[Stock Analysis] Nidec (6594) derives its strength from "management capabilities." What is the "unprecedented change" described by the charismatic CEO?
When it comes to Nagamori, chairman of Nidec (6594), he is one of Japan’s most capable executives and a representative figure of Japanese business leadership. He built a world-class motor company from scratch in a single generation. He is also known as a M&A expert, having completed 61 deals to date, steadily expanding the business. In particular, the substantial growth since 2012 is largely attributed to M&A.
Clear M&A policy and emphasis on acquisition pricing
Mr. Nagamori is also famous as a fierce leader. It is said he works 16 hours a day and even personally leads cleaning in the office. He enforces this philosophy among his employees as well.fierce leader
Originally, the company’s mainstay was small motors for HDDs, but now motors are used in a wide range of electronic devices, including smartphones. Nidec’s M&A activities are aimed at expanding its product lineup to meet the growing demand for motors, and tosell in every region of the worldworldwide.Many managers pursue M&A for expansion without a clear objective, but Nidec’s policy is clear, contributing steadily to scale expansion.
Another success factor of M&A isnot overpay. Even if there is a company to buy, they insist on not purchasing if the price cannot be agreed upon.
M&A is often described as the “curse of the winner,”where buying at too high a price leads to failure. Avoiding this is undoubtedly a key factor in success, and it is relevant to stock investment as well.
“Nagamori-ism” is reflected in numbers
Nidec’s strength lies not in acquiring sparkling, pristine companies, but rather inacquiring underperforming companies and turning them around. Such companies usually have little competition in acquisitions and can be bought cheaply.
By introducing“Nagamori-ism” into the acquired companies, thorough cost reduction is achieved. Even companies not previously profitable can generate profits through cost cuts if they have steady sales. By continuing this, Nidec has maintained profits while expanding its scale.
A concrete manifestation of “Nagamori-ism” is seen in selling, general, and administrative expenses.Nidec’s ratio of sales to SG&A expenses is clearly lower than that of comparable companies. This can be attributed to the practice of personally handling tasks such as office cleaning.
However, the operating profit margin is only 11%, not particularly high. This is because Nidec’s management prioritizes scale expansion over achieving high margins,rather than pursuing high profitability.
Nidec’s strengths and risks
From the above, Nidec’s strengths include the following:
- Rigorous cost reduction (the “Nagamori-ism”)
- Expansion of product lineup through aggressive M&A
- Geographic expansion via M&A
- Introduction of the “Nagamori-ism” to acquired companies at favorable prices
All of these lead back tothe managerial power of Chairman Nagamori. It is because of this that what started as a small hardware company grew into a global manufacturer.
That is wonderful, but I do not think this means the future is guaranteed to be solid.
Because it prioritizes scale,there appears to be a lack of outstanding technical capabilities. I am not a technical expert, so I cannot be precise, but it is suggested by indicators such as profit margins.
If so, then a risk is the “post-Nagamori” era. If Nagamori leaves for some reason without overwhelming technical prowess, costs consciousness may weaken, and the company might start acquiring at prices it previously avoided.
If the sales-to-SG&A ratio rose to 16%, comparable to Mabuchi Motor, operating margin could drop to 7%. And if a Chinese company launches a price war,profits could be eroded quickly, and market share could be lost.
Even Nagamori will be 75 this year. He still seems vigorous, butthe risk of leadership transitionshould always be kept in mind.
Unprecedented changes occurred
Such a legendary leader like Nagamori stated at a press conference, “(in November-December 2018) orders on a global basis for all segments dropped unexpectedly,”“unprecedented changes occurred in all segments worldwide”. After 46 years in management, he said it was the first time such a drop occurred on a month-by-month basis.
A sharp, capable executive like this cannot be ignored.This should be reflected in the outlook for the economy going forward.
