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Diversifying for society’s needs

Interview - October 4, 2022

The hydraulics company is shifting its business model to respond to globalization, digitalization and sustainability trends.

HIDEHARU NAGAHISA, PRESIDENT OF YUKEN KOGYO CO.
HIDEHARU NAGAHISA | PRESIDENT OF YUKEN KOGYO CO.

In the past 25 years, Japan has seen the rise of regional manufacturing competitors who have replicated the Japanese monozukuri process, but at a cheaper labor cost. This has resulted in Japanese firms being pushed out of mass industrial markets. However, Japanese firms still maintain large global market shares in niche B2B fields. How have Japanese firms been able to maintain these large global market shares despite the stiff regional price competition?

To answer your question, we need to look at the structure of Japanese manufacturing. Japanese manufacturing has a pyramid structure. The major companies sell the final products, however the provision and supply of those products are done by Tier 1 manufacturers, such as our company. Tier 2 companies or subcontractors, supply the goods to us as a Tier 1 manufacturer. This structure has existed in Japan for many years, and has been applied to the automotive industry as well as the tool and machinery industries. In this pyramid structure, manufacturing companies have tried to improve the techniques of monozukuri over the years. This does not equate to large investments in capable machines. Rather, it is the Japanese characteristics of perseverance and hard-work in meeting the high demands of the major companies, combined with our constant efforts to improve our technologies, that have allowed us to maintain our high international competitive advantage. A second reason which allows us to maintain our position is that, in Japan, the technology, development and manufacturing sectors are closely linked.

Another characteristic of Japanese companies is that we take good care of our employees. In many Western countries, companies are working for the benefit of their shareholders. In Japan however, the companies exist for their employees and are considered as public institutions, which is why employees contribute so much to their company. Lifetime employment and a seniority system are also incentives for employees. It is these factors combined and accumulated over the years which have allowed us to maintain high quality manufacturing standards. 

That was a successful model until a few years ago. With the acceleration of globalization and digitalization over the past 20 – 30 years, there have been many changes in the manufacturing industry. These changes occurred very quickly and were difficult to keep up with. In Japan, we strive for constant improvement, but we have been slow at catching up to changes in demand. That was why we began to lose our competitive advantages. Japanese products also adhere to one of the strictest quality criteria in the world. I believe that we focused too much on this high quality, and as a result, Japanese companies lost their competitive advantages due to the cost competitiveness of the industry.

To address these challenges and find success in such a highly competitive market, we need to adapt to the globalization and digitalization of the industry. Also, we as a Tier 1 manufacturer must improve our unique technologies in niche markets. That is very important for us.

As you have mentioned, the assemblies of smart phones, PCs and many other consumer electronic products have moved to East Asian countries, with the planning and design being done in Western countries. However, Japan is maintaining its competitive advantage in terms of raw materials and industrial equipment. We can demonstrate our values in those fields, and we want to provide the unique core parts in the manufacturing sector. 

In recent years, we have had a sales increase in the domestic market. However, the Japanese economy did not mature, which made it difficult for further domestic sales growth. This has led to the expansion of our business overseas. Currently our overseas sales account for 60% of our total revenue. However, the rise of South Asian countries, and also China and Taiwan, has increased the price competition. That has made it difficult to maintain a profit in Asia, so we are now revising our mid-term business plan. We are planning to walk away from the price competition and put more value on quality, rather than volume. We have factories overseas in India, Taiwan and China, and we are improving the quality of our products there. Our brand capability has also improved, and this allows us to sell our products at higher prices.

Some Japanese manufacturing companies are successful as niche companies in the global market, but there are no commonalities among them. It depends on the industry and the specific products they make. In our case, we have customized our products according to our customers’ requests. In fact, 90% of our valve and pump products are customized units. We have accumulated knowledge and expertise by customizing our products to our customers’ needs, which makes it difficult for them to switch from us to our competitors. We also do not only sell single unit products. We try to combine them into a system or module which adds higher value.

Some of our customers can be very demanding, and in some cases, those demands can be difficult for us. However, we always say to our sales team, “Never say no to customers.” We try to develop the products together with our customers, so they can evaluate both our attitude and our technologies.

 

Japanese firms take advantage of collaboration and partnerships with other firms to create unique technologies that can penetrate new markets. Can you tell us about the role that collaboration and partnerships play in your business model? Are you actively looking for partnerships in overseas markets?

Our company deals primarily with oil hydraulic products. That has been our philosophy since our company was founded. However, we must respond to globalization, digitalization and energy saving requests. Our core business is still hydraulic products, but it is difficult to grow further as a stand-alone Tier 1 company. Therefore, we need to expand our business into other areas, through partnerships or through mergers and acquisitions (M&A). That will be the source of our future growth.

We often receive suggestions for overseas partnership, and we are proactively considering those offers. For example, we are considering entering the mobile market in India. We are also considering expanding our business into the aerospace industry, as well as the water hydraulic business and hydraulic robot industries. It can be difficult to create synergy between companies in the same sector, however, it is possible for companies in different sectors to create synergy. That is our vision. 



Our company possesses the machines that can crush PET bottles and other materials that can be recycled. Also at our plant, we combine and solidify metal scraps, which we then compress to get oil from. We sell those products as well. Japan’s market is limited however, and there are bigger markets overseas, such as in China and India. We have plants and manufacturing bases in those places and we would like to further expand our environmental equipment business overseas. This is part of our strategy for growing our business.

 

It is clear that R&D plays a major role in your business. Can you tell us more about your R&D strategy? Are there any products that you are currently working on that you would like to showcase to our international readers?

Customization is key to our R&D strategy. As I mentioned earlier, we customize our products to meet the specific needs of our customers. However, we need to respond to globalization and digitalization trends as well. We are therefore gradually shifting our strategy to proposal-based sales. Decarbonization is a key global trend for the future, so more energy saving products are in demand. We are shifting our energy strategy to more environmentally friendly products. Our hydraulic products can make a contribution to wind power generation, as wind power generators use a hydraulic system. We are looking to make a direct contribution to this field. Another example is society’s shift to electronic vehicles (EVs). The EV body materials are diversified, so we are responding to this trend too. There are many opportunities for us to explore. Our mid-term strategy started in April of this year, and over the next three years, we are going to increase our development budget by 20 – 30%.

Another trend that we would like to focus on is IoT and AI. The machine breakdown prediction diagnostics is an area of the market that is available to us, as servo valves are used for those processes. We can therefore make a contribution to this market. There is also equipment, such as amplifiers with communication machines, which combines conventional technology with new technologies. This is an area that interests us, however for this, we will need to form a partnership to make it happen.

 

You opened your first overseas subsidiary in Taiwan in 1969. Since then, you have expanded to India, the UK, China, Hong Kong, and most recently, the United States in 2019. Moving forward, what other countries and regions have you identified for further expansion into?

We are a SME company, so we cannot over expand our global business. Instead, we want to deep-dive into already penetrated markets. We have just entered the North American market, so we need to expand our business there. We need to increase our sales in that market, and we also need to build better structures for further expansion. In North America, there are three major hydraulic manufacturing companies. We do not want to compete with them, rather, we want to enter niche fields where there are no major players operating. For example, the fields of forestry and construction machinery are areas that we would like to expand into.

We have developed our Chinese market to some extent; however, we need to think about the geopolitical risks of that region. Therefore, we are considering shifting our focus to India. We established our local foundation in India 50 years ago. At first, we did not put too much focus there, but now the Indian market is growing. We would like to invest more, both financially and in terms of human resources. Through Yuken India, our local entity, we want to incorporate the market demand there further. In regards to our global supply chain, India and North America are very important, so our strategy is to maintain our focus and expand our growth in these regions. We also want to develop our sales in Southeast Asia. We currently have an establishment in Thailand, but we would like to expand our business into other Southeast Asian countries too.

 

Imagine we come back seven years from now and have this interview all over again: what would you like to tell us? What are your dreams for this company and what goals would you like to have accomplished by then?

The board of directors have been discussing Yuken’s long-term vision for over a year. Our conclusion is that we want to become a truly authentic global manufacturer which specializes in hydraulic products. As I discussed earlier, I like to value quality rather than volume. We would also like to use our high technological capabilities to contribute to global society. To make this happen, we need to develop sophisticated headquarters functions, so that our headquarters can control our different operations around the world. To achieve this, we need to develop our people, so that they can provide high quality global functions, which will allow us to sell the same quality products around the world. We would also like to improve our brand capability. We do not want to be acquired by other major companies. We want to remain a stand-alone company. Our size is small, but we possess high brand capabilities. Finally, we want to improve our profitability, which will in-turn improve our corporate value. Those are our goals for the future.

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