At the biennial Japan International Machine Tool Fair, manufacturers show off the equipment that makes up the guts of the industrial economy. During this year's show, which ended on Nov. 2, more than 800 companies displayed tools such as a box the size of a minivan that sculpts titanium for jet engines, a lathe that carves copper wire into microscopic pins used to test chip circuitry, and a milling machine that turns stainless steel into iPhone cases.
The tools were dizzyingly diverse, yet many had one thing in common: Their brains—the computers that control them—come from a secretive maker of robots and industrial automation gear named Fanuc. Researcher Arc Advisory Group estimates that some 60 percent of the world's precision machine tools use Fanuc's controls, which give lathes, grinders, and milling machines the agility to turn metal into just about any manufactured product. Fanuc's equipment "is so user-friendly. I love it," says Jared Moschkau, a Boeing (BA) machinist who uses a milling machine with Fanuc controls to sculpt 747 parts. "My co-workers all say the same thing."
Fanuc's paying customers—the makers of machine tools themselves—are not so enamored of the company. With its dominant market share, Fanuc charges a premium for its controls, skimming off much of the tool industry's profit. The company posted an operating margin of 44 percent last quarter while many of its customers barely broke even. "They're expensive and have a monopolistic attitude," said Philippe Selot, a salesman with Swiss manufacturer Fritz Studer at the Tokyo fair, displaying a $500,000 grinder used to make anything from gears to hip implants. His company uses Fanuc controls on all its machines. "As a customer, you feel powerless," he says.
Fanuc's headquarters, a sprawling complex in a forest on the slopes of Mount Fuji, looks like something out of a sci-fi flick. Workers in yellow jumpsuits with badges on their shoulders trot among yellow buildings as yellow cars hum along pine-lined roads. Fanuc lore holds that the founder, Seiuemon Inaba, believed yellow "promotes clear thinking." Inside the compound's windowless factories, an army of (yes, yellow) robots works 24/7. "On a factory floor as big as a football field you might see four people. It's basically just robots reproducing themselves," says Morten Paulsen, an analyst at CLSA Asia-Pacific Markets.
Outsiders are rarely allowed inside the facility, and workers not engaged in research are barred from labs. "I can't even get in," quips a board member who asks that his name not be used. Employees say e-mail is banned except on a handful of terminals, and most business is done by phone and fax. "We don't want data going out or viruses coming in," says Kazuaki Shinozuka, one of a swarm of yellow-clad Fanuc salesmen at the machine tool trade show.
The company doesn't have an investor relations department, never meets investors one-on-one, and doesn't have conference calls with analysts. Those who want information must trek to the remote campus, two hours west of Tokyo, where President Yoshiharu Inaba (Seiuemon Inaba's son) takes questions once a quarter. In July, Inaba irked shareholders when he canceled the first-quarter briefing and filed a barebones earnings report that omitted sales breakdowns and data on orders. "Part of our strategy is to make sure we don't give our competitors information," Inaba, in a yellow blazer, explained at the October meeting.
Despite the standoffishness, Fanuc's shares have surged 40 percent this year on expectations of a growing appetite for factory automation in emerging markets. Net profit for the current fiscal year is on track to more than triple to $1.4 billion on sales of $5 billion, about double last year's revenue after a steep fall due to the financial crisis.
Some customers are starting to build their own control systems in an effort to wriggle out of Fanuc's grip, though few have the scale to pay for the necessary research. "It's not at all easy to do your controllers in-house," says Junichiro Shigemizu, a manager for Okamoto Machine Tool Works, which makes tools that sculpt parts for Toyota Motors (TM), Nissan, and Honda (HMC). Though Okamoto this year started to replace Fanuc's controls with its own system in about 30 percent of its machines, Shigemizu says his customers have been wary.
For Fanuc, the bigger challenge comes from rival Siemens (SI). The German controls maker is pushing hard in China. "This is a field we are definitely attacking," says Marc Wucherer, the head of Siemens' factory automation business in the mainland. And China's leading tool maker, Shenyang Machine Tool, in 2004 bought bankrupt German manufacturer Schiess to beef up its technology and is now developing its own controls. Shenyang declined to comment.
Inaba says he's ready for all comers, especially in emerging markets. Fanuc is pressing to get its tools into Chinese technical colleges to win over a new generation of machinists, and it has introduced a line of cheaper products for mainland factories. "We're working harder than ever to penetrate the Chinese and Indian markets," Inaba said at the October analyst meeting. "All of our capacity is running flat out."
The bottom line: With half of the global market for machine tool controllers, Japan's Fanuc can squeeze its clients for hefty profits.