Kawai Musical Instruments Mfg. Co., Ltd. (“KAWAI” or “The Company”), one of our major investees, announced the 8th Medium-Term Management Plan (2025-2035) (“KAWAI Ten-Year Plan”, or “MTP8”) on March 19, and held an analyst meeting on March 21. We would like to comment on our impressions of the plan and key points to focus for investors going forward.
Let us start from the three key takeaways from the plan. First, it is about the duration of the plan, as we can see from the title of the plan “KAWAI Ten-Year plan,”. We all know that building a brand, cultivating consumers and deepening the culture definitely does not happen overnight, and so KAWAI management, rather than sticking to the same old three-year plan as before, decided to take 10 years. In fact, the plan is quite aggressive, or aiming for sales of 130bn yen (+78% from FY25/3)in FY35/3, and OP of 15bn yen (from a loss of 400mn yen in FY25/3), with ROE of 16% as well(Figure 1). To be honest, market may have been disappointed with the plan since OP forecast of 5 bn yen in FY28/3 is only the same level as FY23/3, just before China market collapsed. Nevertheless, we believe that the decision to shift to a plan that aims for long-term brand value enhancement, rather than a short-term performance recovery that relies solely on cost cutting, is a decision that can only be made by a young and ambitious management team that has undergone a generational change, and that the decision to issue such a plan itself is a true evidence of KAWAI’s changing management stance.
Figure 1: Management Indicator Targets
(Source: KAWAI’s 8th Medium-Term Management Plan)
The second key takeaway is the focus to its own strength. KAWAI plans to invest heavily in its core keyboard business, strengthening its brand, in order to substantially increase market share in both US and European markets. As shown in Figure 2 below, KAWAI’s plan is to increase sales of keyboard instruments (pianos and digital pianos) 2.4 times from 34.4 bn yen in FY25/3 to 81.4 bn yen in FY35/3 with over 60% of consolidated sales still comprised of keyboard instruments. While many of KAWAI’s competitors are seeking growth by diversifying their musical instruments portfolio, investors may feel some concern on over-dependency on single product. We feel that is wrong. The fact that KAWAI is concentrating on keyboard instruments is what makes it unique compared to others, and it is a bold message from new CEO, Kentaro Kawai, that is will continue to focus on its strong Piano brand.
Figure 2: Keyboard instrument sales/share targets
(Source: KAWAI’s 8th Medium-Term Management Plan)
Let us elaborate on this a little further. In any country or region, when a person starts playing a musical instrument, especially at an early age, piano or digital piano is usually the most preferred choice since anybody can play a note by putting your fingers on the keyboard, as compared with brushing the strings or blowing hard into the instruments. In this respect, piano and digital pianos are actually most relevant market to build a wide
customer base compared to other instruments. Figure 3 shows the Piano market forecast by Business Research Insights, which indicates that the market will expand stably, although not dramatically. In this context, by offering a range of products from entry-level electric pianos to the highest-end Shigeru Kawai, KAWAI is diversifying well within the piano market, which is actually the second largest musical instrument market after (the whole) string instruments. With increasing the line-up especially in the digital piano, KAWAI is envisioning to take a substantial market share using its strong brands, and that is why it is planning to double the capacity of digital piano manufacturing in its Indonesia plant.
Figure 3: Estimated piano market size
(Source: Business Research Insight Piano Report 2023)
The third key takeaway relates to our concern. The key driving engine of this ambitious expansion strategy is actually “digital marketing”, which KAWAI has never really ever focused on until now. KAWAI’s technical capabilities, stable quality, strong commitment to sound quality, and brand development capabilities that have developed Shigeru Kawai into a top global brand in the 20 years since its launch in 1999 are all highly esteemed, but its digital market capabilities, with due respect, are not well tested yet. This time, with the announcement of the MTP8, the management philosophy was also completely overhauled (Figure 4), expressing a renewed strong will to deliver music to diverse people around the world. We will be closely watching with bated breath to see how this philosophy can be conveyed to increasingly wider audience also through the digital media, amplifying their emotional support, and ultimately resulting into increased sales of pianos. With that said, we encourage KAWAI management to continue to disclose information to investors about such activities through various occasions.
Figure4: Revision of management philosophy, etc. (only in Japanese)
(Source: KAWAI’s 8th Medium-Term Management Plan)
Finally, we would like to mention key aspects to keep in mind as an investor to ongoingly monitor this MTP8. First, please see Figure 5, which presents a slide showing KAWAIʼs regional sales share targets and other related figures.
Figure 5: Regional Targets for Keyboard Instruments
(Source: KAWAI’s 8th Medium-Term Management Plan)
As shown above in upper half of the slide, this plan represents very ambitious assumption regarding the core US and Europe market. For capital markets to fully appreciate this paths, it is crucial to steadily achieve the milestones set for the third and sixth years of this plan. Furthermore, to assess the “feasibility” of this plan from an earlier stage, it is essential for investors to verify whether KAWAI is reliably executing the following two key points, in our view. We also encourage the management to proactively provide updates on progress of these initiatives through IR briefings and other forums.
The first key aspect is ① how to formulate a “true commitment” to really sell the brand, sell the piano while keeping a high integrity in maintaining the brand value. Traditionally, most Japanese companies were cursed with its naïve craftsman-like assumption that “if quality is good, it sells by itself”, and KAWAI was no exception. KAWAI needs to break away from this modest mindset, forming an evangelist-like marketing mentality with an embracive warmth that conveys its excellence to the world. Such “mentality transformation” throughout the whole organization is crucial to successfully execute the newly designed pro-active digital strategy.
The second key aspect is ② whether KAWAI can establish a fast-paced PDCA cycle in which global sales performance and progress toward targets are fully understood by management, allowing timely discussions on additional measures and swift decision- making in monitoring meetings. A common pitfall that leads to the failure of many Medium-Term Management Plans is that companies invest significant effort in formulating the plan itself but lose momentum once execution begins! Otherwise, the monitoring framework is insufficient, preventing early detection of deviations from the plan, and couldn’t make business decisions to further strengthen a successful business or take agile measures to quickly correct underperforming areas. As for KAWAIʼs MTP8, the first three years are designed to create foundations rather than achieve high targets, thus numerical goals are set at moderate levels. This creates a potential risk that the sense of urgency within the organization may weaken without a proper monitoring system and scrutiny. To prevent this, management must maintain a firm grip on execution and ensure sustained focus and discipline.
On March 21, during the analyst briefing, we asked to Mr. Kawai above two points, and he responded that (1) a kickoff meeting with executives from sales offices worldwide will soon be held and he will make sure the put down roots on aggressive mentality there and keep pounding the table, and (2) it was confirmed that a meeting structure has been established to monitor the effects of various proactive measures globally every month. Regardless of how great an organization is, when monitoring protocols are insufficient, it may lead to a lack of awareness of the current situation, resulting in complacency or missing further opportunities for aggressive action. Given that the KAWAI has set a long- term goal to be pursued over a decade, we urge that proper monitoring protocols are being carried out, and with such tireless efforts in place, the plan will become extremely realistic to achieve its goal. As we all know, devils are in the execution of the plan, not in the plan itself.
As a shareholder of KAWAI, we congratulate the management in creating this well thought out and ambitious plan, and look forward to the continued expansion of brand recognition and the growth of corporate value. We will to continue to engage with KAWAI with warmth and rigor. (Shimizu)
For relevant posts on the company, please see the documents linked below.
04/Dec/2024 – Discussion with Kawai Musical Instruments Manufacturing Co., Ltd.
23/Aug/2023 – Discussion with Kawai Musical Instruments Manufacturing Co., Ltd.
27/Jun/2023 – About AGM of Kawai Musical Instruments Manufacturing Co., Ltd.
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