Top Management Message
A President's job is to manage the company, and there are some President's who feel that time spent talking to investors could be better spent managing. I can’t agree with that view; I enjoy meeting and talking with investors, and these days there seems to be a constant stream of brokers, fund managers and stock analysts coming to visit. Far from being annoyed, I welcome them. I am pleased that so many investment professionals are interested in USS. They praise our business model and our unusually strong market position. Of course, many of them have questions about our business and about our future, and I’m always happy to answer them.
I believe that the more thoroughly investors understand our business, the more they will want to hold our shares over the long term.
In the interests of trying to communicate with as many investors as possible, I will try to reply to some of the questions I hear most often. Think of this as the “President's FAQ” – my most frequently asked questions.
What is the outlook for your business sector in the coming years?
To be honest, not very bright. Nationwide, registrations of both new and used cars are stagnating, which means the used vehicle auction market as a whole is struggling. All of the important indicators in the auto auction business are basically flat: there is minimal growth in the number of consigned vehicles. And remember, this is for the market as a whole — not every company is doing even this well.
What will that mean, for the sector and for USS?
One possibility is that we will see more M & A, that is, consolidation of the sector through both mergers and acquisitions. As the market consolidates, the smaller number of players will aim to increase their business scale, lower their costs and boost their market share.
What about USS? Well, we are already the biggest company in the sector by far, and we have already achieved the kind of economies of scale that many of our competitors long for. And we are constantly increasing our business base – opening new Auction Site Locations, improving old ones, extending our satellite TV and Internet virtual auction systems, and yes, doing our own M&A where it makes good business sense.
But what would happen if a couple of your biggest rivals merged?
Could M&A threaten your market position?
Frankly, no. Our nearest competitors have 10.0%. Even if the No. 2 and No. 3 firms in the sector were to merge (an extremely unlikely scenario), their aggregate share would only be around 19% — while we now have 32.5%(January to December 2016) and are aiming to raise that further. In short, we do not see M&A as any kind of threat to our market position.
If the outlook for your sector is not bright, why should I invest in USS?
Excellent question. The answer is simple: Because the sector itself is huge, so there is still a massive volume of transactions each year, even in a stagnant economy, and USS Group will continue to outperform the sector and will capture the largest percentage of that business year after year.Needless to say, dividends have been rising, and shareholders will continue to profit from our growth.
What is the strategy underlying USS Group’s ongoing growth?
Relentless expansion. Instead of sitting back and saying, ”We’re No. 1; we own this market,” we are constantly driven to expand. We look for areas where there is room to grow or room to improve, and we invest strategically. Our strategic map divides all of Japan’s auction market into seven geographic regions, and we are already the No. 1 player in all but Kansai, Tohoku and Chugoku･Shikoku region. We will not rest until we become the No. 1 auction site in each regional market.
But this is only one side of our continuing growth – our physical Auction Site Locations. In addition, we are extending our reach nationwide through the use of two different digital solutions: our Globe Network satellite TV broadcasts and our Internet Live network, which uses the Web. Why am I so optimistic about our growth? Because we are actively expanding in both the physical and digital realms. USS’s strength lies in our ability to combine physical Auction Site Locations, satellite TV, and Internet trading to provide the same high-quality selection of merchandise to users everywhere.
This new aspect of your business (virtual Auction Site Locations) is very interesting. Will the USS business go all-digital in the future?
No, not likely. Nothing takes the place of actually coming to an auction site to trade. For this reason, we continue to expand our network of physical sites, in spite of the obvious capital investment required. At the same time, we leverage the power of two different digital media to provide even greater access to our system. These digital media are not designed to replace Auction Site Locations, but to supplement them. Today, there are already about 2,900 companies registered in the Globe Network and over 29,000 using our Internet service, and 49.2% of all purchases in the USS Group are made through this virtual(external) system (for fiscal year ended March 2017).
While we fully intend to promote our digital services and actively increase participation in and revenue from that segment, we have no plan to shift to an all-virtual auction model. We will continue to fortify all three pillars of our network: physical Auction Site Locations, satellite TV, and Internet-based trading. As we continue to improve all three, our dominance of this business sector will grow.
What about your other businesses? How will they contribute to your growth?
In addition to our mainline auction business, USS is continuing to develop our used car purchasing and retailing businesses (Reproworld and Rabbit) and our recycling businesses. All of these are important to us, and we will continue to develop them as a means to round out our Group. However, it is important to understand that all of our Other businesses, however interesting or worthwhile, will probably not match the high profitability of the auction business.
To people who ask if we will gradually shift our focus to other business areas, or perhaps leverage the profitability of our mainline business to make USS more of a diversified conglomerate, I can only reply: ”We’re a specialized auction company, and we are the biggest and the best in our field. We will continue to develop vehicle-related auxiliary businesses, but always with an eye to possible synergies with our core business. Our first and most important responsibility is to keep growing that core business.”
If your core business model has proved so successful, why don’t you take it to Russia or China or the Middle East and duplicate it there?
Ah, if business were only that simple! In fact, the used car business in those countries is very different from what it is in Japan. Even in the United States, with a longstanding car culture and legal system like Japan, there is no real parallel to USS. Rushing into markets that are only beginning to buy large numbers of vehicles would be foolish.
Secondly, we still have lots of room to grow here in Japan, which I feel has a much higher priority than investing our capital in high-risk ventures overseas. Besides, we already have a steady stream of buyers from Russia and the Middle East coming to our sites now, and this export-driven business looks to be a strong driver of growth in the coming years. I’d much rather develop that business, which we can do here in Japan for almost no additional cost. I’m not saying we have no interest in overseas business; but I want to finish building out our home market first.
May 11, 2017