Globalization of Komatsu Digging Out of Trouble

Globalization of Komatsu: Digging Out of Trouble

Company Profile

Komatsu is one of Japans multinational corporations with a successful background in the manufacture of mining, construction and military equipments. The company also manufactures industrial equipments including lasers, press machines and thermo-electric generators (Haddock, 2007). Its origins were rooted in a Takeuchi Mining Company, which was founded in 1894. During one of the major expansions in 1917, Komatsu Iron was established in Japan with the aim of manufacturing machine tools and mining equipments. Komatsu Company comes into existence as Komatsu Ltd, an independent company in 1921 when the Iron Works decided to separate from the mining company and focus on autonomous contracts (Haddock, 2007). Despite its name, the company has been producing a lineup of heavy machinery. The headquarters of Komatsu is in Tokyo, Japan. It is rated the second largest producer of mining and construction equipments in the contemporary world after Caterpillar.

During the Second World War, the company expanded their focus into military equipments and agricultural machinery to their common products (Haddock, 2007). The company was established with a focus on quality evident in their continued introduction of new technologies in the aspect of manufacturing. Japan later focused into restructuring its industries after the war such as mining, manufacturing and construction. The country managed to surpass the pre-war economic status a few years later. Komatsu is one of the major companies that benefited significantly from the local economic growth (Haddock, 2007). Komatsu has also been involved in other businesses such as transportation, housing and logistics equipments. The company global operations spans in four continents.

In 1963, the government of Japan decided to focus on foreign investors by opening doors for them to access the local industry, especially on earth moving equipments (Haslam et al, 2000). This is when competitive companies found their way into the Japanese market including Caterpillar. It had to do so through a joint venture with Mitsubishi, local brand. Such a strong venture improved the quality standards in the global market making Komatsu company fight competitively for its position. However, the company experienced a strong approach to push for the best and through the slow growth of the domestic market, Komatsu decided to widen its business scope to other countries.

The activities of the company are in six regions, namely: the Americas, Europe and the Commonwealth of Independent States, Oceania and Asia, Japan, China, Africa and the Middle East. Indian is home to two of the groups registered companies and is part of Oceania and Asia region (Thompson, 2012).

Historical outline

Komatsu was established formally in 1917 by Takeuchi Mining Industry as Komatsu Iron Works. It got separated from its parent company to become Komatsu Ltd in may 1921. The company was successful in the 1930s that saw the development of first crawler farm tractor in Japan, the production of castings and steel (United States International Trade Commission, 2005). There was also the establishment of the Awazu manufacturing facility. During the 1940s, the company began manufacturing crawler Dozers, hydraulic pressures and diesel engines. Komatsu commenced the production of special steel materials and high-grade castings in 1935. In the 1950s, Komatsu relocated to a more modernized facility at its headquarters in Tokyo establishing another plant successfully at Osaka. It also managed to acquire more plants at Kawasaki and Himi (United States International Trade Commission, 2005).

By the year 2000, Komatsu had finally established itself as one of the most successful global corporations with a continued expansion into new territories. This was mostly through collaborations, acquisitions and joint ventures. China became the center of a growth strategy during this decade that saw the establishment of the Komatsu holding company in 2001 (United States International Trade Commission, 2005). A sales company meant to handle forklifts was later established in 2003 and another for industrial machinery in 2004. Facilities meant to handle power generation equipments, mini excavators and forklifts were created in 2004. The large production of dump trucks later begun in 2005 with Komatsu Undercarriage China Corp established in 2007. The company has enjoyed a successful domination of the Chinese market since then. It celebrated its first successful 50 years of operation in the Chinese market in 2006 (United States International Trade Commission, 2005).

In the contemporary market, the company is under the ownership of over 305,000 shareholders. Komatsu group recorded a significant net sales of up to ¥2 trillion during its fiscal year that ended in march 2009. The 2010 prevailing economic slowdown affected its global operations facilitating to the decline of its net sales to the value of ¥1.43 trillion (Hitt et al, 2009). The company leads today in the supply of excavators, rigid dump trucks, crawler Dozers and motor graders globally.

Organization and corporate structure

The main company has a registered office in Tokyo, Japan, which serves as the headquarters. The logistics, manufacturing, quality control, finance departments and human resources are located in Tokyo, Japan (Haycraft, 2002). The offices also houses the product support and parts operations and marketing. Komatsu utilizes a distribution network in Japan. The corporate structure is as shown in the table below:

Company Direction

Vision

Komatsu aims at becoming a world class manufacturer of construction, mining, business and industrial equipments. In becoming indispensable to the global potential customers, the company is driven by the success of clients.

Mission

To listen and understand the needs of customers and create channels for providing them with value-added products.

To expand the existing distribution networks further in order to reach more consumers to broaden product range.

Values

Commitment to reliability and quality: quality is the top priority of the company and hence it establishes measures to avoid compromising quality

Customer oriented: Komatsu continues to offer reliable products by valuing customers’ opinions.

Policy deployment: upon announcing the policies of the top management, the company employees at every level understand their assigned responsibilities, make own activity plans and implement on their own initiative.

Human resource development: human resources support the sustainable growth of the company. The employees of the company are part of the most valuable corporate assets, making educational programs and human resource development indispensable globally.

Collaboration with the business partners: in every company operation from manufacturing to sales, the company work as a unit with the business partners globally to improve operations and solve problems.

Major goal

The goal of the company is to become a major supplier of advanced and superior construction, mining and industrial equipments.

SWOT Analysis

The SWOT analysis assists in understanding where Komatsu is in the business cycle. It also facilitates making of recommendations on their internal and external activities. Komatsu is anticipating an economic upturn especially in the developed countries and continued growth in emerging markets (Post et al, 2002). In order to counter the anticipated rate of demand, they have been expanding organically through establishing acquisitions. In relation to the SWORT chart, their company is able to proceed with the opportunities with care not to overreach. The strengths are leveraged to enable the company stay ahead of the competitive market and anticipate regulation. Weaknesses are addressed with threats closely monitored (Post et al, 2002).

SWOT analysis

Strengths

A wide range of products

Dealership network

Japan manufacturing base

Geographic diversification

Research and development Weaknesses

Commodity bet

A weak performance in the domestic market

Labor relations

Cyclical industries

Opportunities

Emerging markets

Growth in residential sectors globally

Acquisitions

The increased demand for mining and construction equipments, industrial machinery and vehicles Threats

Government policies

Intense competitive pressures

Environmental regulations

Slow growth of the Japanese economy

External Analysis

On a global perspective, the company major’s operations on the concept of the mother plant. The mother plants are the core units in production engaged in the design and development of efficient equipments. The rapid growth that Japan experienced during the 1990s in construction and mining sectors created greater opportunities for the company to progress successfully (Alves, 2003). The global market also offers a mix of variables for the company progress, including the increased demand for products, manpower availability, lower production cost, geographical advantage and favorable ecosystem (Alves, 2003).

The company has a deep commitment towards products and service quality, ethics in business, and environment protection while developing towards the maximization of the corporate value for all the stakeholders. In a global based business environment, the external factors that have impacted the company progress include economic, technological, socio-cultural, political, environmental, legal trends and demographic aspects. Being one of the most successful multinational, Komatsu company successes is based on focus on such factors.

Political trends

In most of the countries that the company has production facilities and operates, governments have control over the equipments manufacturing. This is mostly in terms of regulations to ensure Komatsu meet the standards of the law (Thompson, 2012). Tax policies have also been part of the process. The company has faced income tax policies over the years following the jurisdiction of various nations. In addition, the company has also faced excise, import and export duties in the distribution of its equipments countries where it lacks an outsourcing unit. Political instabilities in some of the nations such as governmental changes, civil conflict, military takeover, elections and restrictions in relation to the ability to reallocate capital across borders successfully have influenced the company operations (LexisNexis, 2003).

The company measures in alignment with government policies have enabled an increase in retail trade and economic activities. In addition, enacted policies to the free market have also created a framework for the construction of new premises globally to contribute to the globalization of the company. Over the years, the company has been able to launch remarkable business establishments in Singapore, US, Australia and Mexico (Haycraft, 2002). The start of first overseas construction equipment supply success is in line with various governments-based policies established to enable the import of equipments. Such policies have significantly contributed to the evolution of Kumatsu leading to the setting up of new subsidiaries for the distribution and production of its product lines (Haycraft, 2002).

Economic trends

On a global perspective, when launching operations in a new country, economic conditions, including a recession, growth or decline of such nations are of significance. The people’s purchasing power improves when economic growth is steady (Hitt et al, 2009). Such growth has given Komatsu a good chance to dispose most of its manufactured products. The company has also been able to research and invest in new products and technology through economic stability. A strong currency exchange rate has affected the imports and exports of the company manufactured equipments globally. In terms of economic growth, the company has been operating on a global basis following the economic stability of the most of the markets. An increment in different economic indices and have contributed to the successful operations of the company within Japan and on a global perspective. The periods of economic stability have seen the continued production of forklifts, motor graders, special purpose vehicles, dump trucks and wheeled loaders (Hitt et al, 2009).

The company’s association with other companies globally such as India based construction and mining corporations have been of significance in relation to reliable market structures (Cruikshank et al, 2008). This has been through the signing of agreements for technical assistance with various ministries of defense majorly for the production of industrial, construction and mining equipments. In the 1960s, the company increased its association with companies in America, including Bucyrus-Erie, Cummins and International Harvester following a promising economic progress. In 1964, it opened its first liaison overseas office in India (United States International Trade Commission, 2005). This was later in 1967 followed by the establishment of overseas subsidiary companies in Belgium. Hydraulic excavators and wheeled loaders were launched by the company introducing new quality system. This earned Komatsu the Deming prize in 1964 for quality control.

Technological trends

The advancement in technology has changed the production approach of the company in many ways. The incorporation of technology in the company’s logistics process has also enabled an improvement in the distribution of products and general operations of the global market (Haddock, 2007).

Environmental trends

The adoption of new policies aimed at protecting the environment such as recycling processes and the use of reliable and clean energies, forms the key elements of the company operations in the global competitive markets (Haddock, 2007).

Sociological trends

As the growth of the global population continues, changes in lifestyle are also affected. This has affected the company operations significantly on a global perspective.

Industry environment

The current industry is highly concentrated. There are more than 50 larger corporations that manufacture mining, construction and industrial equipments holding more than 80 percent of the market. The industry may at times be unstable as a result of factors such as the downturn in the construction industry, and poor forecasts for the future (Frasco, 2007). Price increments have also been a significant factor over the past years with the net industry position dipped into significant figures. However, even though the global market continues to fall for Komatsu, specific markets still increase significantly at the same time (Frasco, 2007). Therefore, Komatsy Company should ride out the current market recessions to enable customers cope with cost increment pressures. Some of the characteristics of the industry include:

Cyclical demand patterns

Affected by the shifting demand in developing countries

Affected by the global economic trends

Impacted through the fluctuations in price of resources as a result of dependency on the construction and mining industry

Some of the most critical success factors in the industry include:

Product diversification

Intertwined systems cycle and management policy

Customer satisfaction and oversea market orientation

Focus on the productivity and quality improvement

R&D for the product development, operational efficiency and product design

Competitor analysis

High competition

Komatsu is currently the second largest player globally in the industry with its market share in Japan at 60 percent and 25 percent globally. Caterpillar has been the dominant figure and a major competitor with a global market share of 43 percent (Czinkota et al, 2000). It has been giving Komatsu an important competition in the global market, including companies such as Fiat-Allis and Clark Equipment. In addition to the other faces of competition from foreign based specialized local players, Komatsu has been focusing on higher quality and lower price for its products (Czinkota et al, 2000). This is to ensure it maintains a competitive position in the global market.

Low threats of substitutes

There has been a minimal threat of the subsidies. In the global market, no comparable products exist that would perform the tasks Komatsu manufactured equipments has been doing. Human labor has been the only possible substitute factor, but necessitates time to enable the performance of similar function (Czinkota et al, 2000).

Medium buyer’s power

The presence of a significant number of the local firms that majors in a similar line of production with Komatsu and other bigger global players gives clients a fair amount of choice. This is mostly in purchasing the mining, construction and industrial equipments. To facilitate customer attraction, Komatsu price its major products 30 to 40 percent below the competitor products such as Cat’s equipments (Czinkota et al, 2000). The company also has a global based broad product line with a significant number of variants.

Low supplier power

The global based suppliers of mining, construction and industrial equipments have minimal influence on Komatsu following its ability to handle its operations as an integrated player. Most of the company components are in-house production based. The aspect of vertical integration has assisted the company in pricing its products at good prices to counter the rate of global competition (Czinkota et al, 2000).

Low threat of new market entrants

Manufacturing business necessitates huge capital investment, a differentiating product feature and R&D expenditure to steer a company like Komastu to success (Czinkota et al, 2000). This poses a significant entry barrier in the industry, making threats of new entrants very low.

Internal Analysis

As one of the international leaders in the field of mining, industrial and construction, manufacturing, Komatsu has significant factors that have contributed to its success (Post et al, 2002). Some of the resources, strengths and weaknesses include:

High quality: The Komatsu Company has become one of the synonymous manufacturing companies with value and quality. They have implemented quality management techniques to facilitate the aspect of globalization.

Low manufacturing cost: the company has managed to establish a lower material cost and salary base to enable the offering of its manufactured equipments at a lower cost.

Efficient management team: the company has an efficient management team, which has made it the industry leader in the manufacturing and supply of mining, construction and industrial equipments. From the 1960s, the company has been focusing on improving its product competitiveness.

Logistics: Komatsu has a centralized production facility compared to the competitor, a caterpillar which has production facilities globally. However, the company has managed to shift production in relation to the aspect of protectionism, competitive scenarios and exchange rate fluctuations.

The industry is staging: the market of the Komatsu Company has managed to reach a maturity stage necessitating the establishment of sales and service network.

Financial analysis

Komatsu financial year follows a standard Japanese practice which starts on 1st April and ends on March 31st the following year (Post et al, 2002). The following table indicates the company consolidated highlights from 2005 to 2009 in ¥ Billion.

Consolidated highlights of 2005-2009 (¥ Billion)

2005 2006 2007 2008

Net Sales 1,612.1 1,893.3 2,243.0 2,021.7

Operating Income 163.4 244.7 332.9 151.9

Net Income 114.3 164.6 208.8 78.8

Return on Equity (%) 20.8 23.5 25.1 9.3

Return on Assets (%) 10.0 13.5 16.3 6.3

Number of Employees 34,597 33,863 39,267 39,855

The company has been operating in preference to consolidate its financial within its cycle. The global business of Komatsu as a group of companies is divided into six regions (Post et al, 2002). America has the market, which generates the largest revenue with Japan following in closely as indicated in the following table:

Machinery and engine sales by region from 2006 to 2009

2006 2007 2008

Americas 537.8 541.1 503.4

Japan 487.1 505.1 452.1

Asia and Oceania 252.7 348.4 335.5

China 129.4 189.9 236.2

Europe and CIS 324.0 427.6 284.0

Middle-East & Africa 162.1 230.6 210.2

Total 1,893.1 2,242.7 2,021.4

According to the table, the company business in Asia, China and Oceania has over the recent years displayed a positive trend with the share doubling from 20 percent in the years 2006 to 40 percent in 2009. The demand shift patterns for its products also in the last quarter of 2008 and 2009 brought the sales up to par with the Japanese and American markets (Post et al, 2002).

Identification of Front-Burner Issues

In the company’s progressive approach to the market trends and consumers view points, standardization, quality guarantee and interlocking with the production secures reliability at higher levels. Some of the strategic issues and problems the company faced include:

The focus on two strategies: cost leadership and differentiation simultaneously have been an indication of how Komatsu has shown eagerness to capture the global market. This is not a sustainable competitive advantage for the company as both strategies necessitate different business models.

Globalization through expansion of market at the expense of the domestic market

Nonstrategic expansion planning on a global perspective or the adoption of strategies to study the new market demands

Alternative Courses of Action to Solve the Issues and Problems

Licensing agreements

Komatsu has benefited significantly from the aspect of know-how which it obtains from other companies through acquisitions (Bungay, 2011). This has assisted the company to emerge as one of the most outstanding full line competitors in the global market. The company has also been able to export products on a global perspective which have enabled the strengthening of its position (Bungay, 2011).

Reorganization of the global distributor network

After the company emerged as a full line competitor in the global market, Komatsu has been promoting heavily about a full line product reliability and capability (Bungay, 2011). It has been strengthening its presence in the global market through establishing regional centers to handle parts distribution and services. It has made available its Japanese engineers available to assist dealers with issues to do with service.

Launching of an efficient production oriented choice specification

This approach has assisted the company in building products in relation to the user needs. This is without giving away the aspect of cost advantage. As a result of this perspective, the company products have been preferred over Caterpillars’.

Commitment to development and research

This factor has resulted in the global recognition of Komatsu and has been viewed as a significant player meant to bring out cost effective and innovative products.

Launching of frontier and future project

It has enabled the development of diverse and new products such as the heat pump and welding robots. It has been into a joint research agreement with the Cummins Engine. This is in sharing of information on fuel efficient engine developed indigenously by Komatsu. It was also successful in developing a breakthrough technology of the Cast iron alloy applied in the manufacturing of diesel engines. It has become one of the most significant manufacturers of material and arc-welding robots (Mukerjee, 2008).

Strong relationships and good networking

This has assisted the company in minimizing its dependency on the Japanese market to expand its export level globally.

A continued emphasis on quality

The company won a Japan quality prize regarded as a supreme quality-control honor globally. Komatsu has also won a gold medal twice from the Union of Japanese Engineers and Scientists. The emphasis on quality as a vital aspect has assisted the company in differentiating itself from competitors through the provision of high quality products at affordable prices compared to its competitors (Mukerjee, 2008).

Recommendations

Specifically, the company should:

Maintain their spending in research and development at the current percentage of the revenue levels

Komatsu should continue with the increment in supplier collaboration

The company should maintain a labor contingency plan while it bases operations on a long-term approach to contract negotiations and efforts to strengthen labor relations

They should continue expanding the emerging markets. This is through strategic partnerships, organic growth and acquisitions.

Komatsu should also develop a strong local presence, especially in the foreign markets. This should be with indigenous personnel to establish a strong government relation and facilitate a reduction in the risk of unfavorable government policies.

The company should improve cash flow and asset utilization effectiveness on a global perspective through accounts receivable turnover and inventory turnover.

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