The Quiet SaaS Innovator Enabling Japan’s Top Industrial Machinery Makers to Globalize | H.E.R.O. Issue 10, 16 November 2020

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The Quiet SaaS Innovator Enabling Japan’s Top Industrial Machinery Makers to Globalize | H.E.R.O. Issue 10, 16 November 2020

November 15, 2020 Uncategorized 0

All of Japan's top critical industrial high-tech machinery - from industrial robots, semiconductor equipment and the computer control system of the nuclear power plant, to the trajectory control system of the satellite, biotechnology and pharmaceutical inspection scientific equipment - needed one essential product and solution to befit the "Made-in-Japan" world-class quality status to sell effectively in overseas markets, and is needed as well for similar overseas products wanting to sell well in Japan.

This critical product and solution provided by a quiet innovator in database SaaS has enabled many top Japanese manufacturers & IT companies to globalize over the years, and for top overseas companies to make inroads into Japan's market, including: Fanuc, Toyota, ABB, Advantest, Agilent Technologies, Applied Materials, Atlas Copco, Bosch, Bureau Veritas, Canon, Dell, Dassault Systemes, Emerson, Harmonic Drive Systems, Heidelberg, Honeywell, IHI, KLA-Tencor, KUKA, Kurata, Nvidia, Qualcomm Japan, Park Systems Japan, Pitney Bowes, Sandvik, Saint-Gobain, Samsung Japan, Siemens, Sirona Dental Systems, Teradyne, Texas Instruments, Thales, Thermo Fisher Scientific, Tokyo Electron, Trimble, Xilinx; Apple, Autodesk, Citrix, EMC, ESRI, Fortinet, Intel Japan, Oracle, SAP, Trend Micro, Wipro, etc.

This essential product solution is the technical manual. And key customers such as Fanuc, the world's largest maker of industrial robots, recognizes the importance of the manual in increasing its product value and usability and actually stopped operating the factory for one day just for manual production.

Mr. M, founder and CEO of Japan's #1 technical e-manual database SaaS innovator shared: "Manufacturers cannot survive without creating new products, and these products always need a technical manual. Although this may not be a well-known fact, the market related to manuals is actually very large. According to certain estimations, the size of the market only for Japanese listed manufacturers is about 7 trillion yen. In recent years, the shorter cycles for new product releases, and the improved performance and functions of products is continuously increasing the information that needs to be covered by manuals. In addition, the globalization of the product market has expanded the needs for manuals for other countries."

"We are the very first company in Japan to specialize in producing B2B technical manuals in 1984. Instead of just creating manuals, our goal is provide solutions for clients that will not only improve the quality of manuals, but also drastically reduce costs related to production, and even reform the client’s system. During our 36 years of experience in the industry, we have gained trust from many major manufacturers with our solutions, especially focused on technical manuals."

This week, we highlight one of our portfolio companies, Japan's #1 Technical E-Manual Database SaaS Innovator, which is up +11% during the week (9 to 13 Nov 2020), after reporting on 11 Nov 2020 a healthy set of interim 2QFY2020/03 results, in which sales climbed 11.6% yoy, operating profit rose 31.2% yoy with operating margin improving from 48.6% to 57.1%, on continued demand and growth in its cloud software technical e-manual business.

The company also announced the acquisition of 100% of shares in a long-established technical manual company with over 60 years in operating history and strengths in digital media, editing and production, including 3DCG animation to express product handling, assembly, construction and operating instructions and procedures in an easy-to-understand and accurate manner, as well as advanced creativity and multilingual support.

This rising dividend-yielding highly-profitable and cashflow generative innovator has consistently topped the rankings in the list of Japan's most profitable and highest ROE companies and has also compounded +1,442% in capital gains in the recent 4+ years vs MSCI ACWI World index +44.9%. The company's SaaS business model generates stable and recurring monthly subscription revenue (based on the data capacity of the manual and the number of users), achieving high profitability with EBIT margin of 51.9% and ROE (= EBIT/ Equity) of 43.9% and a strong balance sheet with net cash at 53.5% of total asset.

"Overseas, It is often said that Japanese manuals are jokes," CEO Mr. M pointed out the problems with Japanese companies' product manuals. Japanese industrial equipment manufacturers often make manuals for product operation and maintenance while engineers are in the process of developing their main business. There are variations in quality, such as typographical errors, typographical errors, and the inability to be uniform in terms and designs. Translations of various foreign languages such as English, French, and Chinese are available for overseas customers, but there are many miscalculations, and inquiries and complaints are constant. CEO Mr. M shared: "Thus, while the product boasts first-class quality, the poor quality of the manual result in a big drop in brand image in Japan and abroad. Manual quality is the blind spot of Japanese manufacturing industry."

CEO Mr. M added: "In this expanding market for manuals, many manufacturers are having difficulties in improving efficiency, quality, and reducing costs related to manual production. Since manuals are mandatory for releasing products, some manufacturers even attach documents that look like manuals but are very poor quality. The situation for manuals is quite confusing; manufacturers are neglecting the user’s safety and convenience, increasing support expenses, and even ignoring the risk of tremendous compensation that could be caused by lawsuits. In other words, problems regarding manuals cannot be solved just by outsourcing production and translation. The solution for this problem is to: (1) Thoroughly plan the manual production phase when planning and developing the product itself. (2) Create modules with the information and data in the manual and manage them so that they can be reused in other manuals. (3) Manage the schedule and resources thoroughly so that specification changes of the product will not affect the manual production phase. This is easy to say, but very difficult to execute. In order to solve these difficulties, we have launched a cloud service which is specialized for manuals. The core of this system is the production support system, on-demand printing and delivery system that we have been providing with 'e-manual'."

Given that we as retail consumers almost never read the manuals of our smartphones or household/electronics products, it is difficult to comprehend and easy to misunderstand the business of the company which specializes in manuals for B2B products and does not do B2C products such as smartphones or white goods.

CEO Mr. M explains: "Besides our own living scenes, there are various manuals for B2B industrial machinery, such as maintenance of automobiles, maintenance of engines of power plants and maintenance of semiconductor manufacturing facilities. In the technical manual market, the number of volumes and pages has increased more than 20-fold compared to 30 years ago due to advancements in IT and factory automation. For instance, there are thirty thousand pages in the automobile maintenance manual. In addition, as products from various major manufacturers have become more sophisticated and complex year after year, the descriptions in manuals have accordingly become more sophisticated and complex. However, despite this, the quality of current manuals is a matter of great concern. The reality is that few improvements have been made over the last 30 years."

"The technical manual is actually very important, and it is possible to reduce about 70% of complaints and costs. The creation of the optimum manual not only reduces the cost burden but also improves the inefficiency of the manufacturer and the user and increases product value and usability. In fact, our key customer Fanuc recognized the importance of the manual and actually stopped operating the factory for one day just for manual production. We are the only company in the country that is engaged in consulting and producing of this ‘professional’ manual."

"By implementing our e-manual solution, our customers are able to automatically handle editing work, which reduces outsourcing expenses. By using our manual creation know-how, it is possible to reduce the cost to about a quarter on average. There is no case where the manufacturer did not lower its cost when we helped with the technical manual consulting. Dramatic changes can be expected visibly in terms of both time and cost.”

“We have a clear target company list of 2,000 companies. We carefully select 10 priority customers for each fiscal year. ’Please let me study your manual,’ one of our sales representative asked of a major machine tool maker in 2016. From there, our technical manual creation team corrects everything in about a month, and creates new manuals. The total number of pages reached 24,000 pages. The machine tool company was astound at the returned manual and asked to reform the entire company manual. Since we narrowed down our business targets to priority customers, we have reduced the number of customers significantly from 2012 by about one third in 6 years, and on the contrary, the sales per company has increased over six times. Sales to new customers are said to be five times the cost of selling to existing customers and deep cultivation of existing customers is be a cost-effective strategy. Since our proposal will be for the upper-level companies with decision-making power, it is imperative for each and every employee to have advanced proposal skills and consulting skills. The goal is to become an indispensable presence for manufacturers.”

The company’s cloud-based portal site enables users to centrally manage, edit and distribute digitized manual data with user-friendly functions that include its patented “Term Filter” algorithm that allows users to convert technical terms regardless of when or how they are written and replaces all technical terms that need to be unified based on the glossary. The e-manual cloud service also enables on-demand printing service to reduce logistics and warehousing costs, as well as the online ordering and purchasing of component parts linked with the maintenance manual to the ecommerce site.

A key strength of the company in winning clients such as Fanuc and Toyota is its consulting know-how based on its deep understanding of manuals cultivated from over 36 years of experience. Like Keyence (TSE: 6861), the company commands a high-profit structure by business model design in adopting a “fabless” business model, outsourcing most of the non-core labour-intensive manual writing to 40 external partners, concentrating on the higher-margin front-end design, planning & consulting solution-proposing business and the SaaS-based e-manual database management, thereby positioning itself at the apex of the fragmented manual industry of around 2,500 manual translation companies and differentiating itself from conventional lower-margin manual companies with non-recurring revenue model who are relegated to “subcontractor” status.

The company has also developed the game-changing Artificial Intelligence (AI)-Augmented Reality (AR)-guided manual that can completely guide anyone by conversation through all necessary steps to accomplish value-added tasks such as operating and maintaining a complex machine. For instance, if we do something wrong during the operational/maintenance procedure, such as inserting the right-colored wire into the proper outlet or injecting liquid three times instead of five times into the tube at a consistent speed or recognizing the correct shape of the parts used or how the valve is tightened and whether it is properly tightened, the AI will notice and warn us. This AI/AR-guided  also allows the workers to call each other and communicate, even record, the progress of their work; a supervisor can even look over the newcomers who are in distant places.

CEO Mr. M shared: "VISION is the ultimate AI-AR (augmented reality) manual that anyone can use easily, which does not need the user to see nor memorize tens of thousands of pages of manuals, not only in Japanese and English, but also in any language. We want to escape from the conventional manual that has bothered engineers so far and have AI to monitor and guide the worker to prevent mistakes and complaints, and to shorten the training period for new workers. We have over 30 years experience in preparing manuals entrusted by manufacturers and we incorporated our existing product of cloud 'e-manual' know-how in AI and developed VISION. VISION is possible only because we know the manual. We are familiar with where to watch out and what kind of warning should be given. High performance machine vision in complicated shape recognition is also a big feature of VISION. The AI also recognizes procedures such as tightening the valves, injecting liquid etc and tells the workers how to do it and displays how many times to do so. In addition, it is also possible to call and talk to workers working in different places, so it will be useful for tasks that require team work, such as checking the work progress of the members.”

CEO Mr. M summed up: “It is our mission to produce manuals that are ‘truly useful’ based on our 36 years of experience and wisdom, and we will strive to distribute high-quality manuals that are ‘free of wasteful spending and man-hours’. For manufacturers who engaged us to work with them, we have become a partner to our clients who can receive a lot of ideas and mechanisms unique to their company to promote efficiency. Domestic major manufacturers are aggressively pursuing R&D investment to respond to advanced technologies, labor saving investment to cope with labor shortage, renewal of obsolete equipment, etc. The compatibility of our mission with market needs is increasing.”

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