DP2011-13

K omatsuʼs bus iness m odel
through the product l ifecycle*
Yoichi MATSUMOTO

March 22, 2011

* The Discussion Papers are a series of research papers in their draft form, circulated to encourage discussion
and comment. Citation and use of such a paper should take account of its provisional character. In somecases, a written consent of the author may be required.

Komatsu’s business model through the product lifecycle
Yoichi Matsumoto

1. Introduction
Komatsu Limited (hereinafter referred as Komatsu) is a major construction
equipment manufacturer founded in 1921. Komatsu Iron Works, which manufactured
mining machinery and machine tools for its parent company, Takeuchi Mining Industry,
which was engaged in coal-mining and mining, spun off as Komatsu Limited in 1921.
Before the World War II, Komatsu built the first tractor in Japan and was also engaged
in the development of bulldozers at the request of the military authorities. When
Caterpillar Inc. of the United States made inroads into the Japanese market in the
1960s, Komatsu intensively worked on quality improvement and received the Deming
Prize in 1964. This is renowned as a successful example of Japanese manufacturers in
the postwar period in Japan. Komatsu is one of the distinctive manufacturers in Japan.
Caterpillar Inc. of the United States is the world’s leading construction equipment
manufacturer. Its sales revenue for 2009 for construction equipment was about 18.148
billion dollars. Komatsu was the second behind Caterpillar Inc. and its sales revenue for2009 (fiscal year ended March 2010) for construction equipment and vehicles was about
13.64 billion dollars. The other major manufacturers include Terex Corporation, Deere& Company, and CNH Global N.V. of the United States; Hitachi Construction
Machinery Co., Ltd. of Japan; The Liebherr Group of Germany; and VOLVO of Sweden.
While many of these construction equipment manufacturers source engines from othertruck manufacturers, only Caterpillar Inc. and Komatsu produce them in-house and areable to manufacture construction equipment from cast metals. Therefore, not only thesize of sales revenue but also the diversity of their accumulated technology makes
Caterpillar

Inc.

and

Komatsuprominent

amongconstruction

equipment

manufacturers.
Komatsu’s profitability of construction equipment hovers steadily at a comparatively
high level (Figure 1). Figure 1 shows the operating income margin of construction
equipment business of major manufacturers in the last five years; it is seen that
Komatsu maintained the operating margin of over 10% between 2005 and 2008.
Komatsu’s profitability deteriorated in 2008 and 2009 because of the global recession
triggered by bankruptcy of Lehman Brothers, and its operating income margin went
below 10%. However, in comparison to other companies, Komatsu still kept its edge.
1

While Caterpillar Inc. recorded an operating loss, Komatsu maintained an operating
margin of 6.5%. Another Japanese manufacturer, Hitachi Construction Machinery Co.,
Ltd., also suppressed the deterioration of profitability caused by the global recession at
the modest level. At all events, Komatsu’s profitability is higher and steadier compared
to its competitors such as Caterpillar Inc. and Hitachi Construction Machinery Co., Ltd.

Figure 1 Changes in operating income margin of construction equipment businessof major manufacturers

Note: The graph was created on the basis of the annual reports and the annual
securities reports of each company. Fiscal year ends in December for Caterpillar Inc.
and Terex Corporation; in March for Komatsu and Hitachi Construction Machinery Co.,
Ltd.; and in October for Deere & Company. For Komatsu and Hitachi Construction
Machinery Co., Ltd., results for the year ended March 2010 are quoted as 2009 results.
Similarly for other years, the results for these two companies are slightly out ofalignment of the year in the graph. For Terex Corporation, the figures include theresults of the whole company, and for others, the figures include the results ofconstruction equipment business only. The sales figures do not include inter-segmental
transactions when they are specified.

2

Although Komatsu enjoys high profitability nowadays, it used to suffer from losses
few years ago. For example, Komatsu recorded a net loss of 80 billion yen for the fiscal
year ended March 2002. As discussed later, the demand for construction equipment
decreased dramatically in Japan since the mid-1990s because of reduction ingovernment spending. At that time, the construction equipment business was said to bea declining industry. Even before that, Komatsu had started to seek to diversify its
business in search for new sources of revenue, but none supplemented construction
equipment business. In the late 1990s, Komatsu again concentrated its resources on
construction equipment as its primary business. What did they do since then?
Komatsu’s strength comes from various aspects: intensive cost reduction; strong
penetration in emerging markets; “manufacturing,” which emphasizes a long lasting
relationship with its suppliers; and post-sale services that highly utilize informationand communication technology (ICT). In this paper, I will introduce some examples of
those strengths and show how Komatsu’s construction equipment business “as a whole”
functions successfully from my viewpoint.
2. Characteristics of construction equipment business
Construction equipment is the equipment used for the development of infrastructure
including transportation network such as roads, ports and railways, soil and water
conservation such as dams and erosion controls, water source development, agriculturalland development, and other land development. Hydraulic excavators and bulldozers
are commonly known. Initially, bulldozers were the major equipment, but in the
mid-1970s, hydraulic excavators superseded them. This was due to the shift in theconstruction works from industrial infrastructure to social infrastructure. While
bulldozers are used to push, pile up, and smoothen earth and sand, hydraulicexcavators can be used to perform various functions such as lifting things and smashingrocks as well as digging, piling, and smoothing soil with different attachments to themultijointed articulated arm.
Circumstances surrounding the construction equipment industry, especiallyJapanese construction equipment manufacturers, have some characteristic aspects.
They can be found in the “Research paper on future perspective of construction
equipment industry in Japan 2005” by The Japan Machinery Federation and Japan
Construction

Equipment

Manufacturers

Association.

Insummary,Japanese

construction equipment manufacturers are experiencing three major environmental
changes: 1) stagnant domestic market and expansion of emerging markets, 2)
3emergence of the product lifecycle in the international market including emerging
markets, and 3) increasing importance of post-sale services.
Stagnant domestic market and expansion of emerging markets
The ever-increasing growth as seen in the past cannot be expected in the Japaneseconstruction equipment market. Investments in construction, both from private andpublic sectors, increased dramatically until 1990. Although investment from private
sector was on a downward trend as the bubble economy burst in the early 1990s,
investment from the public sector was steady at peak level until 1996. However, in thelate 1990s, investment in construction decreased substantially. Figure 2 shows thechanges in the amount of work completed (original contracts only) in the constructionindustry. The figures do not include subcontracts from other constructors. The amountof work completed soared steadily since 1975 and peaked in 1993 at about 86 trillion
yen. It then declined to about 53 trillion yen in 2005. Investment in construction scaled
down to two-thirds over 10 years.

Figure 2 Changes in the amount of work completed (original contract)

Note: The graph was created on the basis of the “statistics on construction undertaken”
by the Ministry of Land, Infrastructure, Transport and Tourism. The unit of verticalaxis is hundred million yen. Abscissa axis shows years.

4As construction investment decreased considerably, constructors who were forced toreduce cost started to review procurement of construction equipment. This caused ashift from the ownership of machinery to lease and rental. Thus, the domestic demandfor construction equipment decreased considerably. Although the demand for lease andrental decreased as well, its extent is moderate compared to the decline in the overall
demand for construction equipment, resulting in greater presence of lease and rental
demand in the total demand. Figure 3 shows that the proportion of lease and rental was
21%, at its lowest, in 1993 and it increased to 31.9% in 10 years in 2002. Equipmentthat has particularly higher proportion of lease and rental are hydraulic excavators andmini-excavators with lease and rental proportions of about 39% and 47%, respectively,
in 2002.

Figure 3 Changes in demand for lease and rental

Note: The graph was created on the basis of the “Trends in worldwide shipments ofconstruction machinery (value)” by the Japan Construction Equipment Manufacturers
Association. The unit of vertical axis is a million yen. Abscissa axis shows years. Figureson vertical axis indicate domestic demand only. Data for 2003 or later are not available.

In contrast to the stagnant domestic market, demand for construction equipment is
rapidly increasing in emerging countries. Figure 4 shows the shift in the demand for
major construction equipment by region. In 1991, the demand for major construction
equipment existed mainly in three regions: North America, Europe, and Japan. At that5

point, the demand for construction equipment in China was insignificant. However, thedemand in China and other regions started to rise dramatically from 2000. On thecontrary, the demand in Japan and North America is on a declining trend. Although thedemand in Europe is on an increase, the growth is rather slow compared to the rapid
increase in China and other markets. Figures in 2008 indicate that North America,
Europe, and Japan, which used to be major markets, now have much less presence ascompared to China and other markets. More than half of the demand for construction
equipment is now in emerging markets including China.

Figure 4 Changes in demand for major construction equipment by region
Number of construction machines in demand

Japan

China
OthersEuropeNorth America

Note: Data provided by Komatsu

International product lifecycle
In accordance with the reduction in the construction work, the supply of usedequipment increased in Japan. The trade volume of used construction equipment neverexceeded the sales volume of the brand new equipment until 1996. However, the sales
volume of the new equipment gradually decreased since 1996. The trade volume of usedequipment, which had already exceeded the sales volume of the new equipment in 1997,6and the gap between them has widened ever since. In 1997, the sales volume of the new
equipment and the trade volume of used equipment were almost even at around
100,000 machines; however, in 2004, the former was around 60,000 while the latterreached around 110,000. Collaterally, the volume of domestic stock (the total number of
equipment held by users after sales) is also on a downward trend. It hovered at around
1,200,000 until 2000 but declined to 800,000 in 2004.
The volume of domestic stock decreased as they are exported as used construction
equipment to the Chinese market, which is active because of the urban development,
and to the Middle East market, which is enjoying surging oil price. The export priceremains at a high level, boosting the export volume. Although used construction
equipment used to be resold mainly in the domestic market, the domestic resale volume
started to decline in 1996. At its peak, about 60,000 used machines were sold in thedomestic market per year. The export volume of used equipment constantly increased
and exceeded the domestic resale volume in 2000, reaching around 50,000 units per year.
In 2004, approximately 70,000 were exported overseas.
The product lifecycle of construction equipment varies from small-to-mid equipment
such as bulldozers and hydraulic excavators to larger equipment such as massive dump
trucks used in mines. Newly sold equipment require overhaul after three to five years.
Overhaul means disassembling parts, washing, and reassembling them. By doing so,
the equipment regains the performance level like a brand new machine. Large
equipment are scrapped after this overhaul process is repeated two times. On thecontrary, small-to-mid equipment are often replaced by new ones when the first
overhaul is required. As users of rental equipment tend to prefer brand new machines,
leasing companies are encouraged to own new ones. Increasing popularity of rental andlease furthers this trend. Machines that are no longer used are traded in and then soldto emerging markets. In general, the price of construction equipment is relatively cheap
in Japan. In North America and Asia, the price of machinery is around 10% higher thanthat in Japan. As the demand in emerging countries expanded rapidly, construction
equipment became scarce, and at one stage, Japanese-made used equipment were soldfor the same price of brand new equipment locally made in emerging countries.
Japanese-used equipment are popular overseas not only because Japanese-madeconstruction equipment is high in quality but also because the equipment leased inJapan incur less damages. Users in Japan generally treat construction equipment more
carefully than those in North America, China, or other countries in South East Asia. In
addition, while the average operating hours per year are about 1,200 and 2,100 in North
America and China, respectively, they are only about 800 per year in Japan.
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Furthermore, genuine parts of the brand are used when the parts are replaced during
maintenance; thus, the damage is minimal even with used machines and highperformance is maintained. Between 2002 and 2007, the soaring demand for usedequipment in emerging countries stimulated the domestic demand for the replacementof equipment in Japan, which caused the so-called “used equipment bubble”
phenomenon. (Figure5)
As just described, in the construction equipment industry, the international productlifecycle has been created, where the equipment used in Japan are sold as usedequipment in emerging countries.

Figure 5 Changes in domestic sale and export of construction equipment

Note: The graph was created on the basis of “Trends in Worldwide Shipments ofConstruction Machinery (Value)” by Japan Construction Equipment Manufacturers
Association

Importance of post-sale services
As expected, parts of construction equipment wear away or break down through hard
work such as digging hard surfaces and drilling a hole in rock hills, and thus damages8

are inherent in them. Therefore, the industry is formed on the premise that it requires
post-sale services, in contrast to the electronics industry, which expects trouble-proof
products.
There are two types of replacement parts: functional and essential parts, which only
the manufacturer can supply, and consumable parts such as bearing, seal material, andhoses. A construction machine can be built by combining all these parts. It usuallyconsists of 30,000 parts of 5,000 different types. If the original price of a complete
machine is 1, the total price of those parts would be 3 to 4. In other words, the total priceof the parts would be three to four times more than that of the whole machine. This canpossibly be interpreted in two ways. The simple way of looking at it is that the sale ofparts is more profitable. However, it can also be interpreted that having a supply
system of parts is costly. Some of the parts are only a few hundred yen, but selling theseparts takes as much time and effort as selling a machine itself, which costs a few million
yen. In fact, post-sale services are more laborious. If the parts are sold, it can be
profitable. However, if they are not sold, the risk of defraying the cost is high. Therefore,
post-sale services were not considered as a source of profit.
Local distribution outlets are responsible for post-sale services. In Japan, equipment
manufacturers often have capital alliances with them, but those capital alliances do notexist in other countries.
Post-sale services are required continually after the sale of the equipment. As theequipment sold and held continues to produce income through replacement of parts andsales of consumables, this business model of the sale of the equipment itself combinedwith the sale of replacement parts and consumables can be referred to as “stockbusiness.” Because an already sold machine provides opportunities of sale ofconsumables, it enables manufacturers to maintain more stable sales revenue and beless susceptible to the change in the annual sales of equipment. The more hours theequipment is used for, the more the demand for consumables; thus, the operating hoursof the equipment have a great influence on the revenue of post-sale services.
Figure 6 shows the changes in the proportion of sales of replacement parts for theyear to the total sales of the equipment for the last five years. The domestic figuresindicate that the proportion of sales of replacement parts increased as the sales ofequipment decreased between 1995 and 2006. This is because the sales of theequipment dropped while the operating hours of the equipment increased (thusmachines are used more efficiently) and each manufacturer focused on post-saleservices. Next, the proportion of sales of replacement parts declined sharply. This isconsidered to represent the fact that the sale of the equipment increased because of9

used equipment bubble but the operating hours did not increase. It might be more
appropriate to say that the proportion of sales of replacement parts shifted back to theprevious level rather than saying that it declined. On the contrary, export figures show
a rapid increase in the sales of replacement parts since the late 1990s. This isconsidered to be triggered by the increased operating hours of equipment due to the risein government spending and construction demand before the expansion of theequipment market. Once the sales of the equipment started to soar in 2004, theproportion of sales of replacement parts decreased sharply. This can be interpreted in
two ways. First, the equipment has been more widely supplied, but the operating hoursof the equipment have declined and thus the sales of the replacement parts have notbeen increasing. Second, although the sales of the equipment have increased, there has
not been enough provision of post-sale services.

Figure 6 Changes in proportion of sales of replacement parts

Note: The graph is created on the basis of “Trends in Worldwide Shipments ofConstruction Machinery (Value)” by Japan Construction Equipment Manufacturers
Association

10

As mentioned above, the sales of the equipment cannot be expected to increase
drastically in Japan. Therefore, equipment manufacturers need to increase revenue
from post-sale services in order to maintain stable profit. The decrease in the proportionof sales of replacement parts is considered to be triggered by the two factors mentioned
above, and thus, the challenges for Japanese construction equipment manufacturers are
how to pursue post-sale services, which are laborious but necessary to maintain thequality of the equipment in the expanding emerging markets, and how to produce
steady income through widely supplied equipment.
3．Komatsu’s approach
So far, I have explained three major environmental changes faced by Japaneseconstruction equipment manufacturers: 1) expansion of emerging markets, 2)international product lifecycle, and 3) increasing importance of post-sale services. In
this section, I will examine Komatsu’s approach to these challenges
Penetration in emerging markets
Komatsu’s strong business is supported by its competitive edge in Asia. Komatsu
calls Japan, North America, and Europe traditional markets and regions such as Asia
including China, former Soviet Union, Middle East, South America, and Oceania
strategic markets. They particularly emphasize a region named greater Asia, which
includes China, South East Asia, Middle and Near East, and former Soviet Union. In
the United States and Europe, Caterpillar Inc. historically has great competitivenessand Komatsu has only held the position of number two. However, Komatsu isconsidered to be number one by far in Asia, and it has more than 20% of the market
share in China, which is the biggest market (“New Mid-Range Management Plan” by
Komatsu, April 27, 2010).
Komatsu has a long history of penetration in the Chinese market. They successfullyreceived a sizable order for bulldozers back in 1964. (Komatsu Limited, 1971) Throughdedicated efforts, Komatsu has now built its competitive edge in Asian region. The
difference in the approaches to overseas operations between two major players,
Caterpillar Inc. and Komatsu, is interesting.
In case of Caterpillar Inc., the existing large distributors are responsible for overseas
operations. Therefore, as soon as they enter a local market, a strong network of dealers
is created. On the other hand, Komatsu establishes a local enterprise itself even at asmall scale to develop relationships with local distributors. Caterpillar Inc.’s approach11

to build a network of dealers and production base concurrently takes longer time, but it
unfailingly creates avalue-creating and value-capturing system. On the contrary,

Komatsu enters emerging markets actively from the smaller scale. In some cases, theestablishment of the base for parts supply and post-sale services is followed at a laterstage. While Caterpillar Inc. introduces all product lines, Komatsu sells limited
products that are smaller and construction related, such as bulldozers and hydraulicexcavators for cheap price in order to secure the market share. In contrast to Caterpillar
Inc., who dominates North American and European markets with full-service including
large-scale post-sale service network, Komatsu forges ahead in the emerging market
rapidly and builds its brand (“Weekly Economist” September 4, 2007).
Komatsu, in their New Mid-Range Management Plan “Global Team Work for 15”
released in April 2007, declared that the establishment of a more flexible production
system was their top priority and that they would aim to set out a global production
system that is able to flexibly correspond to the shift in the demand. To be more precise,
there are three key points. First, the equipment is assembled in regions with large
demand. For example, major product lines of typical construction equipment such as
hydraulic excavators are manufactured in seven factories in Japan, China, Europe, Asia,and the United States. Second, the production of key components (such as engine andhydraulic equipment) is centralized in Japan. They once sought the possibility of
producing key components overseas, but came to the conclusion that Japan excels at
refinement, and therefore, manufacturing those components domestically would givethem cost competitiveness (Personal interview, January 24, 2011). Third, they aim toenhance competitiveness in manufacturing, which includes other factories that
manufacture the same type of equipment by realizing cost reduction at the time of
product development or remodeling. This can be achieved by integrating the
manufacturing sector and the development sector through the system that gives the“mother factory” the function of product development. Mother factories are not limited
to Japan but exist worldwide in nine different areas as of the end of June 2010 (one in
the United States, four in Europe, and four in Japan).
Komatsu has expanded into the emerging market through prompt penetration andestablishment of a flexible production system, but they will need to deal with thecompetition with local companies as well. In China, which is the largest growing market,
SANY group has made remarkable growth. They excel at low-end products and have aclose relationship with the local government. Their market share was only 2% in 2007,
but increased by about 2% in a year, and most recently in September 2010, it isconsidered to have increased by as high as 8.5% (Personal interview, January 24, 2011).
12

In 2010, SANY group announced that they will build a construction equipment factoryin Thailand. They are expected to enter the market in ASEAN countries. Major Chinesecompanies import the key components from overseas and assemble them, and they havebeen accumulating technical capabilities through this process.
Recycling business
As the rental market and the used equipment market expanded, Komatsu focused onrecycling business. Komatsu’s approach can be summarized as an attempt to be actively
involved in the whole process from the sale to the disposal of equipment. In other words,
a factory is considered as the heart of the body and a network of dealers, who distributeproducts to the market, is considered as an artery. Recycling business here refers toestablishing a vein that collects blood once pumped out and redistribute the products.
Komatsu reorganized the internally founded “Recycling business project team” as“Recycling planning department” in October 2010 and officially applied its recycling
business model they developed for used construction equipment to industrial machinery.
In accordance with the introduction of new models in April 2011, they will buy oldmodels from their customers and repair them to make them available in the market tocompete with cheap foreign products (“The Chunichi Shimbun” November 15, 2010).
In 2006, Komatsu founded Komatsu Rental, which carries out rental business ofconstruction equipment. In 2007, Komatsu announced the acquisition of shares of BIG
RENTAL and its merger with Komatsu Rental. Komatsu also retains Komatsu Used
Equipment Corp. (KUEC), which sells used equipment and holds auctions of used
construction equipment regularly since they held the first auction in Japan in 1994.
Participants come from various regions and countries including Asia, North America,and Middle and Near East Africa. In 2009, they achieved domestic sales of 1,800 units(approx. 4.1 billion yen) and overseas sales of 7,400 units (approx. 23.6 billion yen).
More than 80% of the total sale is exported overseas (Personal interview, January 24,2011).
As mentioned previously, small-to-mid construction equipment are often traded in
and replaced with a brand new machine at the time of the first overhaul. Local dealers(brokers) in other countries buy these used machines in auctions and import them totheir countries. The guarantee period is usually expired for the equipment sold overseas
this way, and Komatsu’s local distribution outlets perform maintenance and repair for
profit. Although consumable parts can be replaced with generic parts, essential parts ofconstruction equipment are brand specific and cannot be manufactured by othercompanies, so the maintenance of these parts needs to be performed at a local agency of
13the manufacturer. Used equipment is registered at the agency at this point.
In the Chinese excavator market, there have been many used machines imported
from Japan, but as the sales of the new equipment grow, more locally used machines are
expected to be available in the market. Although Komatsu has increased their priceworldwide, they have not been able to raise price in China as intended. The key lies inused equipment and if the price of used equipment increases, it will become possible toset higher price for brand new equipment. However, the revenue from parts andservices is low, at only 5% of the total in China. When parts break down, Chinese
customers often use cheap copy products instead of Komatsu’s genuine parts (Interview
with Kunio Noji, president and CEO of Komatsu Limited, “Nikkei Business” December
13, 2010).
The quality of used equipment is a critical issue that influences profitability of salesof brand new equipment. Therefore, it is necessary to be involved in not only the sales
process but also in the process of collecting machines in the market. To maintain thequality of used equipment, genuine parts must be used. It is a challenge for them toencourage the users to maintain the quality of the equipment using the genuine parts
especially in emerging countries.
Post-sale services utilizing ICT
In construction equipment business, distribution outlets are the ones who directly
deal with customers. Products are supplied to customers through these outlets and they
perform post-sale services such as maintenance and repairs. However, post-sale
operation is complicated. Komatsu utilizes ICT and provides a post-sale operation tool
to distribution outlets to ensure their profitability.
Post-sale operation consumes a lot of time and labor of both Komatsu and the
distribution outlets. The distribution outlets are required to 1) acquire necessary
information (information on replacement parts, repair service information, quality
information, and product information); 2) submit quotations of replacement parts andplace orders to the manufacturer; and to 3) provide the manufacturer with customer
information (operational status of equipment and quality information). Komatsu thenneeds to 1) provide information required by distribution outlets, 2) process quotations
and orders from outlets, and 3) gather customer information. There are around 5,000
types of parts used for construction equipment and hundreds of thousands of industrial
documents on these parts. Each time maintenance is required for equipment thatbelong to tens of thousands of customers, it is required to search in hundreds ofthousands of industrial documents and find the necessary parts, check stock, and place14

order. It can be easily imagined that this post-sale operation consumes enormous time.
This is where Komatsu makes effective use of ICT.
Komatsu has introduced a system called KOMTRAX, which is a machine with
telecommunication function and is fitted as standard equipment (Figure 7). Other
companies also have installed a similar system, but Komatsu is the only company that
includes it as standard equipment. Information on the location, operating hours, andstatus of the construction machine can be obtained through this system. Komatsu
started to install the system as standard equipment in 2002, and now they can obtain
operational information of 190,000 machines worldwide. Post-sale market depends on
the operating hours rather than the number of equipment delivered. Therefore,
operating hours is more important. By looking at the operating status, it is possible toestimate the demand for post-sale services. Information on KOMTRAX is provided to
distribution outlets through the internet.

Figure 7 KOMTRAX system

Note: Created on the basis of the “Fact Book 2009” by Komatsu

15

KOMTRAX makes it possible to know which machine is used where in the world andin what status, and if there is an error, what sort of errors. This type of information
used to be available only at the customer end. Now it can be shared among three parties
including the manufacturer and distribution outlets. This system enables distribution
outlets to make suggestions such as oil change, which is due at the next repair. When
only customers had such information, all outlets were able to do is to wait for orders
from customers. Implementation of KOMTRAX enabled distribution outlets to monitor
the status at the same level as customers, and thus, more proactive business became
possible.
The system also helps effective operation of construction equipment. For example,
KOMTRAX can detect the fact that the engine of a machine at a customer site has been
on for 10 h but the actual operating hours is only 6. Therefore, outlets can advise thecustomer to shorten the idling hours.
KOMTRAX is a sensor to gather data. CSS-Net, on the other hand, distributes
information from KOMTRAX and various industrial documents that headquarter hascompiled to outlets. The information provided includes parts catalogs, product catalogs,
news updates on services (such as information on recalls), operation manuals, repair
manuals, and fitting procedures. While these documents are generally paper-based andprovided from manufacturers to outlets, Komatsu provides electronic data via internet
using CSS-Net. In Komatsu’s system, each industrial document exists as a separate
database. Other companies also possess a similar database. However, Komatsu is
unique in that each database is connected to CSS-Net so that all the informationnecessary for post-sale services can be obtained simultaneously. They started using thissystem in 1998 when the internet use started to rise drastically.
Digitalization of industrial documents and distribution of data through the internet
have mainly six benefits. First, electronic data of the documents are centrally managed
at a computer center and the latest documents can be provided equally and promptly to
all distribution outlets in the world. Second, cost of media such as paper and CD can be
reduced substantially by digitalizing documents. Third, it enables rapid search ofnecessary documents from hundreds of thousands of industrial documents by using a
powerful computer search function. The fourth benefit is information sharing with othersystems such as KOMTRAX and quality information management systems (SMAP:system that utilizes a computer network to centrally manage quality information). The
fifth benefit is that it enables prompt referral of delivery time and market price bylinking to ordering systems for replacement parts, and thereby reduces incorrect orders.
The sixth benefit is that the distribution server has records of access regarding “who”
16

used “which document” and “how” and at “what time,” because the system users arerecognized by an ID. By analyzing these records, it is possible to grasp the movement of
post-sale market statistically. Utilization of this information substantially reduces theresearch cost for service planning.
Implementation of CSS-Net not only reduces information search cost by digitalizing
paper-based data but also enables prompt and appropriate access to necessary
information, and thereby reduces operation cost for post-sale service and improves
quality at the same time. Komatsu sells the CSS-Net system to other companies and it
has been used by Japanese agricultural equipment manufacturers.
4. Komatsu’s business modelThrough the installation of ICT, Komatsu has been trying to transform complex
post-sale service from costly operation to source of profit, and in fact, they have alreadybeen successful in Japan (Personal interview, January 24, 2011). In international
markets, many of the outlets do not have significant capital alliances with Komatsu;
therefore, helping local distribution outlets to make sufficient profit will be the key for
Komatsu to successfully promote their products. This is a particular business challenge
for Komatsu who takes a different approach from Caterpillar Inc., who uses existinglarge distributors to forge ahead in overseas markets. There is also a risk of vicious
cycle. If they fail to build a framework to ensure profit from post-sale services, theperformance of distribution outlets for repair and maintenance services will deteriorate,
which will lower customer satisfaction, which will then reduce the repeat rate at thetime of renewal, resulting in further deterioration of service performance and decreased
profitability of distribution outlets. Furthermore, if they fail to maintain the quality of
construction equipment that customers are using, it will have adverse effect on the priceof used equipment, which will then trigger a collapse in the prices of brand new
equipment. Komatsu has been involved in the whole lifecycle of its products throughvarious means that interactively underpin Komatsu’s healthy business performance.
KOMTRAX was originally developed as a countermeasure for a series of incidents
where construction equipment was stolen and used to rip off the whole automatic teller
machine in Japan. By installing KOMTRAX, customers were able to reduce the cost forburglary and theft insurance. In addition, customers thought it would be beneficial as it
would support preventive maintenance by outlets as it would provide information on
the status of the machine. The original business model assumed Komatsu to receive
service fee in return, and it was still an option that required additional fee for17installation. However, two years later, they changed their mind. They realized thatbeing able to obtain information on the status of equipment is actually beneficial for the
manufacturer, so they decided to use it as a tool for the manufacturer. In 2002, Komatsu
made it a standard equipment and stopped charging customers additional fee.
KOMTRAX has enabled visualization of status of equipment. Not only can this beused for product development, but this has also enabled Komatsu to differentiate itself
in support services. Distribution outlets can now be proactively involved in post-saleservices, and CSS-Net has simplified the complex operations. For customers, this has
eliminated the risk of theft of construction equipment and enabled them to receive
prompt post-sale services. With post-sale services, the quality of equipment will bemaintained and it may be used for a longer time or the trade-in value may be higher. As
a result, Komatsu has been able to make profit from post-sale services, exploit the
emerging markets, and maintain prices for brand new equipment. Komatsu has
successfully built win-win-win relationship among manufacturers, distribution outlets,and customers. Furthermore, the utilization of CSS-Net and information from
KOMTRAX enabled customers, distribution outlets, and Komatsu to share equipment
information at the same level, eliminating miscommunication and thereby improving
the quality of post-sale services. KOMTRAX by itself is a mere sensor. However, byconnecting it to industrial documents through CSS-Net, Komatsu successfully
established strong ties between distribution outlets and customers. Komatsu has given
a new meaning to their business by transforming a mere sensor to something more.
This visualization has also shown other benefits that were not originally expected. In
2004, when the Chinese government implemented fiscal austerity measures thattriggered a decline in demand, construction equipment industry suffered from excess
inventory. However, Komatsu was able to take preemptive measures before the decline
in demand came to the surface and stopped production lines for three months. The
decision was made on the basis of the data from KOMTRAX, which indicated reduction
in operating hours of construction equipment. When the Chinese government again
implemented a tight money policy in 2006, the prevailing view in the construction
equipment industry was that the market would shrink. However, in reality, the demand
was rising and the industry suffered opportunity losses from the shortage of hydraulicequipment, which is an essential part. Komatsu, on the other hand, established a newfactory instead of reducing supplies and ended up in increasing the market share(“Nikkei Business” June 4, 2007).
Komatsu’s ICT is effective in market development as well. Major customers ofhydraulic excavators in China are sole proprietors. Since the unit price is high,18

installment sale is common, but selecting customers by credit ratings will limit sales.
With KOMTRAX, as operational status after sales can be tracked, it can eliminate theconcern of the collection of receivables. If the machine is operating, the customers are
considered to have the ability to pay as they should receive a fee for the work. If thepayment is not made, the engine can be stopped by remote control. If the machine is notoperating, it can be seized depending on the circumstances (interview with Kunio Noji,president and CEO of Komatsu Limited, “Nikkei Business” December 13, 2010).
Therefore, Komatsu has exploited new business possibilities with ICT. As a result, it
has been utilized for the whole product lifecycle from production and expansion of sales
channels to improvement in quality and profitability of post-sale services. The productlifecycle here does not refer to just one cycle from sale to replacement. Komatsu
facilitates the whole cycle in which replacement takes place a few times. They continue
to be involved in the whole lifecycle from production of a machine to its disposal. This is
Komatsu’s approach to maintain product quality and provide a mechanism that
supports the operation of distribution outlets.

Figure 8 Komatsu’s hybrid hydraulic excavator

Note: Material provided by Komatsu

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While reducing the manufacturing cost by more than 10%, Komatsu has focused on
the development of leading products with advanced technologies that will take othercompanies at least three to five years to catch up. The hybrid hydraulic excavator is one
example (Figure 8). The total cost of construction equipment for the whole lifecycle
including purchase price of equipment, cost for repair, maintenance, consumables, fuel,tires, machine management, and the labor cost of operators will be 10 times that of thepurchase price. Considering the total cost of construction equipment, cheap purchaseprice itself is not enough. Komatsu introduced new hybrid construction equipment to
the Chinese market. In China, as the labor cost of operators is only one tenth of that inJapan, technologies to reduce the cost (for example, automatic control of construction
equipment) are less beneficial for the customers. However, the cost of fuel is the same asthat in Japan. Because hybrid construction equipment is three to four times more fuelefficient, it makes more sense to introduce these leading-edge products to the Chinese
market. Especially in China, where equipment is used three times more than that inJapan, fuel efficiency substantially boosts customer’s profitability.
These leading-edge products are a perfect example that represents Komatsu’s
technological competence. However, competitors will start selling similar products atsome stage or the essential parts of those products might be obtained by competingcompanies in emerging countries. The speed at which Chinese companies accumulatetechnologies is phenomenal, and they will soon be able to develop products of a similarlevel of technology. How will Komatsu make effective use of three to five years theygained with the leading-edge products? The win-win-win relationship Komatsu has
established with distribution outlets and customers will be the first step.

Reference:
Komatsu Ltd., Komatsu seisakusho goju-nen no ayumi [Komatsu’s 50 years footstep]
Komatsu Ltd., 1971.
The Japan Machinery Federation and Japan Construction Equipment Manufacturers
Association, Heisei 17 nendo wagakuni kensetsu kikai sangyou no shourai tenbou

chousa kenkyu houkokusho [Research paper on future perspective of construction
equipment industry in Japan 2005], 2006.

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Nikkei Business, June 4, 2007, Nikkei Business Publications.
Nikkei Business, December 13, 2010, Nikkei Business Publications.
Weekly Economist, September 4, 2007, The Mainichi Newspapers Co., Ltd.

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