Keyence: A Leader in Industrial Automation

Keyence is at the forefront of factory automation. For over 40 years, the company has developed customized sensors and measuring systems to enable customers worldwide to automate assembly lines, improve productivity and product quality, and ensure a safe working environment.   

May 2022
  • Masakazu Takeda
    Masakazu Takeda, CFA, CMA
    Portfolio Manager

Innovative Leader in Industrial Automation

Founded in 1974 and headquartered in Osaka, Japan, Keyence has grown to become one of the top five largest listed Japanese companies by market capitalization as of May 1, 2022.  

Keyence is an innovative global leader in the development and manufacturing of industrial automation and inspection equipment worldwide. In fact, the company has garnered much attention as 70% of the company’s products feature the world’s first or industry’s first technology. Because of this innovation, Forbes has named Keyence as one of  the top 100 world’s most innovative companies since 2011.1 With an online retail site, the company serves approximately 300,000 customers in over 100 countries worldwide.

Keyence’s products help automate assembly lines, improve productivity and product quality, and ensure a safe working environment.

Their vast array of products include: 

•    All-purpose sensors and pressure sensors. Keyence supplies product manufacturers with durable and long-living sensors that detect shiny, dark, or transparent targets. 
•    1D and 2D code readers for logistics, automotive, and food and packaging industries.
•    Laser markers used in common applications including automotive parts, PC boards, instrument switch panels and medical devices.
•    Microscopes and 3D measurement systems. Keyence has created the world’s first 4K resolution imaging providing the highest level of image clarity and flexibility.

Keyence boasts the industry’s most advanced products as well as a worldwide distribution network. With globalization on the rise, the company has locations in North America, South America, Africa, Europe, Middle East, Asia, East Asia, and Oceania. Given its worldwide footprint, Keyence provides solutions to customers regardless of where their facilities are located or where their machines are being shipped.  In terms of sales, nearly half of its revenue comes from domestic Japanese demand while 16% comes from China and 14% comes from the U.S.

Opportunities in Industrial Automation

Japan’s leadership in robotics and factory automation has been built on a long history of technological leadership in manufacturing, and today Japanese automation companies such as Keyence are benefiting from strong growth in demand for their products. 

Over the past decade, the number of industrial robots manufactured worldwide has tripled. According to the International Federation of Robotics, Japan is the top industrial robot manufacturer, producing 45% of the world’s supply. 

Industrial automation around the world is expected to continue growing over the next several years. With the increasing adoption of automation in industries including pharmaceutical, chemicals and materials, oil and gas, and manufacturing, opportunities abound for key companies that can produce high-quality, reliable products.  According to a 2020 report, the industrial automation market is estimated to reach nearly $300 billion by 2030, with an average annual growth of more than 8% over that decade.2

Strengths of the Keyence Business Model

Keyence embodies Japan’s cultural ethos devoted to meticulous hard work, precision, innovation, and quality. The following features set it apart from its competitors:

An outsourced manufacturing business model. Keyence’s business model is a difficult-to-replicate “fabless” model. The company specializes in product planning and development, purchasing bulk raw materials and outsourcing its production to contracted component suppliers. It then collects the components and sends them to other manufacturing companies for assembly. Keyence then performs the final inspection of goods. In this way, no supplier knows how to make the entire product.
By operating in this manner, Keyence has several competitive advantages. The company can leverage multiple suppliers who manufacture the same part to obtain competitive pricing and best product turnaround. Keyence also avoids high capital expenditure costs that come with running and maintaining the manufacturing equipment and process. 

A unique direct sales channel strategy. Keyence salespeople conduct business directly with customers, showcasing and demonstrating products on site. Most of its competitors rely on a sales agency model. 

Through this strategy, management has been able to respond quickly to client demand and effectively secure parts, while many of its competitors were unable to deliver product with the current supply chain issues.

Keyence is also known for paying its employees quarterly and monthly bonuses in addition to above-average salaries. In fiscal 2020, salaries averaged $160,000, the highest of any company in the Nikkei 500 Stock Average with 100 or more employees.3 Its compensation has helped the company attract and retain top-tier talent.

These competitive advantages have generated increased profitability and financial flexibility. As a result, Keyence enjoys a fortress-like balance sheet. In fiscal year 2021 its revenue and operating profit surged by 40% and 50% year over year, respectively. Net income topped JPY 300 billion ($2.3 billion) for the first time bringing its 14-year CAGR to 12+% since pre-2008 levels. In addition, the company has cash on hand of JPY 464 billion ($3.90 billion), short-term investments of JPY 540 billion ($4.53 billion), investment securities of JPY 940 billion ($7.89 billion) for a total of an impressive JPY 1.944 trillion ($16.32 billion), equivalent to 31 months of sales. With this level of cash, we believe Keyence is well-prepared in the event of a severe economic downturn. 

While they have a large amount of cash, its return on equity comfortably exceeds that of the average Japanese company. What’s more, Keyence has steadily increased its market cap at a pace of more than a dollar for each dollar of retained earnings. 
(from SPARX letter April 2020)   

Investment Summary

With its long history of manufacturing customized, high-quality factory automation sensors, laser markers, and microscopes, Keyence enjoys a market leading position in industrial automation. Given the company generates only 50% of its revenue outside of Japan, the company is poised for a long runway of revenue expansion from international sales. In addition, the company has historically been more resilient during economic downturns due to its strong understanding of its customer base and its quick response to fluctuations in demand. With inflationary times upon us, Keyence possesses enviable pricing power due to its hard-to-replicate factory automation solution built on an outsourced manufacturing business model. We believe these factors will allow Keyence to continue its impressive growth regardless of the economic environment.

1. Keyence Corporate Profile. 2. Nikkei Asia. 3. Market Research Future.