China accounts for about 30 percent of Fanuc’s consolidated revenue. Destocking in China has been slower than expected, and demand for equipment investment has slowed. Consumption of mobile phones and other goods is sluggish, and sales of processing machines are also sluggish…

Fanuc said on July 28 that it expects its consolidated net profit for fiscal year 2023 (ending March 2024) to fall 34% year-on-year to 113.1 billion yen. That was 24 billion yen lower than the previous forecast. The Chinese economy is slowing down, the demand for equipment investment is slowing down, and the factory automation (FA) sector, which is the main force, will slow down. Consumption of goods such as smartphones is weak, and sales of processing machines are sluggish. Fanuc’s margins are also set to deteriorate as its main cash cow underperforms.

Operating income is expected to fall 12 per cent to 750.3 billion yen, while operating profit is expected to fall 38 per cent to 118.3 billion yen. It is lower than the previous forecast by 69.2 billion yen and 38 billion yen respectively. It will be the first time in three fiscal years that the final profit decline.

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The main reason was the economic slowdown in China, which accounted for about 30 percent of consolidated operating income. The manufacturing purchasing managers’ index has been below the 50-point line that separates expansion from contraction for four consecutive months, according to the National Bureau of Statistics. The factory operating rate also fell to 74.5 percent from April to June, which is lower than the recent peak of 78.4 percent in the same period of 2021.

Fanuc’s overall order book from April to June was 177.3 billion yen, down 14% from the previous quarter. Depending on the product, order volume is seen as a leading indicator of performance after half a year. The Americas saw a decline of 24 per cent, Japan 7 per cent and China 41 per cent.

Initially, there was a view that orders would bottom out in January-March 2023, but destocking in China has been slower than expected. Fanuc President Kenji Yamaguchi said at the earnings briefing on the same day, “Due to supply chain chaos, inventory has increased to unprecedented levels, but actual demand has not increased.” “(Orders will resume) after 2024.”

By sector, factory automation units such as numerical control (NC) devices, which are the brains of machine tools, saw an 11 percent increase in orders, but the recovery was slow. Fanuc does not disclose the profits of each division, but there are views in the market that the division has relatively high margins. Its Robodrill unit, which is used to manufacture smart phone cases, was cut by 20 percent.

The robotics division also decreased by 26 percent. In the context of increased global pure electric vehicle (EV) production capacity, the demand for robots used in manufacturing processes has increased. Yamaguchi said, The investment in capacity enhancement is over, adding, If the operating rate of future facilities increases, investment is necessary.

The operating margin for the full year was 16 percent, down nearly 7 percentage points from the previous fiscal year. In the past, the high-profit system had a profit margin of more than 40 percent, but there is no improvement in the process of changing the main cash cow from factory automation to robots.

The consolidated financial report from April to June 2023, announced on the same day, showed that operating income decreased by 5% year-on-year to 2017 billion yen, and net profit decreased by 28% to 30.3 billion yen. There is a view in the market that “in order to improve profit margins, it is necessary to increase the market share of robots in the face of fierce competition and create an environment where costs can be easily passed on” (Tomohiko Sano, JP Morgan Securities).