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Japan: companies navigating demographic shifts
Trip report – October 2024
Long lifespans and a birthrate that fell below the 2.1 replacement rate 50 years1 ago and is currently at a rate of 1.3, guarantees pensioners will increasingly dominate Japanese society over the coming century.
Although surrounding nations like South Korea and Taiwan follow closely behind, Japan is the first major economy to enter this demographic phase, leaving policymakers the unenviable task of facing down its challenges without a roadmap to follow. Tokyo’s childless train cars and construction sites staffed by greying labourers are the visible tip of a demographic iceberg that is destined to get worse.
% of Japan’s population over 65 years of age 1950 to 20232
Thankfully, we invest our client’s capital in companies and not countries and we are free to avoid companies significantly impacted by challenging demographic trends, even if they are included in the benchmark. Instead of focusing on Japan's stars of yesterday, which increasingly face shrinking markets, we invest in Japanese companies that we believe have their best days ahead. Typically, this means they are addressing Japan’s growing productivity issues or taking high-quality Japanese products into overseas markets. Below are two companies we met during our trip to Japan in June that we believe provide such solutions.
MonotaRO - improving productivity
MonotarRO is a one stop online shop for products including nuts, bolts and bearings that keep factories running. By making factories more efficient they play an important role in making Japan more productive. Today, the vast majority of these factory products in Japan are still ordered by a manager thumbing through a thick catalogue and calling up a distributor. In a labour scarce economy, the time spent every day searching through a thick book for niche products is a significant cost and so too is the idle time spent waiting for products to arrive when local distributors do not have them in stock.
Their solution is simple. An online shop with a wider and deeper number of stock items that reduce searching and waiting time. Since we first met the company in 2013, customers have increased tenfold and profits are up over 700%.3 At the core of this success is a positive feedback loop that has continually increased their value to customers:
MonotaRO positive feedback loop
Most factories will never order the 20 millionth product on their website, but your factory production line might shut down without its timely replacement. Local distributors do not sell enough of this product to justify keeping it in stock, but MonotaRO, selling to over 10 million customers4, can keep it in stock and deliver it to you within 24 hours. This value proposition is so compelling that customers rarely leave MonotarRO.
MonotaRO – growth of stock items and customers 2010 - 20235
For MonotaRO, the key barrier to growth is convincing older factory managers set in their ways to adopt this new technology. Here, demographics are on their side. Every year, thousands of older factory managers retire and are replaced by younger colleagues more willing to use the company’s technology.
Anest Iwata - taking Japanese products overseas
A trait we admire in Japanese businesses is that delighting customers and building high quality products almost always comes first. Despite this, Japanese companies can often lack the commercial awareness to take these world class products overseas and charge prices that reflect the quality of what they provide. But creating world class products is the hard part! All it takes for these companies to realise their potential is the introduction of a commercially focussed leader.
Anest Iwata is a company we believe is on this trajectory. Founded by the Iwata brothers in the 1920’s, the business initially made spray guns for painting and then expanded into manufacturing the air compressors needed to power them. The company is now a world class manufacturer of oil-free air compressors, and as we know from other global air compressor companies such as Sweden’s Atlas Copco, this is a very profitable business to be in if managed well. Until recently though, Anest Iwata was run with a domestic focus and without much regard to increasing profitability or returns. It had great products but lacked ambition to grow in the profitable global market. The chart below6 shows the difference in operating margin (how much profit a company makes on sales after paying for production costs) between the two companies.
Operating margin
A focus on overseas growth and profitability has come recently with the appointment of a new CEO, Shinichi Fukase, in 2022. He has prioritised growing the business outside of Japan and has shown a willingness to make the tough choices and up-front investments required to achieve this. We have been particularly impressed by the difficult decision made this year to raise prices in the domestic market, which has been delivering low profit margins. This is a strong signal of a mindset change within the company, and we look forward to seeing it progress.
No sweeping country-level story of demographic gloom will ever be sufficient to describe this huge and varied market. With businesses like MonotaRO and Anest Iwata we remain confident by the investment opportunities in Japan.
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