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Nidec Corp
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Good day, everyone, and welcome to today's Nidec conference call hosted by Mitsubishi UFJ Morgan Stanley Securities. Today's call is being recorded.
At this time, I'd like to pass this conference to Mr. [ Abe ] at Mitsubishi UFJ Morgan Stanley Securities for the opening remarks. Mr. [ Abe ], please go ahead, sir.
Thank you. Ladies and gentlemen, thank you very much for joining this conference call. This is [ Abe ], General Manager, Institutional Sales Department, Mitsubishi UFJ Securities, Tokyo. Before the meeting starts, please make sure all materials has been distributed. If not, please download the files on Nidec's homepage right now.
Now may I introduce Mr. Akira Sato, Executive Vice President and Chief Financial Officer, who will be speaking to you shortly. First, Mr. Sato will make a presentation. After his presentation, he -- we will move to our Q&A session. Mr. Sato will now discuss Nidec's fourth quarter fiscal year 2018 results, future outlook and management strategy.
Mr. Sato, please go ahead.
Well, thank you very much, Mr. [ Abe ], and good day, ladies and gentlemen, and welcome to today's conference call. My name is Akira Sato, I'm Chief Financial Officer of Nidec, and I'll be your main speaker for today. Joining me is Mr. Masahiro Nagayasu, General Manager of Nidec's IR team.
For the forward-looking statements, please see Slide #2 of our presentation material for details.
Now I'll review the key figures. Our fiscal year 2018 results are illustrated on Slide #3. As summarized on Slide #4, the net sales increased 2% year-on-year and marks a record high. Operating profit decreased 17% year-on-year as we allocated expenses for structural reform.
On Slide #5 and 6, you have a step chart showing the net sales and operating profit year-on-year on Slide #5 and quarter-on-quarter on Slide #6, respectively, by product groups with exchange rate effect, eliminations and structural reform expenses. As you see on Slide #5, the full year fiscal year 2018 net sales have increased, but operating profit declined throughout the previous fiscal year as it has been negatively impacted by structural reform expenses of JPY 38.8 billion, JPY 30.4 billion more than in the previous fiscal year. However, it will be higher if we added back the one-off expenses. The expenses were spent for streamlining domestic and overseas factories, launching new products and completing ongoing M&A deals.
Please turn to Slide #7, the quarterly net sales and operating profit of the third quarter to the fourth quarter decreased due to large-scale inventory adjustments starting from last November. We are making utmost efforts to reduce purchasing cost and expenses across Nidec Group companies right now, expecting to make a V-shaped recovery in fiscal year 2019.
As you see on Slide #8, the business portfolio transformation is continuing to be successful in steadily improving the company's earning power. Slide #9 is showing the cash flows over the past 10 years. The operating cash flow for fiscal year 2018 remained strong. Slide #10 is showing dividends and EPS. You will see that the dividend payouts are steadily increasing, supported by EPS growth.
Please turn to Slide #11. We will continue aggressive capital expenditure to support organic growth. Please see Slide #12, we forecast the fiscal year 2019 net sales of JPY 1.650 trillion, the operating profit of JPY 175 billion and operating profit ratio of 10.6%. The exchange rate assumption for fiscal year 2019 is JPY 105 to the U.S. dollar and JPY 125 to the euro.
Please see Slide #15. In addition to 4 big waves, which are automotive, robotics, energy-efficient home appliances and drone, we have added the fifth wave which is next-generation technologies stemming from 5G communications with 100x faster data speed than 4G. 5G communications are expected to bring us huge business opportunities as one of the growth drivers.
On Slide #16 and 17, we are showing examples of our factory reshuffle in line with our business portfolio transformation and the structural reforms, which we are currently driving quite aggressively. Slide #16 is an example of the heavy-slide motor factory in China, shifting to automotive and other small motors' production. And Slide #17 for the heavy-slide motor factory in Philippines, shifting to speed reducers' production. Both examples show that we are successful in transforming our business portfolio efficiently, while the -- maturing heavy-slide business to growth drivers such as automotive, other small motors and speed reducers.
Please see Slide #18. Since the middle of the 1990's, we have been building our automotive product lineups in 5 groups, which are ADAS, powertrain, chassis, interior and exterior, by combining organic growth and acquisitions. On Slide #19, we are illustrating our expected global market share of electric power steering of -- for EPS motors and next-generation brake motors. We are aiming for 50% global share in fiscal year 2020 and 60% in the fiscal year 2025 for EPS motors. And for next-generation motors, 60% in fiscal year 2020 and 70% in fiscal year 2025. Through electrification of cars and adoption of brushless motor technologies, we are aiming to dominate the global market in both product areas.
Please see Slide #20 and 21. We have won another customer for E-Axles following the Chinese automaker GAC, and European Tier 1 customer for the mild hybrid system. Also, as you see on Slide #21, following GAC's Aion S, which is the first model in the work to the -- adopt Nidec E-Axles. We have also won E-Axles orders from GAC for another model, so-called Aion LX.
Please see Slide #22. Our subsidiary, Nidec Elesys, has developed and launched a next-generation, high-frequency antenna, which is a development of once-in-60 years. Compared to with the existing patch antenna, our new high-frequency antenna is better in efficiency, marginal zone, the degree of waveguide wiring and performance stability. When we -- when incorporated in the integrated ADAS sensor, it will give better camera performance and mountability. We are aiming to utilize this revolutionary technology in such areas as ADAS and 5G.
Please see Slide #23 and 24. We have entered into a stock purchase agreement to acquire OMRON Automotive Electronics, or OAE, from OMRON Corporation. In this connection, other automotive related businesses of OMRON Corporation will be transferred to Nidec as well. OAE engaged -- get engaged in research and development, manufacturing and the sales of automotive electronics products as a subsidiary of OMRON Group, which has strength in controller equipment, systems and electric components based on its sensing and control technologies. And in particular, OAE has produced many type 4G control products for body control system, electric control units or ECUs for motor control systems, power control systems and other areas to address the market's electrification needs.
Through this transaction, we will be able to create new module and systems product by combining Nidec Group's motors, pumps, gears and so on with OAE's products, including ECUs and other electronics products. Furthermore, Nidec Elesys and OAE have a complementary relationship in the area of ADAS, creating high expectations for significant synergies. In particular, Nidec Elesys has strength in wave radar and camera-related products, while OAE has strength in laser radar and driver monitoring systems, which will allow 2 companies to collectively provide a full range of sensors required for autonomous driving in the future.
Please see Slide #25. We have been actively engaged in manufacture, sales and service associated with reduction gearboxes through our subsidiary Nidec-Shimpo. By acquiring the German company, MS-Graessner last August Nidec-Shimpo obtained a complete lineup of small precision planetary reducers. In February this year, through the acquisition of a 70% ownership of the German company, DESCH, Nidec-Shimpo gained an access to the large precision gearbox market, in addition to their current small precision gearbox market, and has become a comprehensive global supplier of precision speed reducers. We expect Nidec-Shimpo, MS-Graessner and DESCH to mutually leverage their technology, financial strength and global customer bases backed by Nidec's finance flexibility.
Please see Slide #26. We have been actively developing our metal forming machinery business through Nidec-Shimpo. Since acquisition of Kyori Kogyo in 1997, we have been strengthening our press business following to acquisition of Nidec Minster in the United States in 2012, and Nidec ARISA in Spain in 2015. Our global foothold has been strongly established with manufacturing sites in the 3 key regions, which are Asia, including Japan and China; the U.S.; and Europe. And we have been able to offer best-in-class products and services to our customers.
Beyond the length of the press machine business, we are also focusing on the broader range of metal forming equipment. We acquired Nidec Vamco in 2017, an industry-leading, high-speed feeding equipment manufacturer. Through this acquisition, we gained Vamco's competitive land, all that quality and the global customer base, particularly in North America and Asia.
With the acquisition of German company, SYS, in February this year, who has advanced technology in feeding equipment from expertise in high-speed, high-precision stamping technology, strong plant recognition in Europe. We have taken a deeper route in the metal forming industry in Europe now. Through the acquisition of SYS in February this year, we are now set to offer high value-added solutions to customers in the metal forming industry across the wall, including motor for all animation manufacturers who serve the fast-growing electric vehicle market.
Lastly, on behalf of the entire management team, I 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. Thank you very much for your attention.
Thank you very much, Mr. Sato. Now we'd like to turn to the Q&A session. Mr. Sato will be pleased to answer any questions.
[Operator Instructions] We will now take our first question from Aaron Rakers of Wells Fargo.
Your presentation clearly outlined some strategic alignments in the hard disk drive motor market. I'm just curious, first of all, how much are you pulling back in that industry? Is there any thought of discontinuing certain pieces of that market? And then I have a quick follow-up as well.
Okay. So please look at Slide #33, which is the -- in the part of the appendix. So this time, we have revised our long-term unit trend. And as you can see, we say a CY calendar year '18, the total number of shipment of hard disk drive were 376 million, but -- and we are looking at a much lower number in CY, the current year 2019, like a 309 million. So the unit is down. Then, thereby, we do have to restructure our business in alignment with the ROE number, which we are forecasting '18 -- '19 and 2020. But in terms of the form factors, we are going to surprise all of the form factors as well as the -- our HDD customers requires. So that is a -- our comment on the -- your questions. Okay?
Okay. Great. That's great. And then just as a follow-up, if you could help me understand for this most recent quarter the shipments by the different subsegments within hard disk drives, the 64 million HDD motor shipments that you shipped, how does that break down between 2.5-inch mobile, 2.5-inch desktop enterprise, near-line and mission-critical? And then what are the assumptions that same question underlying your expectation as far as shipments of 62 million going into this current quarter?
Okay. So the number one, the March quarter number, 64 million, is to say exact 63.7 million, where a 2.5-inch was a 1.9 million; near line 10.1 million; and the 3.5, 21.3 million; and the 2.5, 30.4 million. So we are looking at the market will be down from 75 million to 73 million in the June quarter this year. Then, thereby, we are forecasting our number, 62 million, which is roughly 85% of the market. Okay?
Okay. And can you help me understand the breakdown of that 62 million between those segments?
Okay. At this moment, we are forecasting a 2.5-inch high-end 1.6 million; near line, 12.6 million; and the 3.5, 18.9 million; and the 2.5, 28.9 million.
Our next question comes from Mehdi Hosseini of Susquehanna Financial Group.
David Ryzhik here for Mehdi Hosseini. Just a quick follow-up to the HDD segments. Would love to get maybe your estimate for the overall HDD industry by segment for the March and June quarter? And I had a follow-up.
Okay. We say, in the March quarter, as you see in Slide #34, we say the March quarter was 75 million shipment. But as you understand that we and the hard disk drive industry is in the midst of inventory adjustment, and we understand the production is much lower than shipment number 75 million. Then that 75 million will be falling into the enterprise 4.5 million, near line, 10.2 million; 3.5, 22.8 million; and 2.5, 37.5 million. And at this moment, we are forecasting a June quarter number is 73 million; where enterprise 4.0 million; near line, 30.8 million; and 3.5, 21.2 million; and 2.5, 34.0 million. Okay?
And what percent of the near line would be helium drives for March and June quarter?
At this moment, we do have our own number, and our own number is the our near line shipment versus our helium shipment. The March quarter was 42.4%. And the June quarter, we are looking at a 55%. Okay?
Got it. And are you shipping to motors for helium drives to all 3 HDD vendors?
Yes. We understand that we are the major supplier, and we have been almost a dominant in this market.
And then last one question for me, just regarding the inventory levels in the HDD market, what's your current assessment? How many more quarters do you think -- after how many more quarters do you think we'll be at a normalized level?
Well, there are 2 different situations for a server or near line area and the 3.5 and 2.5. In the near line area, we say the volume is picking up from this June quarter. As I mentioned, 30.8 million. And then we are looking at a little bit higher number in September quarter and December quarter, okay. So thereby, in this adjustment phase, might be near and be over by the end of this quarter. But 2.5, 3.5, still is going to be coming up from the very low number in the March quarter number. But still, the June quarter will be the bottom of 3.5. For 2.5-inch is still near bottom in the June quarter. And the recovery from there, at this moment, we are expecting very slow. Okay?
We will now take our next question from of [ Thiel Wilds ] of Ruffer.
And to change the topic a bit and basically, I want to ask a bit more about some of the one-off expenses particularly the ones to deal with the launch of new product. Can you talk exactly how much of the expenses are seen with the launch of new products? Where the changes occurred between your last forecast and the actuals that we got? And then also, just your policy and how you categorize things as one-offs? I would have thought the launch of new products would have been with the ongoing business expense. And to me, it doesn't seem like it should be characterized as a one-off.
Yes. We have the -- reported the JPY 24 billion of structural reforming expenses as of January '17 is when we revised down our guidance. And it's going to be up by JPY 11.2 billion, along JPY 24 billion. And out of that, we have the -- increased the sunk and loss for starting up of -- for the new products such as traction motor and pop-up camera mechanism. That's going to be up to JPY 7 billion, along JPY 3 billion by JPY 4 billion. That's a -- we have got lot of order in the very much short term, the lead time and that's why we spent money to start mass production as quickly as possible. And is this an answer to your question?
Yes, in terms of numerically. But can you explain to me why these were characterized as one-offs? And more specifically, what wouldn't have been categorized as one-off? And I'd like to make a fair comparison to previous periods, but -- yes, I'd be interested to know where you draw the line.
So as you may know, we have started the kind of development and production from March quarter, but at the beginning of the production in EU was slow. And then we have spent or organized many backed workers for the production line. Those are a starting up cost is categorized other -- a one-time expenditures. And from April, it's going to be normalized. And we are going to spend, we are very much capable to the expenses for the production. So 3 out of 5, we categorize those loss of the start-up in March quarter, other a kind of a one-time expense.
Sorry, just to clarify, would you always categorize the start-up costs in a normal scenario? Say, you weren't ramping as quickly as you had to do over the last 6 months, would you always categorize those start-up costs as one-offs? Or is it just the pulling in of actual labor?
Yes. It is unusual this time because traction motor and also the pop-up camera mechanism. Its demand is suddenly up. That's why we spent a lot of money to such less production.
We will now take our next question from James Pulsford of Eikoh Research.
Can I ask you a follow-up on these one-off costs include restructuring and other ones, the JPY 38.8 billion? Could you for the -- just for the full year, could you break it down into its different components? And comment on to what degree any of the elements of that will reduce future cost, please?
Yes. We reported JPY 35.2 billion in the second half. And out of that, JPY 14.5 billion is coming from the quarter impairment of the machine or those kinds of things in order to transform our portfolio. And also some deflection cost for integration of the -- our factories in European countries and also the Canada area, hard disk drive factory set in the Philippines or China. And the second one is a -- from light loss of the order inventory, which is JPY 9 billion out of JPY 35.2 billion. And the third one is a loss for starting up, I -- as I mentioned...
Yes. And that's a JPY 9 billion, yes?
Is JPY 7 billion.
It's JPY 7 billion. Sorry, yes.
Yes, JPY 7 billion. And JPY 4.7 billion for kind of M&A expense.
M&A, wow, throughout. I'll take it. So of -- so -- and that probably adds up to more or less the whole loss share. And this -- and of that, the one which will have an impact on future costs is the JPY 14.5 billion, yes? The one which has an impact on ongoing costs is the -- or equipment impairment and restructuring, the JPY 14.5 billion, is that correct, is it?
Yes. Yes, it is. Yes.
What will the annual impact of that be?
It'll probably be JPY 14.5 billion is one time. And probably, from next year, we are going to reduce kind of depreciation, all of those kinds of things. And...
So that's what, okay. Right. And can I ask, do -- in your -- in the new term forecast, do you assume any element of one-off or restructuring costs? And if so, what was the -- what's the value?
Well, will you ask again?
Yes. In the new term this year, do you assume an element of one-off costs because I see there were -- last year, they're JPY 38.8 billion, the year before that it is...
Okay. So your question is, what was the amount that we are expecting for fiscal year 2019?
Correct. When you made your forecast, yes.
Yes. We are now assuming the kind of 1/10 of the -- this amount we spent in fiscal year 2018.
Okay. That's about JPY 4 billion, yes?
Yes, that's -- yes, it's something like that, yes.
Right. Okay. Great. Sorry. And last -- my last question is, do you -- I apologize, would you mind -- do you have a split of the JPY 38.8 billion? How it breaks down by division or not?
We have. Small precision motor, JPY 12 billion. And JPY 9 billion for automotive and JPY 9.4 billion for ACI. And JPY 3 billion for machinery and JPY 5.1 billion of the...
Competence?
Yes. So in total, it's JPY 38.7 billion -- or, sorry, JPY 38.8 billion in...
We will now take our next question from Dong Zheng of Ariel Investments.
Just one question to start, which is on the -- your medium-term target of the growth in small precision motors. Given that HDD is still sort of pretty significant portion of that business and can you just elaborate on what are you seeing in the other small motors that's giving you confidence in achieving the JPY 600 billion target? What are the growth drivers and any secular trends that you are seeing?
Okay. So at this moment, the current business of small precision motor, number one, how this drives between water, number two, DC motor and farm motor, and number three, the vibration and haptic. Okay? So for that type of business, we are not expecting so much of a growth from the 2018 results up to 2020. Okay? But as you -- as we explained in the previous announcement in January, now -- we were now starting to provide a so-called pop-up function for a smartphone. Now we are, included in this pop-up business, under the small precision motor area. For that business, clearly, we mentioned in January that we are looking at something like a JPY 25 billion sales within this fiscal year and maybe JPY 50 billion in the next fiscal year 2020. So that would help to achieve a -- something like a JPY 540 billion target, which we set for 2020. So that's what we are looking at right at this point.
Got it. And in terms of the automotive business, it seems like the M&A will play a key role in that business to achieve the JPY 600 billion target? Maybe, I guess -- can you remind us on how successfully, historically, has integrated products from acquisitions into the group? And what metrics that we could track to sort of clarify or just give us a sense of how the integrations are going? And any metrics that you could offer to guide us to...
Well, it's a little difficult because we are doing a lot of acquisitions. So which one -- other than -- if you are not specifying which one, we cannot really discuss the PMI or any direct impact from the acquisition, that's number one. So basically, what we are saying is, okay, at this moment, we understand the current situation in the business today is very suitable for an acquisition. And we have been saying that we are looking at the company in the auto area and in ACI; appliance, commercial and the industrial area. Those 2 area, we say, is a major area for our future growth. Thereby, we are looking at the other companies which would implement our strategy within these 2 growth area. So if you are looking at very big acquisition we announce, for example, Embraco, where we might be very close to the closing then that is ACI. That's going to be bring in -- bringing in something like a JPY 130 billion for the full year basis. Also, we recently announced the acquisition of OMRON, which Mr. Sato explained. That's going to be something like a JPY 120 billion to JPY 130 billion per year. So that's a very big acquisition, one in auto, one in the ACI. So for a more detail Embraco and the OMRON, they already missed this automation where we're going to be getting the synergy from this OMRON acquisition, which we are expecting to close the deal by the end of October this year. Okay? So do you have any question regarding those 2 deals? Do you have any other acquisition questions regarding the -- a follow-up?
Just a quick follow-up on the OMRON. If I remember, OMRON AEC business is historically sort of mid-single digit...
OMRON, okay.
Yes. Mid-single digit operating margin type business has never really gone above 10%. So maybe 2-part question. One is that, is the company strategy continued or like what is the -- trying to bring that up to sort of corporate level margins? And is that going to be sort of that typical profile of the acquisitions going forward, which is that to acquire sort of weak -- lower performing businesses and try to bring them up to corporate level margins?
Okay. As you mentioned, it is now the 4.4% of the operating profit margin in the automotive industry. But maybe as you remember, maybe we acquired the Elesys from Honda. It was just 4.4%. But 2 years later after acquisition, that's -- that was up to 15%, mainly due to the decreasing or reducing the purchasing cost. That's actual level of fact. That's why we are very much confident that we are going to -- we will be able to improve the operating profit margin from 4.4% to 15% in a couple of years even with the OMRON, [indiscernible] impact.
And is it fair to assume that...
Okay. So number two is.
Sorry, go ahead.
Okay. In OMRON, we say the biggest synergy is not just a profitability improvement of the OMRON. Okay? So now you're just looking at the OMRON and you're asking how we are going to improve the profitability of the acquired operation. But one of the big reason that we acquired this OMRON operation is this will help us to increase our sales in the EV traction area where you can see in Slide #20. Okay? So as you -- as we were saying in this -- in announcement that we are getting more and more order coming from Chinese, Europeans and even Japanese for our traction motor system. Within that system, we are selling the motor with inverter, which is a controller. Okay? Then, we are planning to use to link -- we are planning to produce this inverter by using our Elesys. But our Elesys' resource is not enough. So we're looking for another resource to come up with the any controlled component of the automotive motor area. Then, the OMRON, we could have been doing this business would be supporting our growth in this area, Slide #20. So if you're looking at the acquisition, we have to look for the acquisition from the acquired operation or profitability, whatever, whatever or rather, how we can give it up our own business using the resource provided by the acquired business. Okay? So that's my comment there. Okay?
Is there a general rule of thumb going forward when you look at acquisitions is the intent to more boost your existing automotive business? Or it is still more to fix the underperforming automotive business required operations?
So as we say, the most important point is -- you've got to know is we have been doing a component business in the auto ACI. We have been providing a motor. Now we are going to move up to provide a module. The module will be consistent of, for example, in this traction motor case, motor, inverter, the controller and the gear. Those are the 3 key components of the system. Then as we have been providing a motor, we do have enough resource to put the motor, but we do not have so much expertise and resource in the controller area, the inverter or also the gear area. So thereby, for the future acquisition, we are looking at the company, which is going to help us to move from component business to the module business. And also recently, we talked about a platform business. The platform business is really a firm component to the module, but not needed to the -- a traction motor, but rather, if you are looking at the EV business, there are lots more component necessary to make an EV. Then we do have some technological base of the some of the component, which can be make the auto EV. So in the future, we are moving from the module business to the platform business. Then from there, again, we do need more different technology and different product, which may be contributing to make up our EV. Okay? So that's 1, 2, 3. And we are looking at those companies who support us to transform from the -- a component business to module business and module business to the platform business. Those are some of more long-term blueprint that we are looking at for a future acquisition in the auto.
Okay. Got it. And then just one small quick one on the traction motor. Seems like your Ni150F has a maximum part of 150 kilowatts. So is the application for that motor mostly in sort of the hybrid -- Plug-in Hybrid and maybe the mass-market sedan in sort of low par type?
Okay. So those 3 models, you can see on Slide #20, 150 kilowatts model, 100 kilowatt model and 70 kilowatt model. Okay? Those are all EV, not plug-in EV, okay? Then the difference is the power or torque is different. Okay? So 150 kilowatt will be applied to midsize SUV to a more normal passenger. And something like a compact car, then 100 kilowatt is fine. For a much more a small and small compact car, 70 kilowatts. So in order to cover a different size and different function of the car, then we say, if we're going to have 3 different formats, 150, 100 and 70, then we cover almost 80%, 90% of that market. That's the reason why we extended a different verge of the car. Okay. Then, currently in all EV is something that the carmaker can choose. In there, we tried to reduce the battery that they had to go for the target. Then, at that point, they have to, maybe, buy from us the EPG, electric power generator, and DC/DC converter. But the problem is, maybe the total system cost might be a little bit higher than EV because plug-in system would have, as I say, EPG and DC/DC converter on top of the EV component. Okay?
Right, right. And then you -- when you said mid-sized SUV, you mean is that referring to crossover SUV?
Yes. Even the crossover, for example, if you're looking at the Slide #21, Aion, Chinese said Aion, maybe U.S. said Aion, but Aion LX is the -- a midsize or something like a large-sized SUV, whereas they are 4-wheel drive, then they will use a 2 traction motor system in the 1 car because they are all 4-wheel drive. Okay? So within using 4-wheel drive, this car is something [Audio Gap] midsize truck in the Elesys, okay? That's going to be going up to a 600 kilometer by 1 charge and 0 to 100 kilometer per hour, speed in only 3.9 seconds, as you see there.
We will now take our next question from Fei Chen of Fidelity.
I actually wanted to ask the same question as the previous gentleman. I wanted to know whether the OMRON AEC acquisition will be margin accretive. So as you explained, I do understand there will be synergies and there might be procurement cost reduction? I'm wondering if there are other measures that you are planning to do to bring the margin from 4.4% to 15% like personnel reduction were for the restructuring of the newly acquired business or any other measures?
Okay. What we explain in this is, maybe the OMRON is doing the same business as the Elesys we acquired from Honda. Okay? And when we acquired the Elesys from Honda, the margin was the same 4.4%. Within a year, their margin exceeded 10%. Within 2 years, their margin became 15%. Why? Because the most of the cost of those business is a so-called semiconductor chip cost. Then what we found in the Elesys case was, they were buying a little bit paying more, I mean that they are buying a very expensive chip. And we could reduce those chip costs into the average cost that we buy. So those were the major reasons that we could improve the margin of Elesys since we acquired them in 1994 in March. Then, 1995, 1996, their margin is already exceeded at 15%, somewhere there. So we say we can do the same thing with this OMRON because this is the same business as we have seen in the Elesys case. Okay? So this is a major maybe strategy at this moment. Then what I said was, we're not just looking at the profitability of the -- this OMRON, but rather this -- the huge resource like a 60 -- 600 engineer in the -- a control -- motor control area will be added to our auto business. That's going to be huge. And then, that's going to be making it possible, if you're looking at Slide #20, to make a current so-called the inquiry to the road business. In order for us to make the inquiry to the road business, we need to develop our own models where we require engineer to make inverters, the motors, et cetera. Then, as you can see, we already have inquiries from over 15 major OEM -- power OEM and the Tier 1's. Then, in order to respond to these needs, we do need a huge R&D resource. Then, we believe that the OMRON will be equally supporting that area. That's what we said. Do you understand what I am saying?
We will now take our next question from Kuni Kanno of Balyasny Asset Management.
I have 2 questions, please. Regarding the WPR 3, what exactly are you doing at this time? And also, I read this on Elesys note that you're expecting possibly JPY 80 billion to JPY 100 billion annual cost reduction going forward, which is not reflected into the announced '20 guidance. So could you explain that please on the WPR process and the actual effect?
How to increase so how to run with WPR 3 action. One is a reduction of procurement cost, which is the important part. At this point, the market has been regulated. That's why we have a big opportunity to reduce procurement costs. That's one of them. And also the broader expense deduction across the Nidec Groups has been done over. And on top of that, we are now going to reduce debt. And while we're integrating our factory and also the Sankyo network in order to reduce our fixed cost. And that's a 3-year component there in the European fleet. And actual effect for second half of fiscal year '18, it was JPY 14 billion, as explained the January '17.
[Audio Gap]
our guidance. And then after that, of course, we tried to reduce our fixed cost by integration of the factories and the network. And then we will see some additional effect from that transaction, maybe in the second half of 2019. And maybe we will add those effect on our guidance, maybe next time where we will be allowed to develop, in June quarter or December quarter.
Did you in Japan -- just a follow-up. Did you comment up at the JPY 80 billion to JPY 100 billion annual cost reduction? I saw that in the sale side note.
Yes. Actually, the -- as I mentioned in the second half of fiscal year '18, we had recognized the JPY 14 billion, 1-4 of effect from the WPR actions. And it's going to be reflected to the fiscal year 2019, maybe it's going to be up to the JPY 80 billion. On top of that, maybe the deduction of fixed cost will be added JPY 80 billion of the action even we have done so far.
Okay. Great. My next question is the traction motor business. Should we assume you are still losing money in March '20 guidance? And when should we -- if you are, when should we expect that you'll start making money from a traction motor business?
Yes. Maybe we would lose the money by fiscal year 2020, maybe -- and then -- but we're going to improve the profitability of the motor for automotive. The automotive for automotive is going to be up to 17% or 30%. Those profits will be covered a lot from traction motors by fiscal year 2020. And then the automotive profitability will be made with operating margin.
Our next question comes from Takashi Ito of ARGA Investment.
I just wanted to check if you have told people what your expectations are for the Chinese car market in fiscal year 2019? Are you expecting flat or up 5%, down 5%, anything like that? And what is the sensitivity or risk to your profits, if the Chinese market is 1 million extra better or 1 million units worse? Any internal analysis you have done to help understand what will be the impact to Nidec's profits if the Chinese market is better or worse than expectation? I think this will help us be able to be comfortable with your performance this year, however, the Chinese market will go?
Okay. So number one, we understand the unit -- the automotive unit, which are sold in Chinese market was something at 29 million in 2017 and 2018, 28 million. So 1 million down, as you mentioned. Then, this 1 million down, surely affect our total number of units that we sold. But the key thing is already, we have received the order, which is up from maybe 2017 to 2018, the total automotive motor in terms of the total automotive unit, 60 million was the order level in 2017 and 80 million was the number for 2018. But not just the Chinese market, but the global auto market was not as good as expected. So the unit, which we see was somewhat under 80 million. So something like 75 million, 76 million. Okay? So not just the Chinese market, but rather the global market, we are shipping, we are affected. So for example, either the contracts, we are expecting a 10 million, 20 million motors should be shift, 18 -- in fiscal year '18 over '17, but the reality was only 15 million more. But still, we are shipping 15 million more. So 2018 to 2019, at this moment, we are looking at somewhere near 10 million more shipment expected under the order -- current order we contracted. Maybe if the market is down again this year, then 28 million Chinese market down to 27 million, 26 million, then the similar thing happen, but maybe this is the second time we are accustomed to it. Then, the total unit impact might be -- maybe 3 million to 4 million, maybe out of 10 million increase. That's how we are looking at it. Okay? And then how much that would impact to our sales? Maybe the unit is down by, say, 3 million or 5 million because of that then that's going to be something the average selling price is something that a -- maybe 20 -- $15 to $20 per piece, then you can calculate how much sales we can lose. So please note that we already had a contract. So if the automakers or our Tier 1 customer is reducing the real order from the contract, then we do have the right to request the compensation for that. So in the real term of the profit-loss type of impact might be a little bit much less, because we do get a strong return for these kinds of lower number of the orders. Did you get what I'm saying?
Okay. That's great. Okay. And can I also just follow-up and ask for your traction motor. What is the average selling price right now based on the interest? So you have different types of motors, E-Axles and the price is different by the price litigations.
We mainly have been -- mainly focusing on the traction motor systems. And the system price is something like, at this moment, we say JPY 140,000.
JPY 140,000. Okay, okay, okay. Great.
So when we say a 10 -- sorry, 100,000 units are supposed to be shifted during a 20 -- fiscal year 2019 that we said, right? 100,000 x JPY 140,000. That's roughly the revenue unit expectation that we can get for the traction motor business. In this fiscal year 2020, we say 200,000 x JPY 140,000. That's somewhere the number that we are looking for the revenue from the traction motor. Okay?
Our next question comes from Trevor Wild of Ruffer.
This one is on a different topic, which is with your dividend. I was wondering if you could just explain the choice for the absolute amount for this year and next year. And then just comment on the payout ratio? I understand your target is to get closer to 30. And I'm just wondering why you haven't gotten to that target quicker, given cash has not been an issue for the business? And...
Did you see Slide #11 of the handout?
Yes, yes.
Then those are the numbers.
No, no, yes, I understand. I was asking about the rationale behind them for this year, where costs around in your analysis, these are one-offs. So the underlying business is strong et cetera, a good way to showing confidence and that would have been to perhaps increase the ordinary dividend by a larger amount than you did. So I was just wondering your choice to...
So we are trying to payout as stable as possible. So steady increase of the absolute amount of the dividend is number one. Okay? Then, we are achieving that from a fiscal year 2012 up to today. We are showing today that the number is showing similar increase in terms of the dividend amount, number one. So we are not really saying a percentage of the EPS, but rather we are always trying to give our shareholders a higher dividend year-by-year, that's number one. Then, in the long term, we have been saying that we are looking at a roughly 30% of EPS is something some guideline that when we decide an absolute amount of the dividend. Does this answer your question?
I mean, that's -- I know, yes. I mean, you said that before, I was just wondering if you had to comment on...
Yes. And we been saying all the time. It is a long-term fact, right? As you can see from '09 to '19, 10 years, 11 years history, you saw that. This is our policy.
Okay. I mean, I would have expected that having been the policy 10 years ago to be closer to the 30% on a normalized year, given your guiding next year for about 24% that was just an observation.
Yes. We'll just the -- for fiscal year 2019, this is just a forecast. So it depends on the real EPS, earnings per share, for 2019. But based on our forecast of our EPS for fiscal year '19, we say, we are forecasting JPY 110 per share is our dividend for the next year.
Our next question comes from Mehdi Hosseini of Susquehanna Financial Group.
This is David Ryzhik, again for Mehdi Hosseini. I just wanted to clarify on the HDD inventory side, just wanted to clarify your commentary around 3.5 inch and 2.5 inch, given that demand would bottom in the June quarter, are you suggesting that the inventory correction would last past the June quarter and maybe I don't know start to end by December quarter, just wanted to clarify that.
Okay. David, number one, clearly near line is inventory adjusted, but 2.5, 3.5, fairly more structured. So it's clearly on the structural downtrend. So thereby, if you're looking at some recovery or inventory adjustment over, but still the unit is not coming up as expected. And near line is clearly inventory adjusted, so the deal demand is growing year-by-year then what we saw was a huge adjustment took place in maybe a December quarter, March quarter, 2 quarters last year. And that might be -- that adjustment might be over by the end of March then from June quarter, we say unit will be back in the near line, but 2.5, 3.5, it's not just an inventory adjustment, but the real demand, especially in the competition against the SSD is a very big impact on this. So in the long run, as you can see on Slide #34, I think, 33 I think, the inquiry they are on the long-term downward trend. So thereby even inventory adjustment is over, you cannot expect the number is coming back. Can you see the difference, right?
Understood. Understood. But in the HDD industry supply chain, do you believe inventories would normalize as your customers start to rationalize their demand? Would 3.5-inch, 2.5-inch inventories normalize? Or do you expect there to be excess inventories for those segments in the near term?
Okay. Number one, 3.5, 2.5 those are all related to the quarter of one of our U.S. customer. So they were making more, right? For a quarter of the factory. Then those inventories are there. But the real demand to total digest that excess inventory is weak. So thereby the number is not coming up. Then that's going to maybe amount so for the seasonality demand such as the higher demand for a gaming consoles in September quarter. So there are a lot of noise. So you can always see the real inventory adjustments all went up and those numbers, which we are forecasting for the current year 2019. Okay?
And just one high-level question on China for Nidec. You touched on automotive. Just would love to get your assessment of the demand from China for your industrial business? Yes, any color there would be greatly appreciated.
Yes. Industrial area, probably at this point, the demand has indicated -- so we are expecting maybe the third quarter and in December quarter will be carried back to normal level. But probably, next 2 quarters, primarily, I don't think we can expect the kind of a paying up public demand because of Chinese economy.
Right. So just to clarify it doesn't appear as if there -- you don't expect a significant rebound in your industrial business, just given the economic situation in China over the next few quarters? Is that fair?
Yes, it is.
Our next question comes from Dong Zheng of Ariel Investments.
I just wanted to have a quick question on your earlier comment on how you are able to bring the margins from the Elesys of some sort of mid-single-digits to 15%? And you mentioned semi procurement was one of the big reasons. I wanted to get a better understanding on that part, is it purely volume discount? Or are you talking about more, maybe like downgrading from 32-bit MCUs to 16-bit MCUs? Any color -- any help on that part would be great.
Okay. So as I mentioned, it's mainly a volume discount, okay. So Nidec is making nearly 3 billion motors per year. And not every motor, but most of the motor we use, some of the controller. Okay? In those controllers, the same conductor chips are used, but clearly, we get a much better terms of the price on the semiconductor. Okay? Then, if you're looking at the OMRON or Elesys, their volume is much, much smaller than Nidec. So by joining a Nidec so-called a giant procurement program, they will reduce the cost of the semiconductor for a more larger volume level. Then, that is a huge impact on the margin. Then, we understand those are the major reasons that we could improve the Elesys margin from 4.4% before the acquisition up to 15% after 1.5 of the acquisition. Then, we say we're going to repeat the same experience with the OMRON this time. Okay?
Got it. And even though the motors are tend to use EBIT, MCUs and the ACUs tend to use sort of 16 to 32, you still get the volume discount?
Well, clearly, as we said, we are not just the motor, but we do have some electrified generic business. But these kind of the business is concentrating in the motor or motor-related area. Then, the volume is huge because we are the largest motor supplier in the world. Then, clearly, this semiconductor business is the volume business, the volume dictates the cost, Okay?
Mr. Abe, there are no further questions today. So at this time, I'd like to turn the conference back to you for any additional or closing remarks.
Thank you. We would like to conclude this conference call. Thank you very much for your participation today. Should you have any inquiries, please do not hesitate to contact Nidec Corporation or your sales representatives at Mitsubishi UFJ Securities. Thank you very much. Have a good day.
Thank you. This concludes today's conference. Thank you for your participation. You may now disconnect.