“How successful is the unorthodox global strategy of machine tool manufacturer Mori Seiki?”
(07 Sep 2011) This article from Toyo Keizai looks at the unconventional business strategy implemented by machine tool manufacturer Mori Seiki, and evaluates the success of that strategy.
Increased investment in Gildemeister
In spring 2011, Mori Seiki increased its holdings in leading German machine tool manufacturer Gildemeister AG, thereby making Gildemeister an equity method affiliate. Mori Seiki borrowed heavily to finance this investment, thereby lowering its equity ratio to 54.6%, from a previously healthy ratio in the 70% range.
Strategy going forward
Sales and Service: Mori Seiki gains access to Gildemeister’s competitive network in Europe, South America and Russia, thereby complementing Mori Seiki’s Asian and North American sales and service operations. The two companies plan to integrate sales operations in various countries, and have recently opened a marketing headquarters in Switzerland.
Production: By gaining access to Gildemeister factories in Germany and Shanghai, and by opening its first overseas factory in North America in 2012, Mori Seiki hopes to shift from a dependence on exports to global production in Japan, America, Europe and Asia. They also intend to achieve economies of scale by integrating R&D operations of the two companies.
Financial standing
Mori Seiki has been significantly curtailing capital investment while drastically increasing its investment outlays overall. Also, its cash flow from operations has been in negative territory two years running, and its balance of cash and deposits has marked a year-on-year decrease for five consecutive years.
Mori Seiki in relation to its competitors
Cash flows: Whereas most companies in the industry have been cutting back on capital investment since the collapse of Lehman Brothers, Mori Seiki has been ramping up outlays in this area. Moreover, although Mori Seiki’s competitors Okuma and Makino have averaged positive free cash flows over the last five years, Mori Seiki shows negative results for that same period.
Operating income: Although many companies in the machine tool industry are likely to achieve positive operating results for Q1 of FY2012, Mori Seiki looks poised to report negative figures.
Return on investment and synergies with Gildemeister
It will be some time before Mori Seiki realizes a gain on its significant investment in Gildemeister, and any revenues realized are likely to be used to offset goodwill write-downs. Moreover, there are likely to be many challenges to overcome before production- and marketing-related economies of scale will be realized.
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