TOKYO – Ten years after the 2011 earthquake and tsunami in northern Japan, Tungaloy, a local manufacturer of carbide tools, rose to the challenge of reorganizing its management, drawing on the investment style of the famous American investor Warren Buffett, as the region rebuilt itself following the disaster.

Based in Iwaki City, Fukushima Prefecture, Tungaloy was separated from the Japanese electronics group Toshiba, then in 2008 became one of the world’s leading tooling companies, IMC Group, which was part-owned to Buffett. In the years that followed, his highly automated factory became a steady source of income and sales doubled. The company has benefited from Buffett’s management style, which seeks long-term sustainable growth through investments.

On February 13 of this year, an earthquake of six on the Japan Seismic Intensity Scale – an earthquake strong enough to damage buildings – struck off Fukushima Prefecture. Iwaki was also struck by the quake. A week after the earthquake, some of the walls at the Tungaloy factory are showing cracks.

However, less than a day after the earthquake, the factory reopened. It usually takes a while to get the equipment back online after such a natural disaster puts it out of place. Specialists must be brought in for inspections, and other tasks may take longer. But the Tungaloy plant was able to recover so quickly “largely because we have an in-house team that specializes in maintenance,” said Kazuhiro Mishina, manager of the Iwaki plant.

This group of specialists was an idea that came from Tungaloy’s parent company, IMC. When it was acquired by IMC, majority owned by Buffett, the first thing to do at Tungaloy was to set up a specialized in-house maintenance team. It is rare for a company to maintain and repair its own machinery and equipment, rather than relying on outside contractors.

The reason for the change was clear. If the company hires a contractor every time a machine breaks down, the downtime will increase. However, if there are dedicated internal staff, the business can quickly recover from unexpected issues, increasing uptime and reducing lost opportunities. “We have trained multi-functional workers who can maintain various equipment while doing their daily work,” said Tungaloy President Satoshi Kinoshita.

Tungaloy was first separated from Toshiba in 2004 as part of a management and employee takeover. Then in 2008, it became a subsidiary of IMC, whose main activity was the Israeli cutting tool manufacturer ISCAR. Berkshire Hathaway, the investment firm run by Buffett, acquired IMC in 2006.

“We stopped looking for short-term profits and sales,” Kinoshita said of the company’s different focus between its different parent companies, Toshiba and IMC. Prior to joining the Buffett-owned group, management staff changed every three or four years, and management policy changed with them each time. The company published its financial results quarterly and had to restructure under Toshiba’s leadership if its performance deteriorated.

The Buffett style of management is the opposite of what Tungaloy experienced during the Toshiba era. IMC is not looking for short-term profits or sales. Instead, it regularly looks for high sales and profit margins.

“It’s not ‘we ran hard yesterday to rest today,” it’s’ we are running as hard as we can every day, “” said Kinoshita.

The rapid establishment of the specialized maintenance team was based on the idea of ​​keeping machines and equipment running as much as possible – a source of income for the company.

Buffett chose the Tungaloy plant as the destination for his first visit to Japan in November 2011. “We invest in companies that are able to grow in a sustainable manner, that are competitive and that have a vital activity for the company,” said Buffett when asked him at a press conference what type of companies he would like to invest in. “We are looking for companies that will continue to grow in 30 or 50 years.”

Buffett focuses on a company’s gross profit margin as a condition for its sustainable growth. Companies with high gross profit margins are likely to have a competitive advantage, earning revenues that far exceed the cost of their sales. Cost competitiveness through constant cost reduction is also important.

Under the Buffett style, Tungaloy switched to a strategy of not competing on price. In Japan, the selling prices of parts and materials are generally determined by buyers with significant purchasing power, such as car manufacturers. Many subcontractors are unable to negotiate prices sufficiently and struggle to maintain profitability. This was also the case with Tungaloy. “We have changed our mindset,” Kinoshita said. “The price in Japan is not the price elsewhere in the world.”

To increase its power at the negotiating table, the company called on the information and expertise of IMC, which regularly provides its subsidiaries with selling prices for goods. A specialized team researches the price trends of carbide tools in Asia, Europe, the United States and elsewhere, and shares the results with the group. The goal is to use the information in the business strategy of each company.

Carbide tools are made from rare metals, such as tungsten and cobalt. There is a high risk of dependence on China for purchases, and price fluctuations due to market conditions can be significant. Tungaloy has created a system of selling products at a price adapted to each region, by passing on its investment costs.

The company has focused its management resources on increasing the added value of its products and developing its price negotiation skills.

“What has changed the most when joining IMC is that we have developed products with high added value,” said Kinoshita.

The company has devoted more of its human resources to product development and its number of new products has quintupled since joining IMC. As a result, sales in overseas markets increased and the company’s export ratio, previously below 50%, fell to just under 70%.

Automated production has played a major role in the company’s emphasis on added value. Carbide tools are cutting edges that are attached to machines that cut and process parts, and are essential in the manufacture of automobiles and other products. The little ones can be just a few millimeters wide. Previously, each product was transferred manually to a pallet by an employee and then transported to the next processing phase.

Things changed dramatically when the company joined IMC. Now, there are hardly any employees moving products by hand, replaced by robots. Rather than a factory full of humans, fully loaded pallets come and go constantly, transported by conveyors inside the factory and to other buildings in the facility.

There is a specialized system for managing inventory, and it is easy to see the location of each pallet. The automation rate, previously around 50%, has increased to 90%.

Tungaloy joined IMC over ten years ago. The company does not disclose its profits, but sales are 1.7 times higher and manufacturing costs have fallen 25% during this period. It continues to maintain a double-digit operating margin. The company’s ability to remain profitable while maintaining a large inventory is due to the combination of a high product turnover rate, a change in pricing strategy, and productivity reforms, such as increasing automation.

But, while Tungaloy has significantly improved its performance, maintaining sustainable growth while coping with changes in the business environment will be a challenge.

The shift to electric vehicles is well underway, with more cars powered by engines rather than gasoline engines. Carbide tools are particularly in demand for processes that require complex machining, such as the manufacture of engine parts. As the electrification of automobiles progresses, “we may not be able to sell as many parts as we did in the age of engines,” said Mishina, the manager of the Iwaki plant. . IMC’s team of market experts are exploring industry trends and will share with the group any new opportunities they identify. The focus on China, the largest market for electric vehicles, is one of them.

Tungaloy’s products are now mainly used for automobiles, but the company needs to expand its market share in a wide range of other industries. He did not rule out mergers and acquisitions as a means of growth. The only way to keep producing products in demand, even as customers and markets change, is to invest resources in higher value-added products. “We always have to develop good products and make them cheaply,” Kinoshita said.

Buffett’s approach is to leave the leadership to people he trusts and is close to the business on the ground. Independent management capable of reacting quickly to market changes is essential to take advantage of a company’s competitiveness.

Tungaloy talks to IMC executives, such as marketing staff, about once every two months, but the parent company does not send its own executives or interfere in the way business is done. Japanese company. He also does not seek short-term returns on his capital investments.

Even when Tungaloy’s performance suffered after its acquisition in 2008 due to the global financial crisis, IMC continued with its investment plan for a new factory. He was more concerned with the results than the process.

It remains to be seen whether the business will continue to grow for the 30 or 50 years Buffett expects. Tungaloy quickly recovered from the February earthquake and successfully implemented corporate reforms. For the future, the true value of Tungaloy’s management sense, sharpened by Buffett-style independence and decentralization, will be put to the test.