Nidec Corporation (OTCPK:NJDCY) Q1 2022 Earnings Conference Call July 20, 2022 9:00 AM ET
Company Participants
Taku Miyagawa – Mitsubishi UFJ Morgan Stanley Securities
Jun Seki – Representative Director, President & Chief Operating Officer
Akinobu Samura – SVP & CFO
Masahiro Nagayasu – General Manager of the IR & CSR Promotion
Conference Call Participants
Ramsai Neelam – State Street Global Advisors
Takashi Ito – ARGA Investment Management
Tom Grew – Alma Capital
Jonathan Greenhill – Barings Asset Management
Taku Miyagawa
Dear all, thank you very much for joining Nidec’s Conference Call. I am Taku Miyagawa, General Manager, Corporate Division of Mitsubishi UFJ Morgan Stanley Securities. As we kick-off the conference, I’d like to ask you to make sure all the materials are ready in front of you. If not, please download the files on Nidec’s homepage right now. Please note this call is being recorded and the conference material will be posted on Nidec’s homepage for the coming weeks for investors and analysts who are not able to join today’s call.
Now, I would like to introduce today’s attendees from Nidec Corporation. Mr. Jun Seki, Representative Director, President and Chief Operating Officer.
Jun Seki
Hello, everyone.
Taku Miyagawa
And Mr. Akinobu Samura, Senior Vice President and Chief Financial Officer.
Akinobu Samura
Hello, everyone.
Taku Miyagawa
First, Mr. Samura will make a presentation. After his presentation, we will move on to a Q&A session. And Mr. Seki and Mr. Samura will answer your questions. Mr. Samura now presents Nidec’s Q1 fiscal year 2022 results, future outlook and management strategy.
Mr. Samura, please go ahead.
Akinobu Samura
Okay. Good day, everyone, and welcome to today’s conference call. My name is Akinobu Samura, Chief Financial Officer of Nidec. And today, Mr. Jun Seki, Representative Director, President, and the Chief Operating Officer of Nidec, and myself will be your main speakers and answer your questions. Joining us also is Mr. Masahiro Nagayasu, General Manager of Nidec’s IR team. For our forward-looking statements please see Slide 2 of our presentation material for details.
Now, I’m going to review the key figures. Please see Slide 3 of our first quarter’s results. As summarized on Slide 4, net sales increased 20.8% to JPY540.4 billion, marking a record high on a quarterly basis. Operating profit increased 0.2% year-on-year to JPY44.7 billion. Profit before income taxes and profit attributable to owners of the parent increased 30.3% year-on-year to JPY57 billion, and 23.5% year-on-year to JPY41.3 billion, respectively. Both stood at the record highs on a quarterly basis.
On Slide 5 and 6, you have step charts showing the net sales and operating profit year-on-year and quarter-on-quarter, respectively. By product groups, with exchange rate effect, eliminations and structural reform expenses. As you see the upper chart of Slide 6, overall sales increased due to a weak yen and strong machinery sales, which are backed by an increasing sales of semiconductor inspection system, resulting from strong demand for 5G and in sales of press machines on the back of plastic reduction. This covered the negative impact from semiconductor shortage and lockdowns in China. Operating profit also increased due to increased sales and continued improvement on cost of goods, optimize the fixed cost and they have reflection on the selling prices. This covered the negative impact from a product mix change in appliance, commercial and industrial or ACI.
Please see Slide 10. We are aiming to become number one automotive hardware company by anticipating the strong electrification demand boosted by CASE, which means Connected, Autonomous, Sharing and Electric. In the EV traction motor related businesses, mass production of E-Axles by the joint venture with Stellantis is starting this September. And orders are increasing throughout financial year ‘30, backed by the tailwind of strengthened environmental regulations in Europe. In China, in addition to the two existing major customers, we are going to focus our resources on the private customers, including the three new ones. Based on this, we have revised up the target of EV traction motor related sales in financial year ‘25 from the previous JPY300 billion to JPY500 billion.
In other motors and auto parts, the market in financial year ’22 is expected to recover gradually, while the increased raw material prices are expected to continue. We are accelerating the improvement of the profit structure by pressing the high raw material costs on to our selling prices, and by reducing manufacturing costs. And we are aiming to achieve JPY1 trillion net sales organically, and JPY300 billion additional net sales through M&As in financial year ‘25 in the Automotive segment.
Please see Slide 11. The cumulative number of vehicles using our E-Axles exceeded 418,000 units and the number of EV models has reached 11. Despite the April decline due to the lockdowns in China, the June quarter recorded segment increase of 169% year-on-year.
Please see Slide 12. We are making a steady progress to make our E-Axle business profitable, in financial year ’23 on a single year basis by introducing the second generation E-Axle, in the first half of financial year ‘22. The first-generation E-Axle prioritized a speedy entry to the market and expansion the market of share. However, Gen2 is designed to achieve higher performance and further cost reduction. We are also expecting to introduce Gen3 in the second half of financial year ’25, one year earlier than originally planned. First aim is to gain overwhelming competitiveness to win through the high growth period. In the same timing point year of financial year ‘25, we are expecting to recoup cumulative losses incurred in our E-Axle business.
Please see Slide 13. We have announced that we are going to build a flagship E-Axle factory in Pinghu, China in addition to the six factories that are already existing or expected to be built. In order to increase production capacity of E-Axles, this flagship factory is expected to be fully dedicated to E-Axle production from parts manufacturing to assembling with an annual production capacity of 1 million units. We are also planning to build the 8th, 9th, and the 10th factories globally going forward. Our expected segment volume of E-Axle in financial year ’25 has been revised up to 4 million units. We are going to prepare almost double the production capacity to cope with this.
Please see Slide 14. Nidec has established a semiconductor solution center in [Technical Difficulty] Kawasaki, Japan, aiming to plan and implement semiconductor salacity for JPY10 trillion sales in financial year ’30, with Mr. Omura, Director, who is the leading expert of semiconductors in Japan and joined Nidec recently. This semiconductor solution center is expected to build a strong partnership with semiconductor suppliers to establish a sustainable supply chain of semiconductors inside and outside the Nidec Group in anticipation of geopolitical risks and other contingencies and to create synergies between semiconductors and motors, providing high value-added solutions.
The basic strategy for the semiconductor business is to optimize make-or-buy approach. And we are aiming to ensure a stable procurement of semiconductor components. We currently purchase in the first phase to procure a high value-added semiconductor components in the second phase, and to become a comprehensive motor control solution provided in the third phase.
Please see Slide 15. As higher raw material price and lockdowns in China pressurized profitability, we are preparing for the demand recovery by increasing selling prices and reducing costs.
Please see Slide 16. Paradigm shift from ICE, our internal combustion engine vehicles to EVs is rapidly accelerating in two wheels and small cars as well. We are focusing on two largest markets of India and China in both electric two-wheeled vehicles and small EVs. We are planning mass production in financial year ’22 for 11 projects, including six related to electric two-wheeled vehicles and five related to small EVs. We have added in four wheel (ph) motors for electric motorcycles in India. And with regard to production, we have converted the former HDD factory to that of micro mobility and we are trying to double the floor area of our Indian factory.
Please see Slide 17. In the Small Precision Motor segment, we are implementing business portfolio transformation amid HDD motor market structural change.
Please see Slide 18. In ACI, we are executing structural reform in overseas businesses and looking to enter a new phase of growth, while gaining market share outside Europe that is shaken by the conflict. We are going to accelerate top-line growth through three new strategies in the fields of generators and battery energy storage system, battery charger for EVs, et cetera.
And for the air conditioner market, we are going to expand the business globally, mainly for industrial use. Assuming higher raw material cost continues for the time being, the same as in the old business, we will accelerate improvement of profit structures through passing that on to selling price and reducing manufacturing costs.
Please see Slide 19. Despite headwinds posted by demand slowdown in Europe and raw material price hike, we are going to continue efforts to achieve operating profit ratio of 15%.
Please see Slide 20. The newly created machine business group that consists of two subsidiaries, Nidec-Shimpo and the newly acquired subsidiaries of Nidec Machine Tool and Nidec OKK is targeting JPY500 billion sales in financial year ’25 and JPY1 trillion sales in financial year ’30. And through this new business group, we are going to cultivate a pillar of growth with high profitability.
The growth strategy of machine tool business for the two newly acquired companies is to enhance production and sales in China, to win market share using Nidec’s cost competitiveness and brand power and to pursue profitability through mass production effect. The organic growth strategy of Nidec’s employees to strengthen production and sales through collaboration among our major brands in the press machine business and to gain market share of reducers or 6-axis robots.
Please see Slide 21. In other product groups, the operating profit ratio since financial year ’21 is keeping high level of over 15%.
Please see Slide 22. With regard to the inheritance of Nidec’s corporate culture, we are making continued efforts so that the founder’s ideal, management philosophy and passion will be succeeded to and penetrated into the next generation.
Please see Slide 23. We have now five internal directors, six outside directors, including four female directors, who are elected at the AGM held in June, resulting in the outside directors’ ratio of 55% and the female directors’ ratio of 36%. With this new team, we will continue to make the best efforts for fair, transparent, and highly effective governance system.
And lastly, on behalf of the entire management team, we would like to thank our customers, partners, suppliers for their support and commitment as well as our shareholders.
At this time, we would like to open up the call for questions.
Question-and-Answer Session
A-Taku Miyagawa
Thank you very much, Mr. Samura. Now, we’d like to turn to the Q&A session. Mr. Seki and Mr. Samura will be pleased to answer your questions. This Q&A session will be conducted electronically. [Operator Instructions] Okay. Our first question today is from Ramsai Neelam, State Street Global Advisors. Please go ahead.
Ramsai Neelam
Hi. Thanks for taking my questions. So my first question is on organic growth. I mean, during the quarter, we have seen a 15% tailwind from ForEx. And if we exclude that, roughly, we have 6% growth left. So can you break down 6% between the organic growth and also any thoughts on the acquisitions? That’s my first question.
Jun Seki
Ramsai, are you talking about the entire portion or any segment?
Ramsai Neelam
Yeah. I mean, it depends. I mean, is there any significant acquisitions like in machinery. It looks like there is an acquisition, but you can — but broadly speaking also.
Jun Seki
Machinery?
Ramsai Neelam
Yeah. I mean, I think it would be — I mean, at the Group level, I think it is fine, if you can give a broader understanding at the Group level.
Jun Seki
So as far as we have been saying is, as you can see Slide number 20. Can you see the slide number 20?
Ramsai Neelam
Okay.
Jun Seki
And then we say, fiscal year 2025, we are looking for a JPY500 billion top-line, covering the Nidec-Shimpo machine business, okay. That can be divided into the pink portion, it’s a new M&A. And the machine tool business, which means the Nidec Machine Tool and the OKK. And the bottom part, the green part is the Nidec-Shimpo organic growth. So roughly, we say that’s going to be making a one-third each. Is that fine?
Ramsai Neelam
I’m especially asking for the Q1, this particular quarter.
Jun Seki
Pardon?
Ramsai Neelam
So I mean, this is — we are talking about Q1, right?
Jun Seki
Yeah.
Ramsai Neelam
So Shimpo, yeah — and my next question on Slide 15. I think I made a little allocation there. So it seems to me the loss — the operating loss from the traction of this is roughly JPY6.5 billion in the quarter. So can you confirm that? If true, it is actually the operating loss from traction motor business has increased from JPY2.5 billion to JPY6.5 billion. Can you explain those numbers, please?
Akinobu Samura
Sorry, Ramsai. Your voice is breaking. So it’s very difficult to catch. Can you speak again little bit clearly and slowly, please?
Ramsai Neelam
Yeah. Okay. On the traction motor business — EV traction motor business, it seems like there is an operating loss of JPY6.5 billion in the quarter compared to JPY2.5 billion loss in the Q4. Can you explain those numbers and what is the expectations on the profit-making on traction motor business?
Akinobu Samura
Yeah. You are looking at Page 15, right? I guess, you are measuring gap between green bar versus blue bar, that is loss from traction motors. And your question is, Q4 versus Q1. It’s about JPY50 billion to JPY60 billion loss, that is constant. Mainly…
Jun Seki
JPY5.6 billion.
Akinobu Samura
Sorry, JPY5.6 billion. Sorry, I got one decimal wrong. JPY5.6 billion. The majority of those are development fee for coming new products in ’23, ’24. And then as basically we said, currently, we are building and selling Generation 1. Generation 1 is not profitable yet. So each time we sell, we lose money. But, this is not answer to your question, but if we go to Page 12, so if we look at the bottom gray color, the Generation 1 and the light yellow is Generation 2. In this quarter, we start producing this Generation 2. And then time by time, we expand this Generation 2. And Then this Generation 2 is firmly profitable. We already confirmed double-digit. And then it’s a matter of how quickly we can come back from Generation 1 to Generation 2.
And then we said — originally, we said, FY ’23 is the year we make breakevens. But today, I announced, we grew ahead by six months. So before FY ’23, H1 was still negative, H2 become positive. That’s why, as total FY ’23 — positive FY ’23 year alone. We already confirmed, we can make positive profit in FY ’23 H1 by six months ahead. So this is not end. After we confirm this, we will continue to make efforts to go ahead with this to Q4 in FY ’22. So time by time, we are improving profitability, preventing cash bleed from Generation 1. And then that will make a much better in ‘22 total profit of traction motor. But you’re right, at this moment, we lost JPY5.6 billion in Q1, mainly because of development.
Ramsai Neelam
Okay. Yeah, I got it. Thank you. And on the similar line, so I think you had also increased the outlook for financial year 2025 to JPY4 million, the new traction motor units. So can you give some color on what are the factors that are — I mean, contributing to the upward revision in outlook? And also can you give me what are the actual orders in the high property orders of the 4 million units.
Akinobu Samura
Okay. Thank you, Ramsai. I think you are looking at the Page 26 left-hand side chart. If you look at the 25, we are saying in regulator, it’s JPY4 million. It was JPY3.6 million in April. So we increased by JPY400,000 — and then before we explained each time how many brands, how many models. But now it’s too many, at least like a 20 brand and over almost 40 cars. So we quit to announce those because it’s too complicated.
But instead, I would like to tell you a few facts. We are talking about 25, but in ’22, we had the four brands in current lineup, actually, four additional OEMs. We cannot say clearly name of our customers, but all three are Chinese customers and one are international customers. [indiscernible] Chinese — all are Chinese, we can say. Up to today, we have two OEMs, Grange Motors and GD Motors. A total model is over 10, but only two OEMs. So we are very glad to have four more OEMs in this year. And it will expand to more than 20 towards the ‘25. That is the fact one.
And then fact two, actually, what we have in our hand is about JPY5 million not JPY4 million farm order is already reaching about JPY3 million and a very good possibility, probability to get the order is JPY1 million, and we have JPY1 million extra. So we are very confident to achieve this JPY4million in ’25, at least. And then third one, about JPY1.4 million of this JPY4 million is coming from Europe, which is we call NPE Nidec PSA eMotor Companies. That is a joint venture with current Stellantis located in France. And then that start production from this quarter. I cannot tell you exact month, but by this quarter, they will start the production.
Actually, Mr. Carlos Tavares, CEO of Stellantis already announced, I don’t remember if he mentioned the exact month, but it is within this quarter’s end. And then it will grow to more than JPY1.3 million in ’25. And then we’re now receiving many inquiry from European companies and North American companies. So this JPY4 million will not stay. Time by time, it will grow, but — we are very confident. The most important point is, if we assure this, we need to be ready to produce, okay. That’s why I think Page 15 — Page 13, we say capacity first, okay? Not necessarily — not necessarily we prepare double, but we say, we need JPY6 million before ‘25 because now JPY4 million and then it will increase to 4.2 million, 4.5 million, 4.8 million time by time. And then I think JPY6 million may not be enough, yeah. So I think we are one of the most aggressive investor for this production capacities because we don’t want to miss any opportunities, okay? That is the answer to your questions.
Ramsai Neelam
Thank you. And just one more follow-up here. So is there any guidance you can give or put some target units for this financial year?
Akinobu Samura
Sorry Ramsai, say it again?
Ramsai Neelam
Yeah. Is there any guidance you can give on number of shipment units for this financial year in traction motors?
Jun Seki
For this fiscal year?
Ramsai Neelam
Yeah.
Jun Seki
So roughly 650,000.
Ramsai Neelam
And lastly, a final question.
Akinobu Samura
650,000 plus NP.
Jun Seki
Yes. The 655,000 is the E-Axle number, we are going to build in China. And at this moment, within this fiscal year, we see the volume of the NPE this fiscal year, just a minute.
Akinobu Samura
I think we cannot tell that way.
Jun Seki
Okay. So that will be [Multiple Speakers]
Akinobu Samura
And we are not positively announcing that, we’re historically delivering traction motor for LCV world, light commercial vehicle world. And then that is about 50,000 to 60,000 this year. So overall, we can say this fiscal year E-Axle production is about 80,000 — sorry, 800,000. So together with the production we made last year, we can exceed 1 million within this fiscal year. If it’s very fast, we may exceed within this calendar year.
Ramsai Neelam
That’s great. And finally, a final question for me is, broadly, can you give an outlook, I mean, the demand outlook of the Auto segment as well as ACI. So the macro seems weakening in some of the countries. So what is the current demand you’re seeing in different markets? Do you see any slowdown in the kind of demand?
Akinobu Samura
Okay. So just moment, so can we go to Page 19. Left-hand side is sales and right-hand side is profit. About the sales, we are still increasing from last Q4 to this Q1, as you can see, either blue bar or green bar. Green bar is our [Indiscernible] and blue bar is plus group companies. Then it’s increasing. However, if we take into account, we are increasing price. It could revise, not increasing this way. It’s almost flat. And it’s almost flat, but if we look at the segment by segment, industry and commercial motors are increasing, while appliance is decreasing, that makes flat.
And then for appliance side, particularly, we are seeing a huge reduction from fridge and washing machines, we say cold and wet. And then we don’t know if this is temporary deteriorations or this may continue another year or two years. But if we look at the automotive world, we thought it’s coming back last year. Actually, it’s very, very flat as like 8 million — sorry, 80 million per year. So we — I’m telling up my people in appliance teams, it may not come back. So we need rapid right-sizing for headcount of direct labors or indirect labors. And then if it comes back, we can hire. So I’m very — I’m looking at appliance volume very conservatively. Commercial and the industry is still trying. That is the answer to your questions.
Ramsai Neelam
Thank you very much.
Akinobu Samura
Okay. Thank you, Ramsai.
Taku Miyagawa
Ramsai, thank you very much. Our next question is from Mr. Takashi Ito from ARGA Investment Management. Please go ahead.
Takashi Ito
Yeah. So I just have a quick question on the Machinery segment. So is the margins for the machine tool business, the one which has started in FY ’21, higher than the existing Shimpo’s business?
Akinobu Samura
Thank you, Ito. I think it’s almost same. Actually, Shimpo business is still higher and then Machine Tool is catching up and OKK is following Machine Tool. So it’s around 12 — 10% to 12%, while originally Shimpo is staying about 20% and the mix is 18.1% as Page 21 is showing.
Takashi Ito
Thank you so much.
Akinobu Samura
We are not increasing price. This is coming from pure cost reduction. Therefore, our customer is very appreciated. And then we are having many order from customer in global, particularly Machine Tool is very specialized to build gear machinings. We have a huge order for gear maker because of high electrifications. So that is happening. So I think this future is very bright.
Takashi Ito
Thanks.
Akinobu Samura
Okay.
Taku Miyagawa
Thank you very much Mr. Ito. Our next question is from Mr. Tom Grew from Alma Capital. Please go ahead.
Tom Grew
Hi. Can you hear me?
Akinobu Samura
Yes. We can hear you Tom.
Tom Grew
Okay. Great. Thank you very much for taking my question. I was just wondering a question going back to talking about E-Axle or traction motor. And I was wondering, is it possible to explain — you’ve said two things are changing. One is that the profitability will come sooner than we were expecting before, but also that you will be expanding production more aggressively than before, which together seem like they’re going in opposite directions. So is it possible to explain how you sort of — how we can have confidence in these two statements together?
Jun Seki
Yeah. First, profitability, I cannot disclose at this moment. And then, I’m sure our customer is not happy to hear their supplier having high profitability. Then we don’t trump it this way, but since you’re our investors, confidentially, I can explain. We successfully reduced all production costs, including passing parts, by about 30% from Generation 1 to Generation 2. Then, of course, material hike is still continuing. We successfully take all compensation for material hike from customers. So what we can enjoy this cost reduction for either price reduction for more market share or profit.
And then in case, we introduce all of those cost reactions into profitabilities, our profitability is secured as double-digit between ’22 to ’24 before ’25, that is the most important period to take all market share. So we make a final decision depending on competition situations. But if we introduce all this cost to advantage into profit, that makes this program very profitable. By the way, currently, we — I don’t want to say so creative, marginal profit base, it’s almost breakeven. Profit base, minus 15%. So it’s a huge gap. So last year, we lost JPY26 billion — sorry, JPY24 billion negative because of traction motors. So if the traction motor is breakeven, probably we’ll reach JPY200 billion for profitabilities. And then as Ramsai made a question in first, in this Q1, still JPY5.6 billion negatives. But as I said, in H1 in ’23, we can make a positive. So that is profit situation.
And then answer to your second question, productions, of course, investment is giving a pressure for cash flow. But once we’re talking about profitabilities, investment is depreciation. Depreciation line is about 4% to 5%. And then that 4% to 5% becomes bad, unless we feel all the capacities. So let’s say, we fill capacity by 50%, the impact is 2% to 2.5%, not extremely huge. So — and then as I explained, we are very confident to make this 4 million. Therefore, I think — but meanwhile, this is typically Chinese customer. Chinese customer come to us and then pick up what they want and they say they need it next year, less one year. So in that case, we’re afraid more to lose this opportunity than stress from depreciation. So that’s why our strategy is production first. It may impact some, but not huge for profit. That is what we are thinking.
Tom Grew
Thank you. Thank you very much. Can I ask, the Generation 2 E-Axles, obviously, as you explained, more profitable than the Generation 1. And I was wondering, what are you expecting in terms of Chinese customers versus European or non-Chinese customers usage of second-generation versus first generation? Because obviously, your existing contracts with Chinese customers, at the moment, they’re all used to employing first generation. So do you expect them all to switch to second generation very quickly or not? And for Europe, will it just be second generation or?
Jun Seki
Thank you, Tom. It’s very, very good questions. What Chinese customer want is currently delivery. This is a very famous story, but Chinese Government [Indiscernible] long time because local player is always weak as an international player. So like Changan, Changzhou, Shanghai Motors, they are much weaker than Volkswagen, GM, Toyota, Nissan. With 20% price reductions, lower price, we are still [indiscernible] huge market share. So Chinese government are very unhappy to share some profit with those international players. That means with Germany, with Japan, with USA. But what we are seeing is in China, while ICE vehicle is reducing, EV is increasing very fast. And then nearly 80% of those EV is produced by local players. So when we look at this Q1 result, proportion of the local player and the international player has drastically changed. Now local player is more than 50%. And the international players used to have 60% or more, but today they are now like 47%, 48%. So this is what the Chinese government expecting, I believe.
Therefore, they are reaping all the automotive OEM to increase EV more. So I didn’t explain, but when we talked about the 4 million, we used — we’re still using some compression issue. Lately, Chinese player — volume which Chinese player is requesting us always happen 100% or sometimes 120%. So I’m requesting my people to stop compressing their volumes because it’s danger. And then it may change in the future, but at this moment, at least what we are requesting is all realized, okay. So that is the situation. And then therefore, first, their requirement is delivery as they want. And second, of course, price. I have to say, if we have any participant from China, sorry to say it this way, but Chinese automotive market is still not matured yet. So driver is not sensitive as the European driver or U.S. drivers. So accelerations or quietness is less sensitive compared with the European market. So they want to make more EV and they want to sell more EV with a firm delivery with cheaper price. That is their requirement okay.
And then switching to Europe, if Europe is the same tendency, I have to say, at this moment, no, because European players still producing their traction motor by themselves, most of the case. Stellantis case, it’s a joint venture, probably, they are treating us like an in-house. Mr. Carlos Tavares announced that they have a very smart way to reduce cost of this powertrain production with much — with firm control by joint ventures. So they are kind of exception, but except them, all are still producing. And then they are not crazily chasing volume yet. And second, in the European market, still Maxcom speed very important, even EVs. And then autonomous lynch is very important too.
Therefore, they are requesting a very high tool, high accelerations with very good quietness and multi-efficiencies, which Chinese customers are not so sensitive. So I believe this tendency will continue for a while. So naturally, we may have to split the specification for European market and Chinese market. At this moment, we don’t have any problem with this because most of — majority of production for China, we have a Chinese brand. And Europe, only we have a front with Stellantis. In future, probably, this makes some problems and we need to maximize the common platform between Chinese and Europeans. At this moment, we are not facing that problem yet.
Tom Grew
That’s a very clear story. But when you — can I just ask, in terms of Generation 2 and Generation 1, is that the specification split that you’re describing or within those two generations, are there different specifications?
Jun Seki
First, Generation 2 is much lighter, smaller, thinner. So by weight, it’s about 15% to 20% reductions. And then in terms of NVH, Noise Vibration Harshness, it’s about 10% better. Torque and motor efficiency, it’s almost same. So specification-wise, we just kept flat and then all other made better. And then if we bring this to Europe, probably we need a little more care for NVH and then maximum speed by changing dealership.
Tom Grew
Okay. So your plan to switch people on to Generation 2 instead of Generation 1 E-Axle, that is applying for both China and Europe then it sounds like?
Jun Seki
Yes, that we are expecting. But China, it’s already confirmed. All our customers, they want to switch.
Tom Grew
They are going to switch. Thank you. Understood. Okay. And this switch is to drive the profitability improvement that you’re talking about within the next year and a half, yeah?
Jun Seki
That’s right. The introduction itself starts from this quarter, actually, we can tell it’s a September. And then let’s say, in September, total balance of Generation 1 to Generation 2 is, let’s say, 98% to 2%, month by month, it’s gradually increased. And then next FY ’23 Q1, what I’m seeing is balance is about 75% and 25% — sorry, 25% Generation 1, 75% Generation 2.
Tom Grew
Okay. And sorry, final question is, in the medium term, once you’ve built the new factories in both Europe and again expanding in China, do you expect the margins to be very different if both markets are using Generation 1? I understand obviously the specs might be slightly different, but do you expect long-term margins to be or profitability to be different given the production location and pricing with customers and things?
Jun Seki
If we look at price of motor, we are seeing a much higher price in Europe. Therefore, if we make exact same motor, profitability in Europe become higher than China. However, for Europe, probably we need extra specification, as I explained, multi-efficiency and so that cost more. So as a conclusion, I think profitability has become very similar. And then we have not started the business in North America yet, but we’re listening many inquiry for North American customers and North America will be very similar too, but probably a little easier to make a higher profit in USA because of less competition.
Tom Grew
Okay. Thank you. Thank you very much. That’s very helpful. Thank you.
Jun Seki
Thank you.
Taku Miyagawa
Thank you very much, Tom. Our next question is from Mr. Jon Greenhill from Barings Asset Management. Please go ahead.
Jonathan Greenhill
Hi. Thank you. I wonder if you could just give us more details on Slide 14, and in particular, the timing of those three phases. Even if it’s a rough timing, how much you’re willing to invest in that process? And then what you — perhaps a little bit more detail on what you think the benefits will be? Is it predominantly sort of security of supply or are you looking for a big cost advantage from that?
Jun Seki
I think everybody is on Page 14. And then in the table, we say phase one, phase two, phase three, at this moment, we are completely concentrating to make a phase one, which is secure delivery. Actually, we held a kick-off meeting on June 7 in Kawasaki nearby Tokyo. And then we invited more than 30 very famous semiconductor suppliers. And then we explained that probably our approach is a bit different from other their customers because we want to be very transparent for volumes. And then what we want is win-wins, not take-take that standard automotive OEMs. So they’re a bit surprised, but they positively support our approach. We say we guarantee volume for five years. And then of course we pay if it’s less.
And then we also said that if you they don’t deliver, we take priority too. So it’s even. So that communication is ongoing. I think we made about 50% completions. We still need another 50% to complete to secure it all. That’s phase one. And then we are going to complete this by this October or November timings, okay. As I said, July volume is already 40 — more than 40,000 a month. And that exceed to 50,000 very soon and then 60,000 in Q3. So we need a rapid action for this securing chips semiconductors. And then now this team is preparing to move to phase two. Actually, they already made a draft RFQs. I have checked out, but it’s not yet enough. They need probably one to two months more to complete this RFQ. RFQ is travelling at this moment to traction motor, but also that will expand to as our automotive parts and also pressure motor parts and appliance, commercial industry parts. At this moment, this RFQ is dedicated to traction motors.
And then goal is to make a long-term agreement with nominated supplier, as I explained in the beginnings. So we won’t — then this is a direct answer to your question. Purpose is obviously both volume security and also cost reductions, the better price than current. Actually, up to 2020, semiconductor was nothing. You can request today and deliver tomorrow because inventory is everywhere. It’s changed from last year ’21. Then Nidec didn’t have any integrated procurement. So we have over 200 brands, and brand-by-brand, they are procuring — they were procuring semiconductor as they want. We didn’t have a price disadvantage because lots of extra inventory from this world.
And then now we realized that we are treated as like nothing because each procurement activity has very small volumes. So now we’re integrating this requirement as total Nidec to enjoy more scale merit. And then we already confirmed our demand of total Nidec is good enough to make supplier happier. So that is what we are working. Is that answering to your question, Jon?
Jonathan Greenhill
Yeah. Thanks. And phase three, that sounds like a very long-term sort of distant target. Is that right?
Jun Seki
Yeah. I forgot to explain very important point. [Indiscernible] we don’t want to build by ourselves because we have no interest, but semiconductor itself. We just need semiconductor to build our product. Therefore, we want to avoid phase three as much as possible. But if necessary, we’ll go phase three. So first, we want to stop by phase two, and then we want to make a good price and good delivery from existing suppliers. But if necessary, we’ll move to — we don’t hesitate to move to phase three.
Jonathan Greenhill
Thank you very much.
Jun Seki
Okay.
Taku Miyagawa
Thank you very much, Jon. We don’t have much time, so the next will be the final question. Mr. Takashi Ito from ARGA Investment Management. Please go ahead.
Takashi Ito
Yeah. Hi, sorry. Just a quick question. I had missed it earlier. So what are the long-term profit margins for the E-Axle segment as such, the sub-segment?
Akinobu Samura
That’s very, very good question. Again, can we go back to Page 26. Please look at the left chart. Time-by-time, we’re changing ’25 volumes. It starts from like a 2 million, 2.5 million, 2.8 million, now 4 million. Why we are changing? We have not changed 2030 target, which is 10 million. This 10 million stands 45% market share at that time. And then every demand prediction in 2030 is keep increasing. And then, if we can really take a 45% market share, of course, we dominate these areas and then we can lead pricings. That time, I think 20%, 25% margin is not the dream. So then meanwhile, if we say, like 7% or 8% market share, of course, we can’t control this price.
So important point is, we need market share by 2030 to get the higher profitabilities. So as I explained in the transition periods, we — our engineering make a cost reduction anyway together with passing department. And then, if we use those cost advantage for more market share or more profit with less market share, that become choice. It’s depending on situations. But potentially, we are aiming 45% market share in 2030 with 20% to 25% of profitability. That is our strategy.
Takashi Ito
And just a quick follow-up. So right now, the main customers of E-Axles are in China, but how will the ASPs change though if you start developing new products for the European car companies, which needs higher performance?
Jun Seki
This is what we are thinking. Today’s package don’t have that [Indiscernible] we’re splitting our customer Type A, Type B, Type C. Type A, they love to build motor by themselves. Type C, they don’t care if it’s outsourced or in-house because outsourcing is very competitive. They’re procuring traction motor from outside like us. And Type B is in between hybrid, like Stellantis. They don’t want to relying on outside, they want to keep control. Their choice is like joint ventures. Some are like technical corporations, partnership, whatever relationship between. Type B is some soft binding, hard binding. And then we are concentrating to China
There are two reasons. One, there are so many Type C customers. They don’t care to build quite themselves. They are freely requesting us to build for them. And two — reason two is, they have an extremely short lead times, now very much cash consuming because we need production capacity in advance. This is just average number, but current Chinese customer required lead time from order to SOPs about 1.5 years, while European player average time is about 3 to 3.5 years. So spend the money to make it cash. This lead time is very important, particularly our current volume increase in periods. Chinese is much easier to work with because of short lead times, the requirement and then more reliable volumes, okay.
And then, so for this stations, we are building and selling in China. For Europe, I think they follow similar. We say Type A, but actually Type A is transforming to Type A dash. That is — they keep final assembly in their site, but they request a supplier to build data or rotors or inverters and gear and they purchase those as component and they make just final assemblies. Because they — now they’re realizing their in-house cost is far higher than our selling price because they don’t have enough volumes, while we have enough volume already.
So what we are predicting is they move to A to A dash and then finally it becomes C. This transformation occur from cheaper car, probably for very high segment like Segment E, Segment D, Segment F, they may keep in-house, but they can’t keep their in-house production for like a Segment C, B, A. So that’s probably coming to us. And then invading those one by one. And then maybe 2035 or 2040 probably no one build by themselves or at least even they build just the final assembly. That’s what we are seeing.
Takashi Ito
Thank you so much for your time.
Jun Seki
Thank you, Ito.
Taku Miyagawa
Ito, thank you very much. Now, we’d like to conclude the conference call. I’d like to appreciate for your participation. Should you have any further questions, please don’t hesitate to contact Nidec Corporation or your sales representatives at Mitsubishi UFJ Morgan Stanley Securities.
Jun Seki
Thank you, everyone.
Taku Miyagawa
Thank you everyone for joining the conference call, and you may now disconnect.
Jun Seki
Bye-bye.
Akinobu Samura
Thank you. Bye, bye.
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