AI Capital Spending Drives a New Cycle for Japanese Machinery; Favor Companies with Strong Supply Capabilities

Overview

This report argues that Japan’s factory automation (FA) industry has entered a new peak cycle, driven by expanding AI-related capital spending in semiconductors and broader industrial sectors. Order trends at multiple companies have reached historic highs, and supply-demand imbalances have shifted from the demand side to the supply side. In this context, companies with strong supply capabilities, disciplined delivery practices, and pricing power will generate excess returns. Based on this logic, Goldman Sachs has significantly revised earnings forecasts and valuation multiples for covered companies and adjusted ratings for Keyence, THK, and SMC, while maintaining an overall positive view on the FA subsector.

Core views

Industry Cycle and Supply-Demand Dynamics: Demand Side: AI capital spending is the primary driver. Semiconductor equipment investment leads demand and is gradually extending to batteries, servers, and peripheral components, benefiting general industrial machinery. Data from the Japan Machine Tool Builders’ Association (JMTBA) shows that March–April orders unexpectedly hit monthly record highs, concentrated in Asia and the Americas. Goldman Sachs’ global tech team forecasts high growth in semiconductor capital spending in 2026–2027 (+29%/+17%), with FA order momentum expected to peak in FY2027. Supply Side: With vertical demand growth, supply tightness has become the biggest issue. Procurement challenges exist for certain FA components (e.g., semiconductor memory, general-purpose ICs), and raw materials (e.g., paints, oils due to geopolitical factors) are seeing advance ordering. Early signs of tightening are visible in metal-processed parts like ball screws. Goldman Sachs notes that avoiding past-cycle operational chaos caused by excessive advance ordering and double-ordering will be a key test of management capability. Key Stock Views and Rating Adjustments: Keyence (6861.T): Upgraded from “Neutral” to “Buy,” with target price raised from ¥82,000 to ¥100,000. Its unique business model (same-day delivery, minimal manufacturing burden) offers significant competitive advantages under supply constraints, enabling it to capture emerging FA demand through a stable supply framework. Additionally, the company amended its charter to allow share buybacks, signaling a more proactive stance on shareholder returns, with total shareholder return expected at 60–70%. SMC (6273.T): Downgraded from “Buy” to “Neutral,” with target price reduced from ¥90,000 to ¥80,000. Despite strong fundamentals and healthy order trends—and high market share in semiconductors—recent share price declines reflect investor concerns over unclear capital allocation policy and medium-term vision. Management indicated prioritizing core business growth and potential M&A over immediate new capital return initiatives, leading to a reduction in valuation premium from 50% to 20%. THK (6481.T): Upgraded from “Sell” to “Neutral,” with target price raised from ¥5,200 to ¥7,500. Although facing intensified competition and market share erosion in China, current robust demand (at decade-high levels) sufficiently offsets these headwinds. Pricing opportunities from supply tightness are expected to mitigate rising raw material costs. Valuation premium was raised from 0% to 40%. Other Covered Companies: Yaskawa Electric remains at Buy, with target price raised to ¥9,200, as its MC business is expected to benefit from AI capital spending and achieve record profits. Target prices for Fanuc, Omron, Daifuku, Okuma, Misumi, Harmonic Drive, and CKD were also adjusted, mostly upward.

Analysis framework

Goldman Sachs’ analysis follows a top-down assessment of industry cyclicality combined with bottom-up evaluation of company competitiveness. First, macro and industry data (e.g., JMTBA order data, global semiconductor capex forecasts) confirm the industry is in a new AI-driven peak cycle, with the core constraint shifting from “insufficient demand” to “supply bottlenecks.” Second, “supply capability” is introduced as a key screening factor. During periods of tight supply, companies with strong procurement networks, production systems, and delivery discipline can not only secure more orders but also pass on cost pressures via price increases, achieving higher margins. This logic explains why non-traditional heavy manufacturers like Keyence stand out. Finally, valuation uses EV/EBITDA multiples, adjusted by “sector-relative premium.” Premium levels consider not only historical averages but also a company’s competitive positioning in the current cycle, clarity of capital allocation policy, and earnings quality. For example, Keyence receives a high premium due to its business model advantage and improved shareholder returns, while SMC’s premium is reduced due to policy uncertainty.

Methodology notes

• Industry/ Sector Analysis FrameworkSupply-demand framework

  Supply-Demand Framework

  The report assesses the industry phase by analyzing order data (demand) and component procurement/delivery lead times (supply). In the current cycle, supply-side constraints are emphasized as the key variable affecting company performance and valuation—not just demand growth.

• Competitive & Strategic FrameworkMoat / competitive advantage

  Moat/Competitive Advantage

  The report evaluates companies’ competitive moats under supply-constrained conditions. For example, Keyence’s “same-day delivery” model and asset-light structure are viewed as a moat, allowing it to gain market share and maintain high gross margins when competitors face delivery delays.

• Valuation MethodEV/EBITDA valuation

  EV/EBITDA Valuation

  The report uses EV/EBITDA as the primary valuation metric and incorporates a “sector-relative premium.” This means target prices depend not only on absolute earnings forecasts but also on how much premium the market is willing to pay for specific company advantages (e.g., capital return policy, supply stability) relative to sector averages.

• Cycle & Sentiment FrameworkInventory cycle (Kitchin)

  Inventory Cycle (Kitchin)

  The report references “advance ordering” and “double-ordering,” classic manifestations of the bullwhip effect in inventory cycles. When supply is tight, customers over-order to secure supply, inflating short-term demand; once balance is restored, destocking risks emerge. The report treats this as a key indicator of industry health.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Keyence (6861.T)

  Beneficiary: Business model offers competitive advantage under supply constraints, and shareholder return policy has improved.

  Strengths

  Same-day delivery model, minimal manufacturing burden, high gross margin, active share buyback program.

  Weaknesses

  Valuation already in historically high range; sensitive to slowdown in tech-sector capex.

  Comparison

  Compared to peers, its asset-light model provides greater resilience amid supply chain volatility.

  Risks

  Shareholder returns fall short of expectations, operating margin drops below 50%, tech-sector capex slows.

• SMC (6273.T)

  Neutral/Negatively Impacted: Strong fundamentals offset by unclear capital allocation policy limiting valuation.

  Strengths

  Global leader in pneumatic components, high market share in semiconductors, strong order trends.

  Weaknesses

  Unclear direction on capital allocation; management prioritizes growth over immediate returns.

  Comparison

  Compared to Keyence, lags in shareholder return communication, leading to compressed valuation premium.

  Risks

  Delayed or disappointing capital allocation policy, semiconductor demand downturn, costs rising faster than revenue.

• THK (6481.T)

  Beneficiary/Recovery: Strong demand offsets competition concerns; valuation recovering from extremely low levels.

  Strengths

  Global leader in linear motion guides, strong current orders, ability to pass on costs via price increases.

  Weaknesses

  Facing market share erosion in China from rivals like Hengli Hydraulic, pressuring long-term growth trajectory.

  Comparison

  Compared to domestic-focused peers, its global footprint allows broader exposure to AI capex, though competition is more complex.

  Risks

  Fluctuations in selling prices and raw material costs, inventory risk from double-ordering, intensifying competition in China.

• Yaskawa Electric (6506.T)

  Beneficiary: Core MC business directly boosted by AI capital spending.

  Strengths

  Strong demand for servo motors and inverters; exposure to semiconductor equipment and indirect AI demand like data center HVAC.

  Weaknesses

  Robotics business margin recovery may lag expectations.

  Comparison

  Within the FA sector, has higher exposure to the semiconductor cycle, offering greater elasticity.

  Risks

  Slowdown in semiconductor and AI capex, underperformance of cost optimization measures.

Key data

• Semiconductor Capex Growth Forecast2026: +29%, 2027: +17%Forecast by Goldman Sachs Global Tech Team, indicating sustained high AI investment
• Japan Machine Tool Orders ForecastFY2027: ¥19 trillion (+11.5% YoY)Expected to peak in this fiscal year
• Keyence Target Price¥100,000Up from ¥82,000, implying 27% upside
• SMC Target Price¥80,000Down from ¥90,000, implying 20% upside
• THK Target Price¥7,500Up from ¥5,200, implying 0% upside
• Yaskawa Electric FY2/27 Operating Profit Forecast¥73 billionUp from ¥70 billion, 12% above consensus

Impact & implications

For the sector, this implies that over the next 1–2 years, companies with strong supply chain management and pricing power will see valuation re-rating. Investors should focus on firms that can avoid the operational inefficiencies seen in past cycles due to over-ordering. For individual stocks, Keyence is the preferred pick due to its business model advantages and clear shareholder return policy; SMC, while profitable, may face valuation headwinds until its capital allocation strategy becomes clearer. THK is in a recovery phase from negative sentiment, with strong near-term demand providing a cushion.

Risks

• Slower-than-expected semiconductor and AI-related capital spending, leading to demand shortfall.
• Raw material and manufacturing costs rise faster than pricing power, compressing margins.
• Excessive advance ordering and double-ordering by customers trigger sharp destocking and adjustments in subsequent cycles.
• Capital allocation policies (e.g., buybacks, dividends) fall short of investor expectations, especially for companies like SMC.
• Intensifying competition in China pressures global market share and margins (particularly for THK).
• Geopolitical factors (e.g., Middle East tensions) disrupt raw material procurement and supply chain stability.

What to watch

• Quarterly reports: backlog levels, delivery lead time changes, and pricing trends.
• Further guidance from new SMC management on capital allocation policy and medium-term vision.
• Actual scale of Keyence’s share buyback program and total shareholder return realization.
• Monthly order data from JMTBA, especially from Asia and the Americas.
• Actual execution of semiconductor industry capex versus Goldman Sachs Global Tech Team’s forecasts.
• Price volatility of raw materials (e.g., steel, chemicals) and its impact on manufacturing costs.