Nidec Corporation

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Nidec Corporation is a global manufacturer of electric motors, ranging from tiny precision motors to large industrial systems, serving diverse sectors including automotive, home appliances, industrial, and commercial.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Nidec’s revenue streams are diversified across several key segments:

Automotive: Motors for various vehicle functions, including electric power steering, braking systems, and electric powertrains for electric vehicles (EVs). This segment is a growing driver as the automotive industry transitions to EVs. * The latest investor presentation (Q1 FY2024) noted that for the full fiscal year they are expecting revenue increases, thanks to traction from the automotive side of business, particularly given the recent increase in vehicle production.
Appliance: Motors for home appliances, such as refrigerators, washing machines, and air conditioners, with a focus on energy efficiency.
Industrial: Motors used in various industrial applications, including factory automation, robotics, and machinery.
Commercial and Industrial Products: Motors for commercial equipment, as well as industrial products like motors for elevators and escalators.
Others: This segment includes products like hard disk drive motors, optical components, and other smaller businesses

The company notes that these segments tend to fluctuate on short term trends, and their diversification, which also means diversification in customer base, prevents big impacts on the business if one market underperforms.

Industry Trends:

Electrification: The global push toward electrification in transportation and other industries fuels demand for efficient electric motors.
The growth rate is very rapid and the company needs to be agile, but will also benefit greatly from these trends as most of its investments are in electrification based products.
Automation: Industrial automation trends support a growing market for precise and reliable motors in robotic and factory automation applications.
Energy Efficiency: Growing awareness of environmental concerns has increased the market for energy-efficient motors in various applications, creating a significant opportunity for Nidec.
Long-Term Growth: The global electric motor market is huge ($200 billion+) and fragmented, so no individual company currently holds a large market share, making competition intense.
The recent acquisitions (such as Emerson Electric’s business) and investments in new technologies and products mean Nidec is attempting to increase market share and become a market leader.

Competitive Landscape:

Nidec faces competition from several major global players as well as regional competitors.
- Some of these companies are quite big, like Siemens, which means that it needs to focus on high growth and niche markets.
The industry is characterized by high technological requirements, which create a barrier to entry for new players. This isn’t an advantage specific to Nidec though.
Pricing is very competitive, but differentiation is possible on quality, reliability, and specific features.
Nidec focuses on a cost-leadership model, and then focuses on creating differentiation in its products based on the needs of its clients. This helps in building relationships with clients, and provides a value offering other smaller competitors cannot provide.

What Makes Nidec Different?

Broad Product Portfolio: Nidec offers a wide range of electric motors across diverse sectors, making it less reliant on any single industry. They have recently made strong pushes into the EV market and other rapidly growing markets.
Technological Expertise: Nidec has accumulated considerable expertise in designing and manufacturing advanced motors, especially high-precision motors for robotics and other advanced applications.
Global Reach: Its operations span across North America, Europe, and Asia, which allows Nidec to tap into different markets and serve a global customer base.
Strategic Acquisitions: They have consistently acquired companies in fields related to their core business to improve their product offerings and expand into growing markets. For example the most recent acquisitions is for Emerson Electric’s commercial and industrial motors business.
Nidec plans to further grow with M&A. However, they have expressed not wanting to get into a bidding war for acquisitions.
Vertical Integration: The company plans to be more vertically integrated, reducing its dependence on external suppliers, and also allow the company to quickly adjust to the market.

Financial Analysis:

Nidec’s financial performance can be summarized as follows:

Revenues: Nidec’s revenue is generally increasing, mostly due to acquisitions in recent years. * In the Q1 FY2024 earning’s presentation, management said revenue increased as a result of improving production rates in the automobile sector, which is a significant growth driver for them.
Profit Margins: Nidec’s gross margins are pretty stable, and they have a good operational efficiency. However, they noted during the earning’s call that they are working to drive the profit margin higher through production efficiencies, while also leveraging the increased production volumes that are now starting to occur.
Return on Invested Capital (ROIC): In the past, ROIC is a bit inconsistent and fluctuates quite a bit, but has seen an increase in the last couple of years. They are attempting to keep it at 15 percent.
Debt They have around $3.5 Billion of debt, which is used to support its operations and investments in the future. However, they expect this to peak around this level and then start reducing it, so that they reduce the overall leverage of the company. The debt levels are still acceptable though, given the current cash flow and operating profits.

Moat Assessment: 3/5

Sources of Competitive Advantage (Moat):

Intangible assets:
- Nidec possesses a diverse set of patents and R&D capabilities, especially around its precision motor business. This is a good asset.
- Nidec’s has a strong brand image in the industry, but it’s more known within specific sectors, and mostly to other manufacturers, than it is to the average consumer. This is not the strongest type of moat.
Customer Switching Costs: Nidec has established strong connections with its long-term industrial clients, so it benefits from integration with their operations and products, which create switching costs.
Cost Advantage: Nidec appears to operate on a cost-leadership model, because of large scale and improved processes, but as a global company that utilizes global supply chains, it is more likely to be exposed to disruptions. Furthermore, other companies can also use the same strategy.

Moat Rating: The company has a narrow moat. Their competitive advantage is based primarily on a combination of intangible assets such as patents, and good customer relationships. Their cost advantages stem from economies of scale which will take competitors time to catch up to. But, they are still quite susceptible to outside forces. Their patents may also be challenged, and competitors may find ways to produce similar products at similar prices by improving their own production processes. A score of 3/5 is appropriate.

Legitimate Risks Affecting the Moat and Business Resilience

Technological Obsolescence: Rapid technological changes and competition in the industry pose a significant threat to the technology in a company like Nidec, where they need to stay on the cutting edge. Any new companies that come along may make their products seem old and uninteresting, unless Nidec can stay ahead.
Economic Downturns: Given that they have a lot of industrial customers, they can suffer a lot during times when business is slow and people are not investing in automation and other products that would require their components.
Acquisition Integration: Since much of their growth is from acquisitions, if they don’t manage and integrate the acquired businesses, well the value can be destroyed quickly. They have also said that they will not get involved in bidding wars, so there is a chance they might miss out on good acquisitions because they do not want to pay inflated prices.
Supply Chain Risks: Although global diversification gives benefits, it does also create risks of supply chain issues and disruptions. If one region becomes difficult to procure from, the company may suffer in revenues and profits.
Cyclicality: The automotive industry is cyclical by nature and there is a risk that during slower times, revenue from the automotive segments may decrease. However, given that they operate in more than one market, this issue should be minimized a bit.

Understandability: 4 / 5

The company operates in various business segments but the basic idea of what they do is not too difficult to understand. The fact that they manufacture motors across a range of different industries and niches requires some extra studying to fully grasp.
The financials are generally not too difficult to follow.
Overall, a 4/5 ranking in understandability is appropriate.

Balance Sheet Health: 4 / 5

Nidec has maintained a manageable level of debt.
Current ratios are well in line, and long term debts is not particularly high when compared to their total assets.
With continued improvements in operational efficiency, as described in the earnings call, their financial position is set to only get stronger in the future.

Recent Issues and Management’s Perspective:

Acquisition Issues: They had to make a lot of accounting adjustments because of some of their previous acquisitions. That, combined with some issues in their Chinese plants, led to a drop in profits this year.
However, they are looking to improve profitability in the future, with their strategy outlined in their investor presentation.
Management Confidence Despite recent downturns, management reiterated confidence in the long-term future of the business, due to global trends such as electrification and automation. They are investing in the future to ensure that they are well positioned to capture those opportunities.
Stock Buyback: With increased profitability and cash-flow, they are implementing a stock buyback program, which is expected to increase shareholder value.