Last week, we made a visit to KAWAI Musical Instruments Manufacturing Co., Ltd., (“KAWAI”) one of our core investments to conduct a face to face session with its key executives. It was a great joy to see a nice Shigeru Kawai brand concept poster and video at the entrance of its HQ, and we were also impressed to see KAWAI’s antique 64-key mini piano manufactured in the pre-war era (1937–38). It was a moment that reminded us of the origins of a brand that has cherished for nearly 100 years and so we are happy to share them with you (photos below).
In terms of KAWAI’s current business condition, we gained three interesting insights during our discussion. First of all, it is about the sales recovery in Europe, as was already indicated in the earnings analyst meeting on 13th November. It is a common evolving trend amongst different music makers to observe demand recovery in Europe market. However, we view that this trend is particularly strong in KAWAI’s case. KAWAI exudes a sense of being distinctly ahead of its competitors with its Digital Piano sales volume already positive YOY in the 1st half. KAWAI’s brand recognition skyrocketed when three out of twelve finalists at the 2021 International Chopin Competition chose to use KAWAI’s grand piano series, the Shigeru KAWAI, for their performance. In order to add fuel, KAWAI recently opened a showroom-integrated branch in October of last year in Warsaw, the home of Chopin, and has become increasingly active in their promotional activities in the region, such as the holding many masterclasses by the pros. KAWAI has always put its strong emphasis on the tone and the touch of its high-end digital pianos and such effort is starting to ripe fruit. This effort allows its grand piano brand image to naturally extend to its digital piano lineup, positioning the company favorably for further market share expansion in Europe as well as in other regions.
The second key takeaway was their business condition in China. With the shift in national policies, the piano market remains depressed and extremely challenging in China and it seems to be a consensus that the recovery is still far ahead. However, in KAWAI’s case, the majority of its products for the Chinese market (Upright Pianos, Digital Pianos) are manufactured through OEM partnerships with Parsons and Company. As a result, even with a decline in sales, KAWAI was able to avoid severe operational leverage profit decline that stems from the fixed cost burden for those manufacturing facilities. Moving forward, it appears that KAWAI plans to enhance sales of the grand pianos and the premium series of digital pianos appealing to the real music lovers that is still steadily growing in the country. We believe this approach is diligent and with its global brand renewal being planned soon, the strategy makes good sense.
Lastly, it is about KAWAI’s new factory expansion in Indonesia which they will pump in a fresh 4 billion yen capex. With this new factory, which will begin its operation in 2026, KAWAI expects to double its digital pianos’ production capacity in Indonesia. Since the current factory is already operating near full, it is undoubtedly a required investment if they believe to grow (and of course they do). More automated manufacturing processes are planned to be put into place, suggesting an improvement in KAWAI’s profitability. This investment well aligns with KAWAI’s current evolution as it is planning to unveil a globally unified new brand concept and brand message at the NAMM (National Association of Music Merchants) to be held in Anaheim in the U.S. in January 2025, paving the way for a bold and proactive marketing strategy on a global scale. With its new approach of adopting a proactive brand marketing tactics with the active leverage of digital media, the aim is to strengthen the KAWAI brand’s presence in the mass market. As Digital pianos represent the most critical segment to fulfil this strategy, the company made proactive decisions to invest in it ahead of time. We are excited with this risk taking initiative by the new president Mr. Kawai and we, as shareholder, would like to support its judgment which hopefully contributes hugely in business growth during its next mid-term plan period of 2025 – 2027.
Regarding our engagement with KAWAI, as always, we prepared several presentation materials, and exchanged opinions on various additional measures aimed at the company’s upcoming mid term plan. While we prefer to refrain from disclosing the actual presentation and its contents, we would like to respectfully provide a summary of the key points discussed. In the discussion, we reaffirmed our high regard for KAWAI’s increasingly progressive attitude to constructive dialogue with shareholders, which has significantly advanced over the past two years. Furthermore, considering that KAWAI’s P/B ratio remains below 0.6, with a spirit of constructive criticism and encouragement, we engaged in a thoughtful exchange of perspectives on IR strategies, formulation of financial targets, and other relevant initiatives. Firstly, we suggested to KAWAI our point of view that company’s re-branding strategy needs also to be fully consolidated with its IR initiatives since PR and IR has substantial synergistic benefits. While we fully understand KAWAI’s current activities in preparation for its brand renewal as highly demanding and intensive, we proposed that these activities and IR initiatives should not be approached as independent and separate efforts. Secondly, we recommended that KAWAI establish clearer, more structured financial goals and capital strategies that incentivize shareholders to endorse and support its mid term plan to walk side by side aiming to achieve the same long-term goal. We emphasized that having a somewhat ambitious but disciplined financial target will attract more sophisticated institutional investors to become interested in KAWAI and will help lower its risk premiums (i.e., the improvement of the PER/PBR ratio). We shared with KAWAI the importance of the “combined approach” between qualitative (Branding and IR) and quantitative (disciplined financial target) aspects.
Since the beginning of our investment, we Hibiki has long been fascinated with KAWAI’s brand value – which sadly is not recognized in the stock market. One outstanding evidence is the recent news at the 12th Hamamatsu International Piano Competition, which was held for the first time in six years last month after having been suspended during the COVID-19 pandemic. At the competition, which also garnered attention as it marked the first time a Japanese (Manami Suzuki) won the contest, out of the six finalists, three chose to use Shigeru Kawai, surpassing Steinway & Sons chosen of two finalists, and Yamaha, selected by one finalist. During this meeting, we also learned that out of 87 contestants who made it to the first round to perform in Hamamatsu on stage, more than 40% chose to play Shigeru Kawai. We were boldly reminded that KAWAI is already one of the global leading brands supporting the international top professional piano players. The high percentage of participants who selected KAWAI’s piano is a testament to the company’s long-standing dedication to its craftsmanship, exemplified by its meticulous attention to every detail from materials to manufacturing and processing. It reflects that KAWAI is a company which, in its endeavor to promote musical culture, holds irreplaceable intrinsic value that cannot be achieved overnight.
KAWAI’s strategic shift to enhancing the brand value of the highest-quality product line, the Shigeru Kawai, while simultaneously strengthening its global presence in the mass market, marks a progressive departure from the lingering notion common among many Japanese companies since the post-WWII high-economic growth period: the belief that “good products will naturally sell themselves”. We see this change of KAWAI as a proactive and forward-looking break from the somewhat naïve and complacent mindset still generally observable across companies here. To preserve our rich culture, traditions, and values for future generations, retreating into nostalgia or remaining insular is, in fact, counterproductive. Instead, the key lies in boldly stepping onto the global stage, amplifying the recognition of these values worldwide. By doing so, companies can strive for extended reproduction of their values, ensuring that their tradition is passed down in a manner that also aligns with the shifting social landscape and demands of the times. This path, we strongly believe, represents the proper way forward. Building on the 20+ years of agony and success of the high-end brand Shigeru Kawai (launched in 1999), now unquestionably recognized as one of the leading brand, we as a shareholder, hold a great expectations for KAWAI’s forthcoming endeavors.
For relevant posts on the company, please see the documents linked below.
23/Aug/2023 – Discussion with Kawai Musical Instruments Manufacturing Co., Ltd.
27/Jun/2023 – About AGM of Kawai Musical Instruments Manufacturing Co., Ltd.
11/Jun/2023 – Introduction of Follow-up Engagement Video about Kawai Musical Instruments Manufacturing Co. Ltd.
This post does not constitute a solicitation to subscribe for, or a recommendation to buy or sell, any specific securities, nor does it constitute investment, legal, tax, accounting, or other advice.