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Morningstar | Fanuc Weathers the Chinese Economic Slowdown with its Wide Moat

As the world’s largest manufacturer of computer numerical control, or CNC, systems and industrial robots, with around 50% and 20% market share, respectively, Fanuc plays a critical role in factory automation for downstream manufacturers, including Tier 1 auto firms such as General Motors and smartphone-makers such as Hon Hai. The company has been focusing on key motion-control technologies and produces most of the core components in the automation space in-house. Over the past 10 years, research and development expense has approximated 4.3% of sales, and spending was as high as JPY 42 billion in 2016, triple that of Kuka and double that of Yaskawa. We believe Fanuc’s advanced technologies and abundant R&D resources have underpinned its leading position, as evidenced by its outstandingly high operating margin of around 35% on average over the past 10 years, and we believe it can maintain its competitive edge for more than 20 years into the future.Despite near-term earnings volatility due to weaker order flow from smartphone manufacturers and a stronger Japanese yen relative to fiscal 2015, our view on Fanuc’s long-term growth story is intact. In China and the United States, the world's two major manufacturing centers, there is significant untapped automation demand. According to the International Federation of Robotics, or IFR, Chinese manufacturers had a robot density of just 68 units per 10,000 employees in 2016, while in the U.S., the number stood at 189. In comparison, front-runner South Korea deploys 631 industrial robots per 10,000 employees, followed by Singapore (488), Germany (309) and Japan (303). We see rising labor costs driving demand for factory automation facilities in China. Meanwhile, the benign macroeconomic environment is expected to encourage manufacturers to expand or upgrade capacity, sparking demand for industrial robots in the U.S.