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Komatsu’s Sakane Stresses Need
to Strive for Dantotsu, No. 1 at JCCC Business Forum

• Masahiro Sakane, Councilor of Komatsu Limited (“Komatsu”), spoke at a business forum on July 18 about the changing global business environment, discussing Komatsu’s current and future strategies to challenge the changes.

• During the forum entitled “Strive for Dantotsu (No. 1),” Sakane, who also serves as the chairman of Japan’s Advisory Committee for Natural Resources and Energy, explored future projections from the viewpoint of demography, natural resources and productivity and explained his strategy for Komatsu to survive global changes through an effort of becoming No. 1. The forum was hosted by the Japan Chamber of Commerce and Industry to commemorate its 50th anniversary and held at Harper College in Palatine.

About Komatsu Limited

• Komatsu, established by Meitaro Takeuchi in 1921, had consolidated sales of $1,854.9 billion for its fiscal 2015, with the profit rate of more than 10%. It has approximately 47,000 employees on a consolidated basis, of which approximately 57% are non-Japanese. A majority (88%) of its business is in construction machinery and vehicle, with the remaining 12% in industrial machinery and other areas. For the construction machinery and vehicle business, sales in the North American market amount to 24%, Japan 19%, Latin America 13% and China 4%, down from 22% four years ago.

• Komatsu is widely known for its product lineup of power shovels, bulldozers and dump trucks for construction and mining purposes, as well as fork lifts, automobile body presses and wire saws for industrial use. When Sakane assumed the position of president in 2001, Komatsu’s balance sheet was in the red. “In Japan, layoffs are to be avoided. In order to keep everyone employed, [the company] had expanded its business and set up numerous subsidiaries where it could send its employees on loan. [The red ink was] not because of the company’s incompetency in product quality,” Sakane said.
• Sakane’s response as new president was to reduce the number of the subsidiaries based on their performance – whether they were in, or could achieve, the No. 1 or No. 2 position in the world market – and close down those without a potential to become No. 1. The existing 300 subsidiaries were reduced to 110. The existing domestic workforce also shrank after he sent a letter to each of the 20,000 employees to ask for early retirement and 1,100 of them agreed. Sending employees to the subsidiaries on-loan was also discontinued, resulting in the 1,700 on-loan employees becoming employees of the subsidiaries.
• After Sakane’s measures were implemented and poor-performing businesses were eliminated, 51% of the construction/mining machinery sales came from the products that occupied the top market share position, and 88% from the products that were No.1 and No.2 combined. For the industrial machinery category, sales from the No. 1 products accounted for 49% of the category’s total sales and 84% was from the No. 1 and No. 2 products combined.

Global Changes

• For Sakane, a period of 20-30 years is a “short” term in the business cycle. A mid-term is 50-100 years, and a long-term is 100 to 200 years. “Add one more digit to the years of the customary business cycle, and you can see things that you didn’t see before,” Sakane said.

Short Term: 20-30 years

• The change is obvious when you look at the chart of the regional demand for Komatsu construction/mining machinery. The orange section in the chart, representing the demand from 150 countries other than Japan, the U.S., the European countries and China, indicates that the Japan/U.S./European domination in the world economy is over. Demand from China, which hit the peak four years ago, is now 15 compared to the scale of 100 in 2010. “This is the greatest change of all. Money is flowing to somewhere [else],” Sakane said.

Mid Term: 50-100 years

• The world population was 1.6 billion 115 years ago in 1900. It was only 200 million 2,000 years ago. Today, we have 7.5 billion people in the world. This means that we saw an increase of 6 billion in the last 100 years, while the increase was 1.4 billion in the last 1,900 years. It is projected that the world population will be more than 9 billion by 2050 and it will exceed 10 billion between 2060 and 2070.
• The urbanization rate is an important element to consider for the world community; it is a common concept (but not so common in Japan) that living conditions such as public infrastructure and water/sewage will be operated more effectively where there is a population concentration. As urbanization progresses in countries like India and China, the world will share a grave problem of energy and natural resources, food and water supply, and environmental and health care issues. Sakane sees that the ultimate issues would be food and water, as the world water consumption increased 6.7 times between 1900 and 2000, while the world population increased 3.7 times.
• The elderly population in Japan (those 65 years and older) is now reaching 27% of the national population. This high rate of aging is an issue specific to Japan for now; for other nations, it will take 10 more years to reach this level (Germany), 20 years (South Korea), 40 years (China), and 80 years (the U.S.).

Long-Term: 100-200 years

• One hundred and fifty years ago, Japan’s population was 30 million, of which only 5% were those 65 years and older. One hundred and fifty years from now, Japan’s current population of 126 million will come down to 30 million again, Sakane said, but the rate of the elderly population (65 years and older) will shoot up to 50%. He thinks the answer to this problem is to follow the example of the Germans. “As part of the EU economic community, Germany accepted immigrants and achieved today’s prosperity. The only solution for Japan is to embrace the idea of the Asian economic sphere,” Sakane said.
• Sakane also pointed out the issue of declining world energy resources - oil will last 40 more years, natural gas 60 years, shale gas 100 years, coal 130 years, and uranium 100 years. Even if oil could last 80 years, it’s still less than coal. While the world population continues to increase, natural resources will not last more than 150 years.
• Renewable energy can’t support all of our needs and we need some revolutionary ideas for the new energy source. Until it becomes available to us, we need to conserve energy and must use nuclear power, Sakane stressed.
• Considering the fact that uranium could be used up in 100 years, it’s 99% certain that we will have to use spent nuclear fuel for nuclear power production, Sakane said. Speaking about the increase of nuclear power engineers and technicians in China, he commented that it’s “most ridiculous” for Japan to give up its world-class nuclear power technology and end up going to China for its technology.

Komatsu’s corporate reform

• The management is to create customer value by efficient use of human resource, goods, and money, and produce a maximum profit. Then the profit has to be divvied to the stakeholders in a balanced way.
• To realize it, Sakane said, “A corporate must selected a certain market(s), a business field(s), and goods and services then must concentrate on them.”

• Komatsu’s stakeholders are society, media, stockholders, finance institutions, customers, cooperative firms, dealers, and employees. Sakane said that the corporate value was a degree of trust given by the stakeholders. And if the trust stands out from competitors’, it is exactly the corporate value.

• The Komatsu-Way is to increase the corporate value and consists of three chapters; Top Management, Manufacturing, and Brand Management.

• The key points of Top Management are:
• Activating the board. It must be small in size, but adding outsiders is necessary.
• Having good communication with all the stakeholders in the world including all the employees.
• Don’t conceal wrongdoings. Report the bad news first.
• Don’t postpone the risk handlings.
• Cultivating your successors for the two generations.

• The Brand Management is taking actions to increase the degree of “Komutsu is a must” or “being selected as a critical partner”.
• Komatsu created a business model of “Dantotsu (by far the best) Products”, “Dantotsu Service”, and “Dantotsu Solution” to lead the industry and win the competition with its on-site capabilities.

• For its Dantotsu Service, Komatsu installed a GPS system to each construction machine to track the machine when it was stolen. The system is called “KOMTRAX”. Each machine sends out information about its location as well as its conditions such as if the engine is turned off or not. The information turned out to help see the machine’s operation ratio, which has become valuable data to assess the economic climate in the construction industry.

• The Dantotsu Solution is called “Smart Construction” and enables automatic operation of a construction machine. A one-hour survey by a drone can create a 3D map of a certain terrain, and a machine can be operated based on the map. It is a revolutionary method in the industry. It does not require 10 years of operator training and does increases construction efficiency by 20 to 50%.

Komatsu’s Structural Reform

• Sakane said that Komatsu was an epitome of Japan, which meant that Komatsu took the same way as most Japanese companies did. However, Komatsu embarked on the structural reform in 2007 by using outsource, especially in the IT field to reduce its fixed cost. Due to the decision, its operating profit ratio was greatly improved. The company localized the management in overseas facilities, implemented one-time-only comprehensive layoffs, went ahead with a 2-percent-price hike for 10 years even in the deflation, promoted M&A in the U.S. and Europe, and then increased domestic production by 50 % because the company regained its self confidence in the international competition. All the factories were built in Japan in the past five years.
• Sakane said, however, if Japan’s deflation continues, it would be difficult to keep 50% of domestic production because 80 % of its products were sold abroad. He emphasized the importance of transcending Japan’s deflation.

• Komatsu was originally founded in Komatsu City, Ishikawa Prefecture, so it has contributed to the local economy. It transferred a part of headquarters’ function to Komatsu City and built a new factory there. All the education and training facilities were moved to Komatsu City, but the company uses local catering services and ryokan (inns) to accommodate the trainees. About 30,000 trainees come to the City every year, and 700 million yen go to the local businesses.
• In addition to economic contributions, Komatsu has helped local agriculture with its technologies.

Japan’s Essential Challenges

• When you look at the GDP figure of Japan, Germany, and the U.S. in the past 20 years, only Japan’s real GDP (1.25 in 2015) is higher than nominal GDP (1.11 in 2015). These figures express the deflation in Japan. Sakane pointed out that if Japan grew as much as Germany did, Japan would have 250 to 300 trillion yen more of tax revenue, and the fact has caused inflation of Japan’s debts. He also said that Japan had to learn from Germany and accept more immigrants.

• Sakane emphasized that the important thing in overcoming deflation depended on the management of private companies. He said, “Japan will not be able to get out from the deflation if the private companies don’t select their business fields and concentrate on the selected businesses.”

Mr. Masahiro Sakane, Councilor of Komatsu Limited

The chart of the regional demand for Komatsu construction/mining machinery