KUKA AG (NASDAQOTH:KUKAF) is a supplier of robots and systems for process automation in manufacturing and other industries. The company is the No. 1 supplier to automobile manufacturers and among the top five suppliers in the "general industry", as KUKA calls collectively all non-automotive sectors. But why would an American investor want to know about this stock which only trades on a foreign market? It is my goal to answer this question.
KUKA at a glance
KUKA has two divisions: robotics and systems. The robotics division develops and manufactures industrial robots which are used to automate production processes. The systems division provides turnkey solutions. Its offering ranges from planning and building stand-alone components to complete manufacturing cells.
Robotics sales contribute slightly less to KUKA's total revenue with a share of approximately 42% in 2013. KUKA has one dominant customer segment, the automotive industry. It contributes to roughly 70% of KUKA's total revenue.
A similar though less pronounced picture offers the geographical footprint. The following table provides the breakdown of 2013 revenue by geography:
|Rest of Europe||23 %|
|North America||25 %|
|Asia and the rest of the world||18 %|
The one benchmark used to measure industry automation level is robot density. It is defined as "the number of multipurpose industrial robots per 10,000 persons employed in manufacturing industry". Robot density has been roughly an order of magnitude higher in the automotive sector compared to other manufacturing industries, according to the International Federation of Robotics, or IFR . Hence, the automobile manufacturers are the innovation drivers in automation.
However, manufactures in the general industry have been increasingly seeking ways to automate their production lines as well. And since the robot density is far from a saturation point in the general industry, IFR statistics show a noticeably higher growth rate in this sector.
A similar trend is observed geographically. Developed countries have a very high, mostly stagnating, robot density. Emerging markets on the other hand, in particular China, are quickly ramping up.
KUKA is positioning to capture this growth
KUKA has grown up in the automotive sector, where medium to high payloads -- in the order of a few tens to many hundreds of kilograms -- are the standard. Applications in the general industry require robots that are designed to handle much lower payloads, in the order of a few kilograms. KUKA has entered this space just recently with robots that are designed for payloads as low as five kilograms. The three standard products now available are:
- the KR QUANTEC, introduced in 2010
- the KR AGILUS, introduced in 2012
- and the LBR iiwa lightweight robot, introduced in 2013
In order to continue driving innovation in low-payload-application robots, KUKA is cooperating with world leading research institutions, such as the German Aerospace Center for Robotics and Mechatronics.
KUKA is also tapping into the growth opportunity of emerging markets. Just in December last year, the company has started operations of its new plant in Shanghai. Hence, KUKA shows serious commitment to benefit from the just beginning automation efforts in industries and markets less familiar to the company.
The main challenge
I personally see the main challenge in the fact that KUKA ranks "only" in the top five worldwide among suppliers to the general industry. Ranking in the top five in general sounds high. In this industry, though, acquiring a product often means a significant investment in terms of money, time, and production process adjustments. Hence, the decision to buy a product from a certain company is also a long term commitment to this company as a supplier. This, from my point of view, means that it is tougher to convince a potential customer to invest in you(r products), if there are other companies in the industry that are better known than yourself. Hence, it is very criticial for KUKA to prove that it:
- understands the automation requirements of manufacturers in unfamiliar industries
- is able to meet those with its new range of products
- is able to sell those products to unfamiliar customers
Only then will KUKA be able to generate significant revenue from the growth that lies ahead. And it must be able to do so in space where competitors are partially more experienced and with stronger presence. Two of the main competitors are the Japanese companies Yaskawa Electric Corp. and Fanuc Corp. (NASDAQOTH:FANUY). The following table compares some key data of the three companies (data taken from the respective latest annual reports):
|Total sales revenue* (million €)||1,739||2,215||3,218|
|Revenue share robotics division (million €)||743||785||1,048|
|Revenue share from customers in the automotive sector||70%||n.a. but significant|
As we can see, all companies generate roughly the same order of magnitude of revenue from their respective robotics divisions. This is the market space we need to compare here, where the companies compete directly. Also, sales for all companies are mainly driven by automotive. We do not know the exact percentages, but we know that KUKA is the automotive market leader and that its total robotics revenue is the lowest among the three companies
From these two facts we can conclude that-not with certainty but with very high probability-the presence in the non-automotive markets of the two Japanese competitors must be significantly higher than KUKA's.
KUKA has an edge due to its leadership as a supplier to the highly automated and very innovative automobile industry. On the other hand, It has strong competitors with more experience in the high growth non-automotive markets. However, the company has recently introduced a line of innovative products for this sector.
The key question is: will KUKA be able to successfully enter new markets and leverage its technology leadership position to win and maintain new customers? Investors should observe the following two trends to answer the question:
- How is KUKA's internal revenue share developing (general industry vs. automotive)?
- How is KUKA's market share in the general industry developing -- can they close the gap with the industry leaders?
This is no easy undertaking, but KUKA is well positioned to succeed. Hence, it offers the American investor a stock with a substantial presence in euro-denominated Germany, and with growth opportunities ahead in Asia and North America.