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Earnings Call Analysis
Q3-2024 Analysis
Nidec Corp
Nidec Corporation's CFO Samura reported that the company's operations are progressing smoothly and hitting record high results. These impressive outcomes are noted in terms of sales, operating profit, and profit attributable to owners, with year-on-year sales increasing by 3.2%, operating profit growing 36.1%, and profit attributable to owners jumping 40.2%.
The company is shifting its EV traction motor business focus to profits, incorporating a restructuring plan that incurs JPY 45 billion. Management is concentrating on enhancing financial strength and has revised sales upwards by roughly JPY 100 million, while operating profits have been adjusted downwards by JPY 180 billion.
Nidec's product groups report varied performance: Small Precision Motors division improved after revising pricing strategies, Automotive Products benefit from the recovering global demand, and Appliance, Commercial and Industrial Products continue a strong trend with an operating profit ratio over 10%. However, there was a downturn in machinery, including semiconductor testers, due to one-time factors and market bottoming out.
Nidec's cash flow over the past three fiscal years shows a clear upward trajectory with operating profit level and capital flow seeing sizeable improvements, reaching near highest levels historically.
With plans to intensify localization efforts in China and strengthen the joint venture NPE, the company's strategic moves include launching operations in India and Africa. In India, amidst constructing the fifth factory, Nidec looks towards harnessing potential growth, while in Egypt, the company is preparing to begin factory operations, marking its first venture in Africa.
Nidec signals potential for significant M&As in the future, reorienting focus toward larger motors and expanding from their core small motor business. This strategic shift underscores the company's intent to solidify its business pillars, become more versatile across motor sizes, and fortify management stability and profitability.
Emphasizing their core competence in motors, Nidec plans to reignite growth by returning to foundational strengths and prioritizing areas like MOEN for investment due to its colossal growth potential. This expansion includes merging into the energy sector and large-scale motors, a field where they currently lack technology and envision growth through strategic M&A activities.
Nidec remarks on an increased tax ratio expectation, attributing it to the restructuring of the EV business and the distributed profit generation across the group. The management aims to optimize tax by considering global profits made, particularly those taxed in Japan, and discussions include investment implications and the desire to secure adequate profit in the home country for dividend security.
Despite a challenging economic landscape, Nidec aims to maintain dominance in the Chinese market by focusing on quality and innovation. They are shifting away from working with companies that disregard technical value and are carefully selecting customers and markets for profitable operations. Efforts will be concentrated on providing products for exports from China, avoiding participation in detrimentally competitive markets and moving towards a healthier, stable growth.
Now we would like to start the presentation on Nidec Corporation Financial Results of the Third Quarter of Fiscal Year 2023. First, please make sure to turn off your mobile phone or switch it to silent mode. Thank you.
Presenting the company's financial results are as follows: Mr. Shigenobu Nagamori, Group Representative Director, Chairman and CEO. Mr. Hiroshi Kobe, Representative Director, President and COO. Mr. Mitsuya Kishida, Executive Vice President and Executive GM of Nidec's Automotive or AMEC business unit. Mr. Akinobu Samura, Senior Vice President and CFO. And Mr. Teruaki Urago, General Manager of IR Department. That is all.
In today's presentation, these executives representing Nidec Corporation will provide you with an outlook and the details of the company's financial results for the third quarter of fiscal 2023. Then the floor will be opened for questions. If you have any questions on the presentation, please kindly wait until then. This presentation will be over by at 6:00 p.m. Thank you. Now Mr. Samura will give you a presentation on his part. Mr. Samura, please.
This is Samura speaking. I'm the CFO of Nidec Corporation. I'd like to give an update outline of financial results of our company. Please turn to Slide 3. These are the 3 major points that I'd like to cover in my presentation here. First of all, our company has been under operation smoothly as planned. In all of these topics as you can see here, we are standing at record high results. Secondly, when it comes to EV traction motor business, as you may already know, we are currently revising our strategy to be a profit-oriented for our future. In this quarter 4, we are going to be focused on strengthening our financial capabilities. JPY 45 billion or so will be recorded for the restructuring plan of this business unit and the details are shown on Slide 12.
Sales have been updated upward approximately JPY 100 million and operating profit has been revised downward in JPY 180 billion or so. Given the -- based on the financial status and other relevant factors, the dividend has been increased by JPY 5 to JPY 40 making the projected aggregate annual distribute JPY 75 per share. The other main point, and I would like to give you further details.
Please turn to Slide 4. This chart shows our accumulated results. On an annual basis, sales have increased 3.2% to JPY 1,754,688 million. Operating profit grew 36.1% to JPY 169,321 million. Operating profit ratio was 9.6%. Profit attributable to owners of the parent increased 40.2%, JPY 145,908 million, which is a significant increase. All of these are record high results. Please turn to Slide 5.
These are the results product group overview. First of all, left top side, our Small Precision Motors. We have significantly reduced to fix the cost and we try to revise the price strategies for deficit-generating models. And after being hit the bottom, after we hit the bottom in the quarter for last fiscal year, we have continued to have a very good performance.
Next, Automotive Products. On a global basis, the sales are on a recovery track and by capturing this growing demand, we have increased sales and increased operating profit. Next, Appliance, Commercial and Industrial Products. We have operating profit ratio of over 10%, as you can see we're continuing this trend. And when it comes to machinery, we have the semiconductor testers and other major models. We have hit the bottom in third quarter. And in quarter 2, we have some onetime related factors. Because of that, we have decreased sales and operating profit.
Please turn to Slide 6. This is our cash flow over the past 3 fiscal years. Operating profit level has increased and capital flow has improved as well. And as you can see, the results are one of the top highest levels ever. We continue to improve our operating profitability for our future growth.
Please turn to Slide 7. This is about EV traction motor. This is our profitability recovery plan for the business unit. We identified areas of responsibility, areas of growth and improvement. Especially, in the Chinese market, we have CDQ market is something, you can describe this market as we have going to intensify our efforts on the localization of the production of our products. And when it comes to NPE, which is a joint venture with our foreign company, we are going to make necessary efforts for our future growth in this area as well.
You can see on this Slide 8, we have NPE, our joint venture. The growing number of cars are equipped with our E-Axle units. And this business will be consolidated into our group from next fiscal year onward.
Next, Slide 9. We are going to launch businesses in India and in Africa in a growing basis. We have 4 existing factories in India and we have a fifth one under construction. When it comes to Africa, this is going to be our first business case to have a factory established in Egypt. We're going to start operation in this factory in Egypt in the future. These are the basic outlook of our performance -- business performance. Thank you.
Now we would like to have a question-and-answer session. [Operator Instructions]. If you have any questions, please let me know. The person sitting in a front row in the middle.
This is Takayama of Goldman Sachs. I have 3 questions. I'd like to give you questions one by one. First of all, if you go to Slide 7, traction motors future plan, if you add this number [ 13 71, ] which is minus 41, that's your recovery plan? In midterm presentation, when you talk about Stellantis, it was an OP rate of 7% to 8%. How do you explain the change between then and now? And when it comes to AMEC business unit, you said you're not going to sell any deficit-generating models. But if you take a look at the first half of next fiscal year, the deficit has continued to exist. Please explain that as well.
This is Kishida speaking. I'd like to explain this to you as I represent AMEC business unit. First of all, when it comes to fiscal 2024, as Mr. Samura has already explained to you, we're not going to be optimistic about our future anymore, when it comes to establishing next year's business plan. Our focus is now on all these business opportunities that we are definitely confident about making come true. When it comes to AMEC business unit, we are going to have some deficit in the next fiscal year. Now when it comes to traction motor business, we are going to hit and possibly going above the breakeven point according to our current business plan.
When it comes to was to this yellow portion, NPE's production volume, which is part of our production plan. Our annual plan was 1 million units per year. Especially in Europe, the auto market itself is undergoing dramatic changes currently. It's not just EV products only. 680,000 units are what we are thinking of. This is based on the total number of production mix of our European customers.
When it comes to sales forecast, JPY 10 billion, JPY 20 billion, JPY 30 billion, et cetera, is part of our growth plan. Throughout the year, the operating ratio is said to be 7% according with our previous explanation. In the second half of the next fiscal year, we're expected to reach hit the target in the second half of the fiscal -- next fiscal year. That's our plan. But at any rate, these are all conservative figures on a quarterly basis. These are numbers we must hit as we try to aim for further growth in the future as a part of our Nidec's DNA, so to speak.
My second question is as follows. On the group-wide basis, I'd like to Mr. Nagamori or Mr. Samura answer my question. The second question. I believe there are some uncertainties, I believe. When recover of the traction motor business is minus 139 and rapidly going into the positive territory based on the contribution by the Stellantis. That's the image that I have in my mind. 2,500 to even 3,000, are you going to achieve those figures. But these are the conservative numbers. But if I believe in other business, we'll be able to make up for this type of struggle. What is your plan for the next fiscal year and onward? Can you give me your future plan?
First of all, I would like to look back the past the lesson that we have learned. When it comes to this business I'd like to explain to you what happened in China. We launched Gen 1 first and we were -- we expected certain amount of the asset. And our calculation was correct. But when it comes to Gen 2 and after that, prices decreased significantly. There was a large gap between those actual figures and our expectations. I have been running the company over the last 50 years. Whether it be our customers, our competitors and our service are all in deficit. This is the first time for us to have this kind of experience after all these years. It's a typical red ocean environment. We're not really sure the basis of the price to be decided. This is not an excuse or anything, but say there are 10 companies, 10 competitors in the market and other companies are making profit.
And if we are not making a profit. In that case, the responsibilities on our side, we all analyze and understand our competitor's products. We know competitor's component prices, et cetera. And given those results of the analyzation, we know that they are in a deficit. We're not lately technologically in a disadvantageous position. We are truly superior to them in terms of quality, et cetera. Their products are really cheap. Up until a certain point, we had Gen 2 after Gen 1, and we were going to Gen 1 followed by Gen 2 and Gen 3. However, despite this plan, the more we made more deficit than we were in and so were our competitors and customers.
That's not the type of environment we believe we should be in. We should be able to generate a healthy profit, so we decided to decline the orders. We had the Stellantis whose prices are promising and Stellantis can bring us to be able to generate the operating profit over 15% and more in the future. This is our joint venture with our customer. So quantities are guaranteed. There is a mutual guarantee between us and Stellantis. I cannot give you a name at this moment, but we have some inquiries from our domestic customers in Japan and demands are increasing. Inquiries are coming in large numbers starting with 8% to 10% in operating profit ratio.
Therefore, that's how I'd like to start our business. So this impairment that isn't really anyone's fault. But even the machine that we're able to still use, we need to impair it at this point in time because we don't want to combine it with something that is completely unprofitable, and we don't want to start off with that. So that is why JPY 45 billion in -- these are the facilities and also inventories as well.
It's possible that we may be able to use some of these, so that is why we're writing it off. So I believe that the way we do this, this way is not wrong. I think it's maybe BYD and Tesla, they are profitable, but most of everyone else is loss-making, but they're receiving enormous amount of subsidies to do this. So that's why Tesla is now beginning to lower the prices. So in the beginning, it was like 10%, and now it's like in a single digit and they're lowering the prices furthermore. So the OEMs are now entering this market now and they're all loss-making. And they can't exit, so that is why they will continue, but we're a components manufacturer. And for us to be in that competitive ground, it's not necessarily a good sound management.
So as Kishida just explained, we want to be very disciplined here. And I don't want to blame anyone for this. So the way maybe we purchased the equipment, facilities, maybe we bought something that was expensive. But I'm the CEO, so I'm responsible for that. So the top management has changed this time. And most of the people who were in charge, I will be announcing the personnel affairs later on, but basically, we are completely renewing the management. And so most of the people who were in the company front before are continuing on and people who have come joined in between as a mid-carrier are no longer in the company anymore. So Nidec itself will continue to do the R&D and production.
So even from the design stage, if we use this kind of parts, we will not be profitable. And Nidec is very strict and disciplined about that. But someone who comes from the outside of the company, mid-careers, they don't not concerned about that and they continue to just buy and buy and then they go and take orders even if it's unprofitable. So that was not very successful. So the relationship with Stellantis isn't like that. We are partners. Our partners also need to make money. And I think -- I believe that they are trying to, and we have the Japanese company as well. And we have the -- Stellantis have never done this before, but the Japanese OEMs are making on their own.
So what about the cost difference? I think they are now beginning to understand that. So I don't think they will do a reckless price cut. As a result Chinese customers, I think, are quite abnormal. Maybe there were about 200 companies and they're all going bankrupt one after another. And if you go to China, you can see all these different cars no longer the OEMs are existent. So the pricing is not appropriate. So we will continue to see companies fail and only healthy companies will remain and survive. So we will begin to see more Japanese players. We will see Western players as well. So it's a comparison with them. So I was wondering why we were able to sell this product at this price. But because it's in such a price war right now.
So we would ask those cheap players to stay out of the market for a while. And Nidec, we are a company that is very much disciplined. So lots have been saying, if other companies are making money, we won't be the only one that's not making money. That would not be the case. Here, we don't want to sell something in different quality at the same price. So we want to be the first in the market and we had -- there's 800,000 cars in the markets in China. So that is why we started, but the pricing is completely different now today than it was initially when we entered the market. So as Kishida explained, we will basically redo -- look at the pricing and everything else, and it's being looked at and overseen by Nidec proper employees.
So we make sure that we don't want to repeat the mistake we did before. So then this EV traction motor business is you can expect maybe JPY 10 billion in improvement. So you started with JPY 220 billion and you'll have this improvement here, and you want to improve it on an overall basis, right? So this is quite solid forecast or plan. So next year, the profitability we have to do JPY 250 billion, I think. AMEC, even if we you take that alone and if you look at the auto businesses alone, the existing business like the brake motor that we have been doing from before, continues to perform strongly. And as you can see from the financial results this time, everything else are generating JPY 10 billion in profit.
And if you do a simple math, that's [ JPY 400 billion ] per year. So and basically, traction motor losses were basic -- taking away, eating away the profits. So we will be able to eliminate that. So next step will be the JPY 300 billion. We are about 2 years behind, but we have to do JPY 300 billion, JPY 350 billion and even then, we're about 3 years behind. So if you look at each of the businesses, you will see that even the Precision Motors, they're introducing new products and they're coming back at a high speed and very profitable. Even ACIM, MOEN, as well overseas, they are introducing many growth products as well. So I believe that this will be another 15% or so. I think that's pretty quiet firm. So this is a very solid foundation based business also long term as well. So we have this old pumps and they need to be replaced.
So for example, Hitachi is staying 3 to 5 years, but we can probably expect long-term solid orders coming in, in the next few years. And we have this new machinery business. There's already 4 companies that were all making losses were now turning it around. Now we had a strong semiconductor business growth, which was actually down slightly, but then this is expected to recover next year again. So I think this number is not impossible to achieve. So if you look at the detailed numbers, you will be able to tell. If something goes wrong, maybe whatever we were dependent in terms of semiconductor, maybe that's a little bit of an uncertain. But I think that we are basing our business is on solid foundation. So the greatest issue will be -- the problem is traction motor as we have been talking, because they are already in the red and so we have to stop that losses.
And that itself, it makes about JPY 30 billion, JPY 40 billion in difference. So that is slightly different from our initial plan, not in line. But we know this already, the cost. So all we need to do is just correct that and go back to the original Nidec where we were before. And another point is that next month, we have succession products, which we will be announcing and we will also have a big shuffle of personnel. As I have said earlier, the people who joined the company as new graduates are now 40 and 50 years old and they have really grown. And we were hiring a lot of mid-careers before we made mistake. So now we're trying to grow people from internally. And they are hard workers. And we are finally beginning to see that. I think in the last 5 years, we had too many people coming from outside, and I think we were not very aligned in terms of our vector. We were overspending in expenses, so that has been corrected. That will be very different from the past management.
And last question very briefly. So climbing the mountain, maybe E-Axle isn't exactly the key. So maybe you need to do M&A. What about that?
Sure, we are planning to do a big M&A in the future. I will be stepping down. And what would I do instead? I will be looking at M&As. So actual operation will be handed over to the new management. M&A when looking at so-so large size, our company -- we are a motor dedicated player. We're expanding a little bit, but we want to go back to our origin. Especially going forward, large motors have solid growth prospects. So we want to enter into that market, covering from small motors to large motors. So we want the motor business to be the core, the pillar of our business. I think our access, our pillar has been shifted a little bit more towards auto, but we want to go back to the motors. We're already #1 in the world in motors.
So we want to make sure that the pillar is bigger and solid, and that leads to solid management stability and profitability. So this is very basic. We don't want to expand ourselves too much because that's probably not good. And that big pillar is motor, and we are good at motor, and we're most profitable in motors. So this is where management resources need to be concentrated and the related areas peripherals will expand and so rather than to go and advance into areas that's completely unknown to us, we would be where we were. We were a little bit too focused on traction motor, and this is because someone from mid-career was covering it.
So that is why we want to -- these members are now retiring, they're heading towards that direction, so we have new people who are excellent talents and they are with us for a longer time and so they will be taking over. And people need to understand it as a policy and philosophies, these people are what we need as a company. And people from the outside tend to bring in some foreign elements into our company. That's not really -- we're not going back to that type of situation.
Any other questions from anyone in the audience? The person in third row from the front.
This is [ Nagai ] of TV Tokyo Broadcasting Corporation. I'd like to give you 2 questions here. You talked about the importance of people who joined the company right after graduating from college. The current -- one of the topics is, hot topics is a wage increase. What is your policy for the wage increase.
I'd like to increase the basic wage by 15%. And on a company-wide basis, we're going to give a 5% increase. In 2020, I promised to the people of our company that we're going to increase the amount of sales level by 20% on a group-wide. Our call -- and if this -- what I said is going to take place, our calculation is going to be correct. And we have Murata Manufacturing [ as QSR Corporation, ] we're going to hit their levels when it comes to wage level or salary level.
You talked about the EV traction motor business a few minutes ago. It's not just EV, but when it comes to the market of China as a whole, how do you see the immediate situation? The National Bank has announced a downward revision. What is your economic perspective of China?
Well, overall Chinese economic situation is not really good. I'm not really thinking of which one is particularly good, et cetera. But we are in a very broad range of business in China. We have had some struggling in traction motor business, but other motors -- regular motors are doing very good in China, but the growth pace has somehow stagnated right now compared with the past. We're currently having some shifts towards India as well as Africa. We need to check the future potential growth of individual countries and regions that are going to affect our growth as well as a company. In home appliances, air conditioners, for example, we are doing very good in these businesses. Washing machines also. We're going to enter into the market, bikes, for example, and other -- these products are going to grow.
India has a future potential and Africa has a very good future potential for the next 10 to 15 years. Just like 20 years ago, we entered into the Chinese market based on possible future growth perspective. And being in such a growing countries and regions are going to affect us positively. When it comes to machine tools, the business is going to grow significantly in India going forward. Well, overseas markets, outside of Japan, are doing a very good, robot machine tools, et cetera. Domestically speaking, competitive is being lost in many respect -- many areas. In China, you really cannot see when and how are you going to be able to hit the bottom when it comes to pricing. We would like to select politically stable countries, that's the very basic of our business. We're not going to enter any business just to lose our money, and we're not going to do that.
In that regard, I believe you said that other motors are really fine in China. But when it comes to other industries, the momentum has been lost in summer or so. We have been ending a very high level of shares in the market, 70%, for example, when it comes to some of our products. These successful products are not really affected negatively in a situation in China, but we're not losing market shares there. Product quality is very important as far as we are concerned, when it comes to power steering brake-related products. It's not something you can purchase just because they are inexpensive. Our profitability is very high when it comes to these products. Whether it be our home appliances and other products.
In some countries, expensive products are liked. It's not just -- when it comes to washing -- vacuum cleaners there are rotating revolution is, it should be as high as 120,000 per minute. Some countries cannot really deserve to -- cannot really make that type of expensive high-performance products. That's why we are going into these markets to make such products. But we are now going to set our price too low or excessively low. But many people are interested in traction motor, so we did what we could do, but we're not going to lose any more profit or money.
When it comes to immediate situation in China, in traction motor and other process, do you have any actions to take?
We are thinking of that. We are currently developing products with which we can win in the Chinese market. Technologically speaking, we're not going to be focused on price too much. We have quite a few OEM manufacturers. These manufacturers are launching EVs. And we're now at a stage where we can make comparison among these products. Now Japanese manufacturers, too, can be evaluated when it comes to their products. Performance is very important when it comes to the selection of the products. Based on that, we should set the prices. We added -- all the products have costs. And cost should be the very base of our calculations of profitability.
Any other questions, people? The person at the second row, please.
This is Akizuki of Nomura Securities. I have 3 questions. First of all, automotive business other than traction motor business, what is the situation of non-traction motor business? That's my first question.
I'd like to give you an answer for that. This is Kishida speaking. As I've touched upon it lightly a few minutes ago, we have this organic businesses, which does not include traction motor business. So these businesses are going smoothly, steadily. Brake motor is a power steering motor business, in addition to these products, we have some control units attached to these products as a system. That's the type of proposals we are making in growing numbers. We used to have more than 50% market share and we have a very good relation of trust with our customers. In these areas, we are making more than JPY 10 billion worth of profit per quarter. And one more thing. When it comes to the traction motors when you go back to Slide 7, you can see the middle section of the right-hand side. This is one of the new areas we are in, NPE and other businesses. We have some growth supporting businesses indicated here.
China's traction motor business, there -- in this business, we are making more than 800,000 units for our customers, stators and other components. What we are going to produce on a group-wide basis for our European and other countries' customers. That's what we are going to do from the second half of the 2024 fiscal year. In order to do that, we're not yet to receive any finalized orders, but we are having some inquiries. Over the past 50 years, Nidec has been in this motor business. We have true capabilities. When it comes to traction motor used to be one of the very promised areas, but we are going back to the very basics, very original so that we can regrow further, then that's the type of phase we're going into in the 2024 fiscal year and thereafter.
Here's my second question. This is something that I'd like to ask Mr. Nagamori. In this consolidated business report, the modest profitability recovery, this is something that I'm not used to seeing in a report issued by Nidec, what is your plan or strategy for your motors -- small precision motors?
Well, the new products are coming up very soon. Large motors are coming up as part of our business product portfolio, motors for electric e-bikes. We are going into -- our products are in many of our customized products. These products are all competitive. These competitive products will grow in business in the future. In general motors in the home appliances area, we are having very -- some of the very good, highly competitive products available for our customers, the ones for vacuum cleaners, robots, et cetera. We are utilizing very new cutting-edge technologies for these products. These products used to be in a struggle once, but we are currently debuting some brand-new products in this market. This is part of our restructuring strategy, restructuring effort. Being young means that you can work hard.
We never give up until we win in the market. We're not really thinking -- we're not really focused on life-work balance, et cetera. By saying this, I could be subject to criticism by many people, but young people themselves are trying to work hard rather than being focused on a work life balance. Unless you're #1, you're same as being the last. You have to be first -- to be in a market, you have to first produce, make the product in the market. Small Precision Motor is the original business that we started as a company. We must not be beaten by our competitors in this business. And many of our in -- almost all of our engineers in this area. This is a Nagamori group, so to speak, of engineers in this SPMS business group. I'm sure that they are going to regain very high competitiveness just like we worked very hard and achieved great success 20 years ago.
Here is my third question. This is a very small question. Very simple question. I believe Mr. Samura can answer this question. The tax ratio has increased a little bit. What is your plan for the tax ratio for the next fiscal year?
We have had this expectation on the net higher tax ratio. We need to streamline our EV business. In this process, we are thinking of FX by the tax ratio. Secondly, as far as Nidec is concerned, we are making profit as a Nidec group. There is a limited amount of profit as Nidec Corporation. In order to secure the original amount of money, base money for dividend, we need to secure JPY 100 billion or so. For that, we need to think about tax-related effects. That's what we need to think -- keep in mind constantly. That's how we like to do our tax management.
I believe you have already understand what Mr. Samura said, but we have made a profit in Thailand, in China, et cetera, and other countries overseas. But we have to pay 10% tax in Japan. We would like to make investment locally. So we have left some of our money in these places, countries. But still, by paying this money, we would like to pay this money so that we can secure profit in Japan. That way, in Japan, the tax ratio has -- effective tax ratio is probably going to increase. That's our expectation.
Any other questions?
Naito from Citigroup Securities. I have 2 questions. So first question, I have some questions about the number. Your traction motors, the way the profit will be generated next year. So I'm looking at Page 7. But between Q3, Q4, your profit growth is larger or greater than sales growth, so what is the change can we expect here? And also in the following year in FY 2025, is Q4, would that be the basis? So those are my 2 questions.
So let me, first of all, answer that question. So Q3, Q4, in particular Q4, including profitability, the reason why we are improving, I think that's the intention for your question. As we have been saying from before, Gen 3 will be online from the latter half of Q2. And the contribution rate will increase. With regards to Gen 1, we are applying various strict order-taking constraints. Whatever is unprofitable, we will not take any orders. So we will continue to do that with Gen 1. And then we will be able to increase the contribution ratio of Gen 3 and also we will take orders from highly profitable customers, especially Japanese OEMs in Japan. So that will be added on in Q3 and Q4.
Also, improvements towards NPE. So this is an improvement in output and productivity. Those will also contribute as well. So as a daily effort, we will make sure that this effort was accelerated. With Q3, we will finally be able -- Q4, excuse me, we will finally be able to reap our efforts. And 2025 onward, it's really about how can we continue this effort. So that would be our perspective. That is all from us.
A follow-up question. So you have Gen 3 and X31, so the development status is in line with the plan?
Yes. With regards to Gen 3, in terms of progress rate of development, it is in line, on schedule. However, we want to be profitable, have solid profit generated. And we want to be very selective on our materials and to produce the product. Rather than to acquire many number of customers, we want to focus on providing to Guangzhou Automobile Group, GAC, which is our customer joint venture partner. So in terms of progress, it will be more solid, at least that this revised version is much more solid in terms of progress rate than compared to before. So development is in line.
If I may add, so with regards to the traction motor business, I know that we have lost confidence temporary. I know that many people feel like you can't trust us any more, feel confident about this business anymore. So in the past, we're not -- unlike the past, where we can't be hard on the analysts anymore. So if you're hard on us, I will be hard on you 5x more when we recover. But I can't talk about the numbers right now, but maybe it will be better to speak about this more once we're able to achieve the track record and this have an outcome. You realize I'm very quiet today, right, because I want to be -- I think numbers peak more than anything else. But I think the responsibility on us. So for example, Gen 1 and Gen 2, just to give you an example, against the selling price, I'm very concerned about material ratio and if it's 50%, then you can get 15% in profit.
However, whether it's small or large motor it doesn't make much difference. But the previous CEO was trying to get 95% in the material ratio and it can't be profitable. So this is where we are trying to be very disciplined. We have a lot of people, so we need to probably reduce the headcount and then improve our material ratio, then we should be able to achieve profitability of 15% for sure. But we talk about inverters, but that's just an excuse, just a justification. Even if we're not profitable with the inverters, if we can improve the ratio of motors, material ratio to 50%, then we should be able to get the numbers. So we need to look at the design stage as well rather than to use expensive outsourced components, maybe we can produce it in-house. So rather than to purchase from our side, I think we need to make it in-house.
We used to do that. This is very basics of management. I mean what we -- if you try to purchase from the outside, this is an amateur. So this is something we're already doing this. So if we're not at 50%, then we will not sell it anymore. And these initiatives are being taken by people who have been in the company since the new grads. They know the business really well. And we are trying to eliminate people from -- or reduce number of headcounts in the indirect divisions as well. So people who are going traveling overseas for business and drinking expensive wine, we don't have any of those people anymore so you should expect a significant improvement in performance. I have been doing this business for 50 years and those are big lessons learned for me. And so I will be much louder next time, but I'm holding back right now.
So I have 1 more question. Focus of investment. Where would that be for you going forward? Where would you want to focus on in investment. You said that you were too focused on traction motors, so would it be MOEN or would it be Precision Motors. You talked about how there's a good growth potential. So where would you increase investment? Where would you want to focus your investment in order to grow sales?
Like you said, MOEN, I know that this has a huge growth potential. If you look at it, you can tell. So if you look at the mid- to long-term global facility needs, those are the things that were being special. Also battery, we have very concrete energy-saving product. We purchased this from Amazon. So Amazon has a very high technology and a strong technology in this. So it's kind of like Hitachi purchasing AD. So energy sector, which is new, but this is basically all motor related. So we will look at large-scale motors. We do not have the technology from before, but if you add that and that would include control technology as well. And it will take us 30 years to start from scratch. So we want to do an M&A with companies with those technology knowhows and grow.
But the problem is motors are -- it's not just a plug-in to electricity. Most of them are battery-driven motors now. So whether it could be a conventional vacuum cleaner, it's all cordless. For example, hair dryers used to be very heavy, but it's now much more efficient and it's now wireless. So we have strong technology in here. So even the companies we have acquired in the past, the reason why, for example, MOEN is very profitable now is because of our success in M&A and we have added on new technology, and that's contributing. So the M&A from now on will be different. The technology we purchased, we buy, is different from before. And with this new technology, we're able to make it completely more profitable.
And I know that some of the analysts are writing this report that's completely wrong. And this is the reason why the valuation has gone down so much. But it's only just a -- traction motor is just a very small percentage of our entire business. And it shouldn't really undervalue us like this. I mean, I think the analyst doesn't really understand our company. So I think I mean that's the assessment and now at least have to accept it, but I want to buy this company myself 100%. I probably shouldn't be saying this. But I'm trying to keep myself restrained today, but a lot of people aren't coming to the plants anymore, so they don't really understand the actual product, and they still write these reports and in most cases, they're wrong. So please wait and see. I'm not going to end at this. I am becoming more and more bullish. So I probably need to stop at this point.
So our time is almost up. So this question will be the last question. Do you have any questions? Yes, then this person here in the front.
[ Hira ] from Nikkei newspaper. Two questions. One is a clarification. In traction motor business in Page 7, you have a wording that says as a one-off cost onetime expense. And you talked about facility and inventories, you talked about JPY 45 billion. So if you deduct operating losses, is that what it is? Or what does it contain and what's the breakdown?
There's so much we can disclose. I mean he's from a newspaper company, so he doesn't really understand that you should only speak in rough big picture. In Q2 we talked about how we will shift our strategy. And after that, we reviewed and identified this, and we've done this over the last 3 months. The JPY 45 billion that we have indicated this time, it's about JPY 10 billion in parts. Facilities and equipment is about JPY 30 billion and the rest is JPY 5 billion. So in Q4, we will scrutinize this and make sure that we are able to have a precise number here. It will be, in particular, Gen 1 related, especially when there was a chip shortage in COVID. Even in this long lead time, there was a lack of supply. And there were components that we were placing orders on just a volume basis and we have a lot of that still on hand, and they're all Gen 1 related, so we will be reviewing all of that. So that's the assumption. So that's the situation.
I have 1 more question for Chairman. Excuse me. So a question for Mr. Nagamori. So EV market in China, even though there's price competition, it still drives the global EV market. And currently, the market is very difficult. But maybe next year or the year after and going forward, would it be a growth driver for your company? Do you have a lot of expectations for China? So would you give me your mid- to long-term perspective on this?
Well, we're #1 in China. It is -- China is growing. So in AC motor, we're #1 manufacturer. So we still have a top market share in many of the products in China. And there's technological innovation in China as well. Where there's a big transformation is -- the thing is that Chinese companies themselves think that there won't be a very large growth going forward. So that's why they're exporting a lot and if it becomes a lot of the Chinese products are not accepted, so then it will be replaced by our products. So there's an element of that. I would say it will take some more time, but whatever is of high quality, people are willing to pay high price. So can they export with the Chinese motors? I would doubt it. And they know that. So Chinese customers, they talk about export, export and there's a lot of acceleration for export.
So in that sense, I think many people say it's Nidec, it has to be Nidec. And I think that will be the case with traction motors in the future too because they say prices are the first and foremost, that is why we can't work with some of these clients. We want customers who understand the value, the technological value. We don't want them to price it with ignoring that value. So that whatever is being -- the order has been placed, we have received, we will need to produce. So there's a relationship going on, but there's just a few more to go. So Gen 3 going forward, it's not that we will only produce for China.
Are you going to make these products in China still?
We're not going to make any products in order to -- just to make a loss or deficit. We're going to produce products for, those end products to be exported from China to overseas. That's the only type of products we are focused, and we are not going to any unfavorable competitions.
Here's one additional question here. When do you think excessive competition in China is going to stop?
It will end sometime in the future. And just like anything else. And now the price decreasing is significantly dramatic, to express it. This is the first time that I experienced something like this in my long-term career. All this company involved in such competition now are now gone in the market. It's not every day, but these companies are going one after another. If you are going to do business with such companies, we are going to be ridden with deficit. It is better for us to quit such a business as soon as possible. Little by little, like our -- the Guangzhou Automobile, there was GAC is one of those companies in China that are paying us properly. But all the other companies are breaking, tend to break the promises with us.
That's not the type of business we are used to. We shouldn't be having such business anymore. We're not really only focused on sales, we are focused on operating profit as well, which is more important than sales. We're not going to have inflation, but we need to have a healthy growth with at least minimum operating profit ratio of 15%. We purchased various companies that were in deficit, loss-making deficit. Loss-making companies are what we use to purchase. Now we need to recover the traction motor business, which is making loss and stopping the bleeding will make a huge difference.
Now it's about the time for us to finish this presentation. This is all for the presentation by Nidec Corporation's financial results for the third quarter of this fiscal year of 2023. Thank you very much, everyone, for your time.
Thank you very much.