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We have this interview with Mr. Noji, President & CEO of Komatsu Ltd., on a quarterly basis. My name is Akari Joko and I am going to interview Mr. Noji.
In the feature section of this interview program, we decide on different topics in relation to Komatsu fs strengths and future efforts.
In this feature section today, I am going to ask Mr. Noji about Komatsu fs business of mining equipment,
which is working in coal, iron ore, copper and other mines around the world.
Before starting the interview, let me introduce some mining equipment.
Most mines are situated very far from human habitats, such as deep inside tropical jungles or at high altitudes like 4,000 meters above sea level.
Most mining equipment works round the clock driven by operators in different shifts in mines around the world.
Typical fleets consist of dump trucks, hydraulic excavators, wheel loaders, bulldozers and motor graders.
While mining equipment has the same product names and shapes of construction equipment, its size is much larger than construction equipment.
For example, Komatsu fs largest dump truck can carry a payload of 327 tons. It stands over 7 meters tall with the tires with about 4-meter diameter.
Komatsu fs largest hydraulic excavator weights about 800 tons, equipped with its bucket which can scoop 42 cubic meters of earth at one time.
Hydraulic excavators excavate overburden above mineral seams and load excavated minerals on dump trucks.
Wheel loaders are also used for loading at some jobsites.
Dump trucks carry excavated earth and minerals. Typically, five to ten dump trucks are needed per loading equipment.
For this reason, dump trucks represent the largest number of equipment at mines.
Bulldozers and motor graders are used to level the ground as well as build and maintain the roadway for dump trucks.
Mr. Noji, I understand that the mining equipment business is burgeoning today.
Please tell us about the market size in terms of annual demand.
Until fiscal 2003, supply and demand for commodities was well balanced, and therefore the market size was around 2,000 units per year even at the peak.
Over the years, the market used to have a 7-year cycle, as customers replaced equipment with new machines after about seven years of use.
Since fiscal 2004, however, demand began skyrocketing driven by Chinese economic growth. We are estimating that demand will climb to about 6,000 units in the current fiscal year, which is about three times over the conventional peak.
Is such an increase of demand nevertheless related to China, as you have just mentioned?
That fs right. In line with its economic expansion, China has changed from an exporter of commodities to an importer.
Because China imports commodities from around the world, the supply-and-demand balance was disrupted, escalating the commodities prices.
Recent prices of coal and copper are about two to three times higher than those around 2004.
Iron ore prices have been stabilized at about four to five times higher from around 2004.
Under these conditions, resource developers have continued their proactive investment, thereby expanding demand for mining equipment.
Concerning China, you have already described that the construction equipment market demand has been slowing down.
Does this have any influence on the mining equipment business?
As construction projects have been directly and adversely affected by the government's credit squeeze measures,
monthly demand for construction equipment has been declining for some time since last year, year-on-year.
Meanwhile, China's importing volume of iron ore has not declined yet and China's production volume of crude steel is growing more than last year.
Based on these facts, I don't think we will have any problems.
In terms of backlog orders for our mining equipment, we have more than one year worth for large hydraulic excavators which we produce in Dusseldorf, Germany,
super-large dump trucks in the United States, and 100-ton class dump trucks and large bulldozers in Japan.
With respect to super-large dump trucks made by our Peoria Manufacturing Operation, we are negotiating orders for delivery in fiscal 2013 today.
I see you can project the market conditions of mining equipment better than those of construction equipment.
Are there any more differences between the mining and construction equipment businesses?
Yes. We have only one competitor in the mining equipment business. Caterpillar and Komatsu together occupy over 80% of the market.
The number of mining customers is extremely small.
Therefore, for example, whatever happens at a mine in South America or South Africa will be heard by all mining customers around the world before you know it.
It is indeed a very small world.
Hours of machine use is very long for mining equipment. They work round the clock every day except for the Christmas holidays.
No stopping?
No. As the highest priority of customers is to achieve the targetted production volume, our machines are expected to work unfailingly.
To meet their needs and expectations will remain the decisive factors of market competition,
that is, how thoroughly and steadily we can provide machine maintenance service.
As product support is important for customers, they don't decide to purchase equipment only by the prices. Am I right?
Right. They don't decide what to purchase based only on initial costs.
More important for them is the assurance of attaining their planned volume of production.
The next factor concerns production costs, that is, how much expense is needed to produce one ton of minerals by using given machines.
I now understand that the relationship of trust with customers is very important for the mining equipment business. Then, how about earnings?
Mining equipment works for about 5,000 to 6,000 hours a year, as it almost never stops, except for the Christmas holidays.
Therefore, parts wear out quickly, and their sales are large and important for us.
About four to five years after selling one unit of mining equipment, we can expect to generate parts sales and service revenues worth about another new unit.
Today, parts sales and service revenues account for about 40% of the total sales of our mining equipment business.
We had sold a fairly large amount of equipment by 2008. Those units sold in 2007 and 2008 are expected to be brought in for overhauling today.
As overhauling is absolutely needed, we can be certain about revenues from it.
Moreover, we know that the amount of equipment which requires overhauling will increase steadily in parallel with the number of units we have delivered.
While we had delivered about 4,000 units by around 2003, this number will triple this year to about 12,000.
We must provide excellent service to these units this year and onward.
In this regard, our parts business for mining equipment will continue to expand into 2014.
To prepare for this business expansion, we have invested in production facilities for wear-out parts,
such as inner parts of engines, bucket teeth and undercarriage parts for the last few years.
Would you tell us about future efforts?
We believe that teamwork among customers, distributors and Komatsu is very important to develop the mining business.
To build up the Win-Win-Win relationship of the three parties, we have been engaging in brand management activities since about 4 years ago.
In these activities, we work to clearly define customers f goals and expectations and think together with customers
how we can support them so that they will be able to achieve their goals and expectations.
Among the problems of customers, we have discovered that training and manpower shortage are acute,
specifically in the areas of mechanical engineers to repair equipment on the jobsites and operators for dump trucks.
As a solution to the shortage of operators, we have developed and commercialized the Autonomous Haulage System.
This system is capable of not only operating driverless dump trucks but also performing computer-controlled automation.
By getting involved in mining operations, we can become their trusted partner.
AHS also frees customers from operators f wages, which are said to be 100 million yen per dump truck.
It certainly is good pay but they are having a hard time recruiting drivers. So you can imagine how demanding the work environment is.
In Chile, for example, there are mines situated 4,000 to 5,000 meters above sea level. In this regard as well, we are receiving a lot of inquiries from many mines.
We are also working to reduce CO2 emissions in mines. Our efforts include a biodiesel fuel project and development of hybrid mining equipment.
In the trolley assist system for dump trucks, they extend their pantograph to receive external electric power from the power line, when they climb the slope.
While super-large electric-drive dump trucks use diesel engines to generate electric power to turn the motor for traveling,
in the trolley assist system, they become independent of using diesel engines when climbing a slope.
With respect to super-large hydraulic excavators, which are most commonly stationary at the jobsites,
they can easily use the power line to get external electric power and thereby also avoid CO2 emissions.
We also offer electric-drive models. In fact, 70 to 80% of our largest 800-ton models are the electric-drive type.
About 10,000 units of our mining equipment are installed with the KOMTRAX Plus,
so we can constantly monitor their operating conditions and manage detailed data.
So you can give your customers timely, on-target advice.
That fs right. Based on KOMTRAX Plus data, we can make proposals regarding needed inspection, maintenance and overhaul plans.
In this way, we are assisting our customers in maintaining a high level of machine utilization.
Furthermore, we are also offering training programs for customers f operators, service engineers and mining engineers as a joint project with our customers.
As we strengthen our brand management efforts, the establishment of the Win-Win-Win relationship as one team made up of customers, distributors and Komatsu is the most important task for us.
Thank you very much, Mr. Noji. In this feature section, Mr. Noji has elaborated on Komatsu fs mining equipment business.