Back in 2001, Komatsu (KMTUY), the world's largest construction equipment maker after Caterpillar (CAT), began putting a global positioning system into every dump truck, excavator, and bulldozer it sold. The technology, dubbed Komtrax, lets Komatsu track where its heavy machinery is anywhere in the world. It also records how much fuel every vehicle consumes and the amount of strain on the most heavily used weight-bearing parts.
Komatsu originally wanted to monitor its leased equipment and prevent theft, but the data proved useful in unexpected ways. These days the company relies on Komtrax to figure out how much wear and tear its machinery is getting and when it should dispatch staff to perform maintenance for customers. That record is good to have when calculating the resale value of vehicles that get traded in. But Komtrax's biggest benefit is the real-time snapshot it provides of construction activity in every country where Komatsu does business.
Komatsu's top brass can now react to market shifts as they're happening, rather than waiting weeks to see industry statistics. "If mines and construction sites are operating the equipment full-time, we know there's a chance that market demand will go up and we can order our factories to ramp up production," says Komatsu spokeswoman Natsuko Usami. "We can also pass on the information to our parts suppliers so they benefit, too."
The China Factor
So far, Komatsu has shipped 144,000 Komtrax devices in new equipment and as add-ons to older machinery. The technology partly explains why the Japanese manufacturer has avoided losses despite the freeze on building and mining projects globally and the erosion of overseas earnings from the strong yen. In its fiscal first quarter ended in June, the company's operating profit plunged 90%, to $91.2 million, from the April-June period last year, and revenues dropped 47%, to $3.5 billion. The company forecasts that global demand in construction machinery will fall by a third this year. That drop will likely push operating profit 53% lower, to $800 million, and revenues down 24%, to $17 billion, for this fiscal year, which ends in March 2010.
Komatsu's resilience is behind its rise to 25th in consulting firm A.T. Kearney's annual Global Champions ranking for 2009. Some analysts expect Komatsu's outlook to improve soon. In a Sept. 14 report to investors, Credit Suisse analyst Shinji Kuroda predicted that Komatsu will raise its full-year earnings forecast when it reveals quarterly results in late October.
One reason for the optimism: China. Thanks to Beijing's $585 billion stimulus spending, China is enjoying a building recovery. In the latest quarter, China was Komatsu's biggest market, accounting for 20% of global revenues and surpassing Japan in sales for the first time.
In recent years, Komatsu's focus has been on what it calls "Greater Asia"—Asia, Japan, Russia, and the Middle East. Those markets, plus Africa, currently account for nearly two-thirds of the company's revenues, and will likely lead a rebound in construction activity later this year, analysts say.
playing up fuel-saving features
Komatsu President Kunio Noji is taking action even before the outlook brightens. He is reducing costs by making fewer models and shutting some factories in Japan and the U.S. To position the company for an expected rebound in demand in Eastern Europe, Asia, and the Middle East, Noji has plans for a new factory to make 20-ton excavators in the western Russian city of Yaroslavl. The plant is slated to open next June. Meanwhile, the company has been whittling inventories to improve cash flow. By early October it aims to have 9,000 units on hand from 14,500 units at the end of March.
Komatsu knows it can't fight Caterpillar on all fronts. So the company's strategy is to defend its turf in Asia, where its share is larger. Komatsu also has to fend off competition from Japanese rival Hitachi Construction Machinery as well as Asian manufacturers, like China's Sany Heavy and Korea's Hyundai Heavy, that sell their equipment at lower prices.
To distinguish itself and avoid a price war with rivals, Komatsu is playing up the high-tech, money-saving features of its construction machinery. It was the first in the industry to develop diesel-electric hybrid excavators that save on fuel by reusing energy captured when the brake is applied to stop the machine's swiveling arm. Komatsu was also the first to commercialize a fleet of giant, wirelessly controlled, unmanned dump trucks, bulldozers, and shovels that can be monitored remotely and help mining companies trim labor costs. That equipment only accounts for a fraction of sales now, but Komatsu is betting it will bolster the company's reputation as the most innovative in the industry.