acquired even if the direct management now comes from Kanamoto. This is how we respect Japanese culture.

In any case, M&A is not a permanent solution for our growth. This is why we strive to expand our operations by continuously evolving concepts from different business sources. We are the first with this business scheme in Hokkaido, but now we have to look towards the future and expand our operations to Kanto and Kyushu. The Japanese economy as a whole has great potential for success.

With Japan’s population shrinking and ageing, Prime Minister Abe proposed last month to raise productivity by 20% at construction sites by employing AI to replace construction machinery with machines that can be operated automatically. He also proposed using drones to carry out surveying at public works sites such as tunnels and bridges. At Kanamoto, you provide the latest information-aided construction-related devices and construction equipment in cooperation with Sooki Co., Ltd., a measuring instruments specialty firm. How important is it for you to remain an innovative company? How are you nurturing a culture of innovation within Kanamoto?

Within our organization there are two functions that boost innovation inside the company: one is the new project division, which works to identify what new products will be required in the marketplace. The second function is related to specific regional demands; this group works to identify the needs of contractors in other areas, including the largest companies. 

When people think about new demands, they typically think these will come from the exact working site. However, our customers usually require a neutral viewpoint from a third party who understands the nature of the jobs required; we will be that source of information and guidance.  We work closely with customers to see what they do and how they do it, and then we can link this to ideas to improve our customer’s efficiency.

Another of Mr. Abe’s main goals is to double foreign investment in Japan from now to 2020. To what extent is Kanamoto interested in being perceived as the construction equipment rental company of choice for foreign construction companies interested in penetrating the Japanese market? What are the values you would like foreign construction companies coming to Japan to associate with Kanamoto?

Kanamoto has ties with Singapore, Hong Kong, Thailand, and many European countries, but not with many American businesses. There have been some inquiries from the military bases in Japan, but we have not had much experience working with American companies over the past years.  It seems that language could be a barrier.  On the other hand, the Japanese government has set a limit on foreign workers. Visas are not easy to acquire, and the barrier is high. 

We joined the American Rental Association a long time ago, when the construction rental business lagged in Japan.  There was a need for us to learn about business operations and how this business could be handled.  The association accepted me as a foreign member, and helped me acquire greater knowledge in this business segment. Most of Kanamoto’s strategies come from America. Compared with the US, in Japan ownership of equipment by rental companies is higher than by construction companies.  There is a great potential in Asia, which is why we have established joint ventures with other Asian countries. Finally, we sell used equipment with the Kanamoto logo, so our company has high name recognition in Asian countries and with local partners.  This allows us to enhance our brand before launching joint ventures. When we decide to do a joint venture, the process is smoother because local partners already know us.

In 2003, Kanamoto was honored with the IR Excellent Firm Award from the Japan Association for Individual Investors (JAII), becoming the fourth company to receive the award. Taking into account that more than 31.7% of all Japanese stocks are in foreign hands, to what extent are you interested in attracting some of these foreigners to invest in Kanamoto?

There will be fluctuations, but Japan’s economy will probably remain more or less the same. However, purchasing or buying companies in Japan requires expert local knowledge, which can be found in Japanese management but rarely in foreign management. This is probably the biggest barrier for foreign investors with interest in the Japanese market.

In the case of Kanamoto, foreign shareholders hold 27% of our shares, which gives us a great opportunity to hear global opinions from different perspectives. We are looking forward to increasing this percentage.