After 42 years at the world's second-largest maker of construction equipment, what Komatsu President Masahiro Sakane doesn't know about dump trucks, excavators, and bulldozers probably isn't worth knowing. Despite that nuts-and-bolts knowhow, it's Komatsu's sky-high profits that are winning the 64-year-old plaudits from shareholders. After posting a net loss of $710 million in 2002, his outfit's earnings have risen rapidly.
Komatsu has managed to hitch its fortunes to China's surging growth engine -- and recover 70% of its investment there -- at the same time it nurtures its existing business in mature markets such as the U.S.
The company now expects operating margins in its core construction and mining equipment division to reach 9.7% -- on a par with rival Caterpillar (CAT ). BusinessWeek Tokyo correspondent Ian Rowley spoke recently with Sakane about Komatsu's growth plans. Edited excerpts of their conversation follow.
How important are emerging markets in Asia?
While we are worldwide No. 2 behind Caterpillar, we have the No. 1 market share Asia. This is our strength. Demand in the region increased 2.4 times between 2001 and 2005 and our market share has grown.
What about your business in mainland China?
China is also doing much better than we expected. In April, the Chinese government said it would restrict growth in four sectors -- real estate, steel, cement, and aluminum -- which all relate to our business. I expected business to be affected for 12 or 18 months, but 6 months later it's already rebounded. Now, I believe the annual growth rate of our business in China will be 50%-60% until 2007.
How are you coping with emerging market risk?
Certainly there are risks and the biggest risks are in China because of the [potentially unstable] political regime. However, we're not manufacturing key components there, and we've also already recovered 70% of our investment in China. In that sense, I wouldn't think it's a major risk.
How does China stack up against the U.S.?
It's often said that we're solely benefiting from our China business but it's not really true. China was only 4% of sales last year. Brazil, Russia, India, and China plus South Africa [or BRICS markets] account for 11% of our total business in the construction-and-mining equipment segment. That is smaller than the U.S, which is 20% of our sales. However, that suggests to me that the BRICS markets have a lot more potential. I think they will be bigger than the US by 2010.
How do you measure productivity in China?
We're installing GPS [global positioning systems] on machines sold in China. Now we can monitor how many hours each machine is working. When the Chinese government made announcements affecting the economy, we decided to close a plant in China for three months. Other manufacturers all increased their inventories [relative to Komatsu]. Because of the inevitable cyclical factors in our industry, we have to try to understand movements faster than our competitors. Another benefit is that if a customer doesn't pay on time...we can disable the machines remotely. Now, almost everyone pays.
How are higher oil prices affecting Komatsu?
We tend to do well when the oil price rises. That's because countries with natural resources gain foreign currency and they then invest in road construction, irrigation, and other infrastructure.
Can Komatsu overtake Caterpillar?
I would like to catch up with Caterpillar businesswise and sizewise. However, they're currently 1.7 times our size, and that's a big difference.