Horiba is a Japanese technology company that applies its expertise in chemical analysis to industries including medicine, manufacturing and automobiles. One year after revelations that Volkswagen cheated US emissions tests, Hamish Galpin, Head of Small & Mid Cap Equities at Hermes Investment Management, profiles the business that disarmed the infamous ‘defeat device’.
Horiba rose to prominence last year after its auto-testing equipment was used by researchers to uncover VW’s deliberate distortion of its emissions data. While the company’s biggest clients are car manufacturers performing indoor tests during product development, it also builds portable on-road testing machines. These are about the size of a suitcase and fit in the boot of a car, taking readings from the exhaust as the car is driven.
These portable devices were not detected by the ‘defeat devices’ that enabled VW to game testing protocols, revealing the illegal volumes of nitrogen oxides being emitted and ultimately causing 11m vehicles to be recalled. Since the scandal broke, Horiba has reported a rise in emissions-testing equipment sales. With an 80% share in the broader market for auto-testing equipment, the company should benefit from more rigorous analysis of the environmental impact of vehicles in the coming years.
Horiba is also counteracting the impact of the inevitable long-term decline of the combustion engine by broadening its testing equipment and services. Last year, it bought MIRA, a UK government-owned automotive test facility in Nuneaton. The site operates a broad range of indoor and outdoor testing services, including an autonomous vehicle test track with an independent wireless communications network, and has been designated by the UK government as an enterprise zone.
Horiba also applies its expertise in fluid analysis to a broad range of other industries, producing equipment for research laboratories, environmental monitoring, semiconductor manufacturing and medical instruments.
While the company’s management team has been criticised for ongoing periods of underperformance in certain lines of business, it argues that advances made in these areas can be applied across the group to make the whole stronger. This is the case for scientific and laboratory equipment, where budgets are often low but customer specifications very complex. We believe this commitment to research and product innovation will allow Horiba to retain its market share and reward investors who are prepared to be patient.
The company has also accrued significant market share by outlasting competitors in tough business periods. Its highest margin activity is developing equipment for semiconductor production and, having seen several rivals exit the market, Horiba now has more than 50% global market share. This area of the business is likely to benefit from a wave of investment in 3D NAND flash capacity, a new form of storage for mobile devices.
We view Horiba as a business with strong, proven long-term potential. Through its ability to survive in volatile periods and commitment to developing new products through innovative acquisitions, the company has shown that it is focused on the future. As a result, it looks likely to maintain, or even build, its market share in the coming years.
The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products. The above information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.
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