Jan 23, 2019
Operator
Good day, everyone, and welcome to today's Nidec's Conference Call hosted by Mitsubishi UFJ Morgan Stanley Securities. Today's call is being recorded.
At this time, I would like to pass this conference to Mr. Abe at Mitsubishi UFJ Morgan Stanley Securities for the opening remarks.
Mr. Abe.
Please go ahead, sir.
Abe
Thank you very much. Ladies and gentlemen, thank you very much for joining this conference call.
This is Abe, General Manager, Institutional Sales Department of Mitsubishi UFJ Securities, Tokyo. Before the meeting starts, please make sure all materials have been distributed.
If not, please download the files on Nidec's homepage right now. Now may I introduce Mr.
Akira Sato, Executive Vice President and Chief Financial Officer, who will be speaking to you shortly. First, Mr.
Sato will make a presentation. After his presentation, we will move to a Q&A session.
Mr. Sato will now discuss Nidec's third quarter fiscal year 2018 results, future outlook and management strategy.
Mr. Sato, please go ahead.
Akira Sato
Thank you very much Mr. Abe.
Good day ladies and gentlemen and welcome to today's conference call. My name is Akira Sato, Chief Financial Officer of Nidec.
And I will be your main speaker for today. Joining me is Mr.
Masahiro Nagayasu, General Manager of Nidec's IR team. For the forward-looking statements, please see Slide number 2 of our presentation material for details.
Now I will review the key figures. Please see Slide number 3 for the fiscal year 2018 accumulated nine month results.
As mentioned on Slide number 4, we have revised down our annual guidance on the back of decline in customer demand beyond our prior expectations and resulting large-scale inventory adjusted starting from last November. However, despite these turbulent circumstances, we have achieved record-high net sales operating profit, profit before income taxes and profit attributable to owners of the parent for the accumulated nine month.
In order the achieve the device target, we will make the utmost effort to reduce purchase cost and expenses across needed group companies in order to improve our cost competitiveness. Slide number 5 and 6 are showing the downward divisions announced on 17th this month.
On Slide number 6, we have made comparative analysis on the figures before and after the divisions. And as you see below the operating profit has declined by JPY 50 billion to JPY 145 billion, which includes each segment decline as well as structural reform expenses of minus JPY 24 billion and the cost reduction of plus JPY 14 billion.
The structures on Slide number 7 and 8 are showing our sales and operating profit year-on-year and quarter-on-quarter separately by product groups and exchange rate effect. As you see on Slide number 8, the quarterly operating profit have declined by JPY 20 billion to JPY 31.1 billion as a result of decline in all the segments and structural reform expenses of JPY 9.4 billion.
Please turn to Slide number 9, the hard-disk drive shipments in December quarter will lower down the forecast made last October, mainly on the back of decline in the data center demand in China. We continue to see a weak demand in the March quarter and we have revised down the annual shipment forecast as you see on the right side of this slide.
Please see Slide number 11. We have been repeatedly saying that we are currently experiencing the four big waves, which are automotive robotics, energy efficient home appliances and drones.
In addition to these four big waves, next generation technologies stemming from 5G communications are expected to bring us huge business opportunities as the fifth wave. 100 times faster data speed gives life to hardware our innovations, which will require new business areas such as thermal management, we will elaborate on the thermal management later as well.
Please see Slide number 12. We have studied mass production of pop-up camera mechanism.
There are two types of mechanisms, which are called pop-up types and slide-up types. And in both of them, cameras are built in the body instead of the surface of the smartphones to utilize the display and the cameras come up only when they are used.
We have already received orders from this mechanism from two smartphone manufacturers and we are currently in negotiations with other major players as well. Please see Slide number 13.
We have completed the tender offer for 48% of the outstanding shares of Taiwanese listed company, CCI, the demand for thermal module products where CCI had strong expertise is growing quite rapidly not only in the communications and the IT areas, but also outside of that. In the communications and IT areas, we have made through fresh entry and along to module products such heatsink, heatpipe and vapor chamber on the back of the increasing thermal management demand arising from 5G communication.
In addition to these, thermal management is becoming more and more important in other areas such as automotive and home appliance markets, where demand for ECU cooling solution for EVs and over cooling needs for white boost are very strong. And also in the drone and robotics market where solutions for multi-heat disposal are required.
We will aim to improve thermal management technology and our product development capability to collaboration with CCI and to propose a thermal solution by combining our motor products with CCI thermal module to customers in wide range of markets. Please see Slide number 14, the new electric car brand, Aion S, recently unveiled by GAC NE’s, which is the new energy vehicle arm of Chinese auto maker, GAC Motors, will be the first line of the cars to about Nidec’s three integrated traction motor systems for the Aion.
And this is our first order received for mass production of passenger cars. Weighting on the 87 kilograms, our compact and light weighted E-Axle integrates our structural motor and inverter and gearbox, achieving our power out of output of 150 kilowatts and maximum torque output of 3900 Newton meters.
As it’s illustrated on the right side of this slide, we are expecting our traction motor related sales of JPY 100 billion in fiscal year 2022 and JPY 200 billion in fiscal year 2025. And if you simply adapt all the inquiries, which are in the final stage of negotiations with our customers, excepted sales could be reach close to JPY 500 billion in fiscal year 2025.
Please see Slide number 15, as Nidec Group’s product line-ups has been expanding substantially in recent years. We have unveiled a plan to build buildings for the second quarters of the parent company, the headquarters for group companies and a integrated power and research and development center in order to accelerate intergroup co-operation and to achieve group-wise sales target of JPY 10 trillion in fiscal year 2030 certain functions and Nidec’s – head office expected to be relocated to this site.
Nidec imposed new research and development center constructed as a part of Phase I construction and 500 employees expected to work at this site eventually. Lastly on behalf of the entire management team, I'd like to thank our customers, suppliers for their support and commitments as well our shareholders.
At this time, we would like to open up the call for questions. Thank you for your attention.
A - Abe
Thank you very much Mr. Sato.
And now we would like to move to Q&A session. Mr.
Sato will be very pleased to answer any questions.
Operator
Thank you. Today’s question and answer session will be conducted electronically.
[Operator Instructions] We will now take our first question from Mehdi Hosseini from Susquehanna Financial Group. Please go ahead.
David Ryzhik
Hi, thanks so much for taking the question. This is David Ryzhik for Mehdi.
A few if I could. So can you elaborate on what segments of Nidec business are most significant inventory adjustments?
And perhaps can you share your thoughts on China demand today? Is it fair to say that you won't have a good read until after the Chinese New Year?
And I have a few follow-ups.
Akira Sato
So in terms of sales, clearly, we were affected in the small precision motor area and also the auto area and the AC area. So those are the very big three segments that we are affected by slowing down by Chinese economy.
So as you understand that China is the biggest market for the auto being around 30% of the global market then as you may know that the sales, auto sales in China has been stagnant, especially from July up to December last year. So that's going to be having some impact on that.
Also, we have some inventory build-up in the room air conditioner in China. So if you're looking at the global room air conditioner market, China is roughly 45% of the market and that market is stagnant and that's going to impacting us.
The small precision motor area as you understand that we are supplying our motor to the IT product such as the PC, smartphones and others. And there, as you understand that the smartphone market, the China is roughly a 30% or 40% of that total market.
Thereby if China demand or China consumption coming down, that's going to be impacting us in the various manner. That’s our answer for your first question.
David Ryzhik
Thank you. And as far as the HDD market, I would love any estimates around December quarter industry units by segment and what trends you're seeing into the March quarter by segment.
That would be really helpful.
Akira Sato
So if you’re looking at the Slide number 9, so we say we revise down our forecast for the record because the record has not been finalized until Seagate or Western Digital, those suppliers announced shipment number, but at this moment, we say 87 million was the number for December quarter and 78 million is the number for a March quarter. Then that 87 we say can be divided into a four form factors: enterprise 5.0 million, near line 11.3 million, 3.5-inch 28.7 million, and 2.5-inch 42.1 million.
Our forecast for March quarter, which is 78 million, we say enterprise 4.7 million and the near line 11.7 million, 3.5-inch, 24.5 million, and 2.5-inch mobile 37.2 million.
David Ryzhik
Understood, thank you. And any sense on what percentage of units are helium for December and March quarters?
Akira Sato
So helium, we say, we do have our own numbers, but using our own numbers, 53% in December quarter, 53% of near lines were helium in December quarter. In the March quarter that might be coming down to 46.7%.
David Ryzhik
Great. And then last question any sense on inventory levels in the HDD supply chain?
Any color around that? And was that also a big factor in your change in forecast?
Akira Sato
Our forecast is based on the number we are given by our customers. So at this point, we do not know what is the reason, but there are several factors.
One of our customers is considering a closing down the factory. So thereby, they are making more than the real demand.
Then also, as we saw it, the customers’ number has been coming down sharply at the end of December. So that means the inventory were there so that they would cut the new order for components.
David Ryzhik
Got it. Thank you so much, really helpful.
I’ll get back in the queue.
Masahiro Nagayasu
Thank you very much. Next question please.
Operator
We’ll now take our next question from Takashi Ito from ARGA Investment. Please go ahead your line is open.
Takashi Ito
Thank you very much. This is Takashi Ito of ARGA Investment.
Thank you very much again. I just had a few questions.
One is just can I confirm your overall exposure to China? And also update us on how house business outside China, so Europe, U.S., et cetera?
Is that seeing similar order declines? Or are those markets okay?
And also, just quickly on how long you think the channel inventory will take to normalize if you think that China has two months, or three months excess inventory? Something like that would be helpful.
And lastly, sorry, if you could just elaborate on your structural reform expenses, just want to understand what kind of restructuring you are doing now because I always think that Nidec is already a pretty lean and well-managed company. So I know that orders are down, but what kind of costs are you able to restructure at this point in time?
Thank you very much.
Masahiro Nagayasu
Okay, first question, China exposure. So overall, if you count China as end demand, we say roughly 40% of overall sales are going into China, okay.
So as we are looking at China is 40% if China's demand is coming down, that's going to be impacting us a lot. That's going to be through the auto business as we are selling our motor component to the cars sold in China.
And also the home appliances such as the room air conditioner. As I mentioned already, the global market for air conditioner is something like JPY 14 million, but 45% of that is in China.
Then if you are adding up any Chinese room air conditioner make a share, that's going to be over 50% of the global market. So thereby, China presence is very large there.
And when they're just slowing down, as you mentioned, then we do have some big impact. Then we mentioned about some of the inventory number where we say, at end of September, JPY 40 million inventory, where we believe that JPY 30 million is the operable amount.
So that means the excess inventory at the end of September was something JPY 10 million, and that should be coming down when the real demand is there, but the real demand itself we saw that demand is coming down in the December quarter, thereby it would take a little bit more time to liquidate all the excess inventory. That is the current situation.
So we say it will take another two, maybe three quarters, but at minimum, two quarters, meaning March quarter and June quarter. Then the final question is structural reform and Mr.
Sato will answer those numbers.
Akira Sato
Yes that is we plan the JPY 24 billion of structure reform expenses in the second half. And out of JPY 24 billion, we have four factors.
First one is the impairment loss by integrating our factories. That is the JPY 10 billion.
And write down inventories and materials that is JPY 8 billion. And some loss of startup of the new factories, that is JPY 3 billion.
And we are going to recognize among eight expenses by JPY 3 billion in the second half. That's a total of JPY 24 billion.
And really, we should be able to integrate our shift current factory to other areas. So for instance, the hard disk drive factory, such as Philippines, we are going to shift that factory to deduction here production.
And in that case we are going to recognize impairment loss of the equipment or machine for heavy drive production. And another one is an European operation.
May be we have many, many factories in European countries. That's why we're going to integrate the factories to few number of factories.
So in that case, we have to recognize impairment loss by integrating our factories. So that is structured default expense.
Takashi Ito
Thank you very much. I’m sorry I missed the first few minutes of the call because I had trouble dialing in.
But just to confirm, outside of China like Europe, for example, is it mostly in line with expectations, or things are also worse than expectations in markets like Europe, generally speaking?
Akira Sato
So Europe, we say, it's – the Europeans situation is a little bit worse than our expectation, but not as much as China, especially the latter part of December quarter, we saw the European demand is coming down.
Takashi Ito
Great. Thank you so much.
Akira Sato
Thank you very much. Next question please.
Operator
We will now take our next question Aaron Rakers from Wells Fargo. Please go ahead your line is open.
Aaron Rakers
Yes thanks for taking the question. Just to build on a prior question, I know you mentioned the breakdown of hard disk drive units by your expected shipment levels for the quarter, for the total industry.
I was wondering, just to understand, if there is any kind of share shifts going on? Could you give a similar breakdown of your motor shipments by those segments for Q4 and Q1 expectation?
Akira Sato
Okay, so as you understand, also hard disk drive industry is also going through the inventory adjustment. So thereby, shipment number and the production number will be different.
So for December quarter, we really mentioned the shipment number seems to be 87 million that is what we mentioned. But the real production number will be something about 85 million.
And March quarter, which is 78 million will be shipment number, but because of the inventory buildup that our focus for a production is something like 73 million. Then as we have given our own number is number nine, when you calculate the share is very stable at 85%.
Aaron Rakers
Would you be able to give the shipments – your expectation of shipments by – of that 72 million and 62 million motor shipments that you expect in Q4 and Q1, new order shipments by 3.5-inch is the segment?
Akira Sato
Yes. What I said is across the form factor, if you calculate, JPY 72 million December quarter our result divide by JPY 85 million well the production shipment number JPY 87 million, then you can get 85%.
So what you need is a breakdown of our motor by form factors?
Aaron Rakers
Yes, please.
Akira Sato
Okay so the third quarter JPY 72 million is something like a 2.5-inch high and 2.6-inch near line 9.2; and the 3.5 26.4; and the 3.5 33.1. So that’s going to be something like 1.5 or JPY 71.6 million, which we rounded up to JPY 72 million.
Aaron Rakers
And how would you expect that to breakdown in the March quarter?
Akira Sato
March quarter we say JPY 62 million which is we say an exact number, JPY 61.6 million where a 2.5-inch high end is JPY 2.0 million; near line, 3.5-inch JPY 21.1 million; and the 2.5-inch JPY 29.0 million.
Aaron Rakers
Thank you for all that detail. I'm just curious as you look at your forecast and you kind of look at what was previously talked about last quarter, it looks like the most severe reduction that you are seeing is like a 25% or so reduction in your near line expectations.
As you look at the near line business and you kind of think about one of your larger customers going through a facility closure, thinking about the end demand, possibly data center, I'm just curious of how you think – how you see that potentially rebounding as we look through calendar 2019? I think previously, you were talking about JPY 15 million near line drive shipments, now you're at roughly JPY 12 million in this quarter.
Do you think we see a rebound as 2019 progresses? Or is this a new level that we should be thinking about for a while?
Akira Sato
Okay, so as I clearly mentioned that we are not forecasting using some motors, but rather our number is based on the real number that we are given by our customer. And based on that number, we're going to produce the motor components and we ship, that's number one.
Then, if you're going to be talking about the huge difference of the number, which you mentioned as of October and as of today, so those are clearly the change in the market and then change in the customer’s production plan, that's number one. Then, as you may know that, clearly, you look at those numbers then the near line is in the middest of the inventory adjustment.
So if you're looking back all those quarters back to two years, a year ago, those numbers were something like JPY 8 million, or JPY 9 million. The market number is also JPY 11 million to JPY 12 million.
So we're coming back to that level here for third quarter to fourth quarter because of the inventory adjustment. So in that sense clearly the number in the March quarter last year or June quarter last year.
March quarter last year was JPY 14.0 million for a market and the June quarter JPY 13.6 million in the market. May be those markets were a little bit over the real demand.
Thereby, that's going to create the excess inventory that we are in the midst of the inventory adjustment for this December quarter than the March quarter. Then, probably, we're going to be finishing that by a June quarter because one of our customers said that it may take two to three quarters in that financial announcement telephone conference, two to three quarters, and the number is validating that statement.
Okay?
Aaron Rakers
Very helpful. Thank you so much.
Masahiro Nagayasu
Thank you very much. Next question please.
Operator
We’ll now take our next question from Barbara Heap from British Airways Pension. Please ago ahead your line is open.
Barbara Heap
Thank you. I think some of my questions were actually answered in the previous questions, but just very quickly on the JPY 8 billion through inventory write downs.
Could you just explain on an accounting basis how you treat those? So is there any possibility as conditions pick up that they get written back?
So if you could just explain that. And the other thing is on your traction motor, I'm just wondering if you could just clarify if this is the – if you have one model and this is going into a particular size of car?
So will this be used with the targets that you've given? Will it be used in a particular range of cars?
Could you maybe provide more clarity in terms of where you think it's going into the market?
Akira Sato
Okay, first question, write down inventories, our accounting policy is we're going to write down 100% if we have the inventories for one year. And for, six months 50% should [indiscernible], that's our accounting policy.
And we see current inventory level, and probably mainly due to the kind of slowing down the sales. That’s why we expect the inventory, we exist maybe longer than one year, we expect.
That’s why we decide to lay down the current inventory in a particular product. That’s we’re going to do.
Barbara Heap
Are you able to disclose which products, specifically?
Akira Sato
In the areas such as auto and ACI, we have very carefully, we review the inventory level and then we decided that lay down inventory in various areas.
Barbara Heap
I am just wondering can you tell us what products specifically it is for you, it is small motors, as an example, or is it a different product?
Akira Sato
Yes, for instance, the very old motors for auto. That’s we laid off.
And also, some motor for air conditioner. That’s a part of the lay down of the inventory.
Barbara Heap
Okay, thank you.
Masahiro Nagayasu
So your second question is the traction motors, right?
Barbara Heap
Yes.
Masahiro Nagayasu
So as you saw in slide number 14, so we are just talking about the Guangdong auto and that is a first customer, and we’re going to start shifting of this E-Axles May this year, so another four months. Then, if you’re looking at the chart on the right, we’re talking about, we do have inquiries from the – across the group.
So at this moment, we’re counting 13 promising customers inquiry to come up with this number as you can see on the right side. So the total 13 customer, eight customers are requesting the system and five customers requesting just a motor.
So system and the motor had the different price pack as you understand. Then that eight customers who are asking the system shipment, then we say three customers are China, three customers are Europe and U.S.
and two customers are Korea or Japan. And the motor customer, I say, five-customer, one China, three American or European and one Japan or Korea.
So that situation, we have been expiring from the October end. So maybe the next time, we’re going to talk about this in April, we may follow-up and update the situation.
Is that fine?
Barbara Heap
Yes. So I’m just wondering in terms of the – can you give me some idea of what size of cars these are normally used in?
Masahiro Nagayasu
Okay. So we say 150-kilowatt is from the something like a middle-sized car up to the middle-sized SUV.
Barbara Heap
Thank you.
Masahiro Nagayasu
So the other EV in China is something like 100-kilowatt and much smaller size. So basically, we understand the most of the passenger cars are somewhere between the 100-kilowatt level or 150-kilowatt.
That’s going to cover most of those passenger cars. But if you’re going to be looking at the larger car than, clearly, you need a much higher output, okay?
Barbara Heap
Thank you.
Masahiro Nagayasu
Thank you very much. Next question please.
Operator
We’ll now take our next question from Matt Breidert from Ecofin. Please go ahead.
Your line is open. We’ll now take a next question from Matt Breidert from Ecofin.
Please go ahead. Your line is open.
Matt Breidert
Thank you very much for the question. I wanted to ask a little bit about what kind of changes you’re making in this temporary slowdown period around your manufacturing production activity?
If you expect to produce significantly less, and if so, what kind of a run rate of production across your different product lines you would expect to see into the final quarter, maybe even into Q1? And then the second part of that question is, do you expect any temporary headcount reduction associated with the slowdown in production?
Akira Sato
[Foreign Language] First of all, the production maybe you take some decision, as you already know, our inventory level the lumping up by JPY 49 billion in the inventory by as of the end of December. So that’s we’re going to adjust our production volume in March quarter.
December, may be the sales – our sales has been dropped very significantly the last minute of December. That’s why, we did not adjust our sales in terms of the production volume.
That’s why the inventory level is coming up. That’s why we are going to adjust the production volume in March quarter.
And so related to that’s deduction of our production volume, we are going to – not going to hire the new employee probably in China and Taiwan and Philippines mainly due to the decline of large number of shipment. We are going to not hire the new employee in those countries that I talked to you.
Matt Breidert
Thank you very much. As a follow-up to that question, I understand from your accounting treatment of the 50% and 100% treatment of inventories.
But could you give us a sense during this period of decline in orders and demand from your customers, what type of pricing reduction you've seen on a unit basis during this short-term period? Has it been modest or significant relative to the decline in volume demand?
Akira Sato
For interest in auto area, maybe, shipment to China – Chinese customers their sales has been down by 30% compared to first half. And, ACI area, we have been down by around JPY 40 billion on sales to China, so most of the declines of the sales are coming from China.
So maybe we will – maybe very carefully – it's coming back to a normal level. So currently inventory adjustment is picking off, so that probably we have to optimize that production level.
Matt Breidert
Okay. Thanks.
Masahiro Nagayasu
Thank you very much. Next question please.
Operator
We'll now take our next question from Kuni Kanno from BAM. Please go ahead.
Your line is open.
Kuni Kanno
This is Kanno on Balyasny. Thank you for taking my question.
So regarding the restructuring cost of JPY 24 billion, could you give us the split between the division? Also, the effect of JPY 14 billion, could you split them to the division?
That's my first question, please.
Akira Sato
The breakdown of the two divisions of business unit of precision motor expenses, is that your question?
Kuni Kanno
Yes.
Masahiro Nagayasu
So the total JPY 24 billion, we say a, small precision motor JPY 10.2 billion; auto business, JPY 6.3 billion; ACI, JPY 5.3 billion; machinery, JPY 0.4 billion; and the electric and optical component, JPY 2 billion. That's going to be making a JPY 24 billion, where that we say it's a structural reform cost.
So in terms of the JPY 14 billion so-called, the cost cut, we are as we say that we are now soliciting the ideas and that's going to be making some changes. But this is some ideas by segments, JPY 14 billion WP3 impact?
Akira Sato
At this point, I have no idea of that.
Masahiro Nagayasu
Yes, because it's not really calculation thing, but rather, as we say, we were doing the whole consolidated basis. Then at this moment, we are soliciting the idea from the all employees, around 100,000 employees to come up with the how to cut the cost.
So depending on the situation, the number would fluctuate. Okay, by saying.
Kuni Kanno
Okay. Well, understood.
Thank you. Should we outperform this JPY 24 billion restructuring, should we expect some effect outside of this JPY 14 billion, some effect will materialize into March 2020?
Masahiro Nagayasu
[Foreign Language]
Kuni Kanno
[Foreign Language]
Masahiro Nagayasu
[Foreign Language]
Akira Sato
Yes, structural reform expenses, of course, this is the one time. And but I don't expect that the JPY 24 billion structural reform expenses in March of 2020, as you said.
So but maybe small amounts to be recognize, if we going through, we will continue to restructure and reform in particularly in the European countries. So that maybe we're going to recognize some or it’s going a small number of restructure and reform in fiscal year 2019.
Kuni Kanno
Understood. Thank you so much.
And just wanted to confirm about the definition of the WPR 3, so this JPY 24 billion is the whole WPR 3? Or is there anything specific other than what you just explained about this JPY 24 billion?
Masahiro Nagayasu
Okay. So WPR 3 is the idea of the cost cut, okay?
So the cost cut is widespread, maybe starting from the procurement cost then we are going to reduce the procurement cost and all the other cost to come up with a JPY 114 billion, that's number one, okay? Then WPR means that how much we had to cut the cost, then we had to cut the cost to the level where if the sales is back to 75% of a peak than the OP margin should come back.
That's what we did in the WPR 1 and 2. Then when the sale is backed to the peak, then the margin should come up to a double.
So if you – by setting those a target, you can calculate how much fixed cost you have to cut and how much variable cost you have to cut at whatever the stage of rebounding. So that the 3 – I mean the common thing 1 to 3 is all the situation, we say is the inventory adjustment.
That means our sales will be back eventually. We do not know how long we take, but we say we believe that the sale will be back.
Than when the sales be back, then we have to improve our profitability. As I mentioned, when the sales be back to 75% of the peak there should be regional OP margin.
But if the sales back to 100%, that's be double. Then based on that assumption that we calculate how much fixed cost should be cut, how much variable cost should be cut.
Then we're going to solicit all those items to cut the cost on across the all employees then try to materialize that. So all the cost cut type of endeavor will be included in this WPR 3.
Kuni Kanno
Great. Thank you so much for the explanation.
And is it fair to say, this WPR 3 is more difficult than 1 and 2 just because you are so lean? Or is it going to be the same because your company size has gotten a lot bigger?
Akira Sato
[Foreign Language] It might be simpler in WPR 3 compared to WPR 1 and 2, because we’ve got a lot of companies we acquired in last couple of years. So that maybe, we’re very much focused on how to reduce the cost of newly acquired companies.
That’s very much simple and it’s going to be contributing and improving our profitability or OP margin in Nidec total.
Kunihiko Kanno
Understood. Yes, thank you so much.
Masahiro Nagayasu
Okay. The one was in the March quarter 2009.
The WPR 2, March quarter 2013, then this WPR 3, March quarter 2019, okay? So clearly, if you looking at those years and date, our company all different, not all different, but many of the companies on yield.
And also, we do a lot of different business.
Kunihiko Kanno
Okay. Yes, thank you.
Masahiro Nagayasu
Thank you. Next question, please.
Operator
We will now take our next question from Dong Zheng from Ariel Investments. Please go ahead, your line is open.
Dong Zheng
Hi, thanks for taking my questions. I have a few questions on the E-Axle and then one on Shimpo.
On the E-Axle, just curious to understand in terms of – is it your systems capability in terms of integrating the inventors and motors, et cetera, as to your key competitive edge, or is it the motor as the key component within that systems? And then the second point of the question is, when you look at the long-term durable competitive advantage in E-Axle?
Is that the design side that’s more durable or the manufacturing side? And then lastly, just if you could verify if it’s like IPM motor?
And then if it’s in-house permanent magnet technology or third party? And then I might have a one or two follow-ups.
Thank you.
Masahiro Nagayasu
Number one, okay, this system combines the motor, inverter and gear. So for the three key components of this E-Axle, the system, we’re going to make everything in-house May be the very first batch that we’re going to ship to the Guangdong auto then we may use some of the outside supplier for a inverter and a gear.
But eventually, we have planned to make everything in-house. That will be the answer for your first question, okay?
The second question, where our competitiveness lies? Our competitiveness lies with a very small and compact and powerful motor system.
So by integrating a motor, inverter, gear to one, then we – our system is the lightest among all these, so-called, E-Axle or traction motors system in EV or PHEV. That’s going to be making we are little bit different from the other supplier.
Then the third, we were talking about the motor systems, clearly, we say, this is the IPM. Is that fine?
Dong Zheng
Yes. And then, I have two follow-ups if I can may.
Just in terms of some customers may want to purchase the system versus the motor. Just curious in terms of the economic difference between motor versus system to the company?
And then, what do you see as potential substitutes for the IPM motor in the near future or distant future?
Masahiro Nagayasu
Okay. Number one, every auto car maker is thinking that the EV or PHEV market will expand very, very fast.
So thereby, no car maker can afford to make everything in-house. Then also, if you’re looking at this market, EV market, PHEV market will become 10 times in next seven years or eight years, no car makers can afford to make all that in-house.
Because that’s very risky, right? So thereby, they need some partners outside.
So we try to become the partner. So we do not care whether those system or our business is our own design ones or customer design ones, we don’t care.
And that’s where we clearly we say our trends will be in the production side. So us, we do have, today, over 220 factories in 43 different countries.
Wherever our customer designate, we can make the system in any country they want. That’s the key strength that we have.
So it could be our design system, as I mentioned, or it could be our customer design that’s fine. Does this answer your question?
Dong Zheng
I guess just coming back to your earlier comments that having all three key components, the motor, inverter and gear, largely to achieve the lightest weight possible for the same power output. But customers sort of just integrate your motor into their own design, this does seem like it would offer that light advantage -- weight advantage, and seems like a pretty significant weight advantage that you’re offering here in three in one.
So just, I guess, are there cases today, where as you are talking of customers, whether they want to just incorporate motor or mass majority of them want the systems?
Akira Sato
So as we answer that there are 13 customers, eight customer wants system, five customer want the motor. So there are lots and lots of different customer want different part.
So we’re not just offering this E-Axle the system. And also the system can be this system or any other system, right?
So we are offering the solution to the car makers what they want. So our product, we’re going to sell under this traction motor or motor system may be different by customer by customer.
That’s something we just try to make clear. So if the customer design those motor or system, there’s so-called a built to print and we’re going to take that type of business also, okay?
Dong Zheng
Understood. And then…
Akira Sato
But the key thing is, this kind of a traction motor system will become a standard product then the key is volume. If you have the volume then you can offer more lower cost.
Then lower cost – more volume and lower cost would making a standard and that any manufacture of that standard with a large volume wherever the customer wants in any country or region, that’s going to win this a competition. And your question regarding the pop-up?
Dong Zheng
And the -- is it -- you have to in-house permanent magnet technology? And then whether if you were to move beyond 150 kilowatts, would that -- would this capability of lightest product be different?
Or…
Akira Sato
So basically, we buy magnets from outside. We are not making magnet, okay?
But those are the components. So if you are looking at any key component, which is comprising the motor, that’s going to be a steel, cooper, aluminum and magnet.
Then we buy those four key components or four key materials like a low material base, okay? Then we are making all those components out of those materials then put into the motor.
Then we have a inverter, and we have gear and we set everything and then we can come up to the system, E-Axle Okay?
Dong Zheng
Okay. And then just quick one on Shimpo, originally, you have ambitious plan – reduce your capacity condition, is that still on track?
And if you feel the need to may be lower that or maybe postpone some of the further additions, how easy or difficult can that be achieved?
Akira Sato
Okay. Number one, the market is coming down very sharply from the last year.
That is like March quarter, it was great, but now, June quarter, it become half September quarter, if become half of that, then you became now half. So if you looking at the market of the industrial robot market, the reduction gear demand is coming down by 85% from the quarter last year.
Those are the order level today, okay? So with that situation, we are not really -- we cannot escape from this low-demand industrial market as of today.
So thereby, in the long run, we believe that it’s coming. But in the short term, it’s in the war situation as of this quarter.
But in the long run, as we say, we are -- we believing the demand is coming up. So as far as we can, we can keep our CapEx plan.
That’s our current thinking, okay.
Dong Zheng
Got it. Just if you would feel the need to postpone or lower that number, how easy can it be done?
Akira Sato
Well, the difference -- no, no, we have some financial resources and all of the other resources. So if you -- maybe we’re going to hire the walkers, because we build a no product that we make, right?
But if we’re going to be ordering the machine, then we may take those machines, because we cannot counter it. For example, if we can cancel, the next time we will not know when we can buy those machines.
So for some of the contract that we have already make, we just try to honor those contracts. But clearly, we’re not going to be starting a production because the order level is very low, but still, we are very waiting.
Whenever the order comes up, we were the first to catch up the demand. That’s the idea.
Dong Zheng
Thank you.
Masahiro Nagayasu
Thank you very much. Next question, please.
Operator
We will now take our next question from Jon Greenhill from Baring. Please go ahead.
Your line is open.
Jon Greenhill
Hi, thanks. I have two quick questions.
Firstly on Slide 12, the ramp of the camera mechanism, obviously you’re ramping sort of now into next year and beyond, what can you say about margins during that ramp and the ultimate margin that you think you can get on the camera mechanism? And my second question just on HDD, which obviously a lot of technical change coming in the HDD market and more powerful technologies, are you a bit more hopeful that, that will help drive somewhat of a recovery as we go through this year and next in the HDD market?
Akira Sato
Margin for our ballpark, it depends on the volume, but we are going to start much production from this month and its one of the production team by March this year and in that case maybe margin for popup, the popup mechanism, it will be around 15% to 20%. And we are expecting more customers.
So the other smartphone manufactures in Korean or China in that case we will be able achieve around 20% of the margin which very high volume based on production. Okay.
Your next question was the hard disk drive and look at Slide 9. Great.
We don’t, you know will be rise down our forecast for the market as well as all our own spindle motor. Okay?
But if you’re looking at the current market, maybe December quarter results. So, if you’re looking at that the total market is down, but there are two different things.
Okay. Then near lines and the enterprise server still there is the opportunity for the growth in the future.
Clearly, the airline as we mentioned that we see this as an inventory adjustment. But the 2.5 and 3.5 might be able to different, because SSD penetration is a little bit more than expected and that’s going to reduce the hard disk drive in that.
So in the long run, well, we say a maybe 2.5 inch may not be a viable, but 3.5 inch would remain, but near line is coming up. So to see that clearly, we have to see the ASP up, because mix is going to change.
So we have to say total revenue might be down, but not as much as this time, because it’s more gradual down than the gross of airline and also as high ASP on the near line would be a comparison some blocks of the 2.5 inch and 3.5 inch. That’s how we see the future.
And at this moment it sort of bit difficult to say how much would it be for the issue? Clearly, we say the 5G situation would require more so high capacity hard disk drive, they’re more high capacity hard disk drive require the helium hard disk drive, where those helium hard disk drive would give us more volume on our current spend, that’s how we see this market.
And this answer your question?
Jon Greenhill
Yes. It was great.
Thanks very much.
Akira Sato
Thank you very much. Next question please.
Operator
We’ll now take our next question from Hiroshi Kamide from RoboCap. Please go ahead.
Your line is open.
Hiroshi Kamide
All right. Thank you very much for the question.
Just back to the restructuring cost of JPY 24 billion you’ve given us the details of what they are for and for the divisions. Could you please give me an idea of photography where losses the impairment costs have gone into with regard to your factories, I understand you have love the factories worldwide and I would told that a lot of the heavy listing for restructuring would be done mainly in Europe as back being done or is that too much to do.
Thank you very much.
Akira Sato
Yes, we don’t think the allocation. So first of all a single model or small precision motor area – that's mainly in Philippine.
That's because hard disk drives have been down and then we have to shift our factory of hard disk drive to deduction gears or maybe we are going to integrate that Philippine operation to hydeloperation, that's we have to do in order to incorporate the decline of the shipment volume or production volume in the hard disk drive. So that’s mainly in small precision motor area, we're going to set restructuring reform extensively in South East Asia.
And ACI, I'm saying, in European countries, when we acquired the European operation for Emerson last year – early last year. And we're going to integrate some factories to other factories in the European countries.
So maybe we're going to spend the restructuring reform, our impairment loss in European operations.
Hiroshi Kamide
So, do think you would have to do more activity such as restructuring in Europe? And do you think you would like to shift more production to outside of China for instance, like to Mexico?
Masahiro Nagayasu
Yes, actually – maybe, we're going to add the production capacity in Mexico on top of current production capacity in China. That's our plan because mainly China is the biggest market and the growing market.
So that maybe we have to keep the production capability or capacity in China even though, right now it’s kind of demand had been down. So that any shift to Mexico means we're going to add production capacity in Mexico on top of current production capacity in China.
Hiroshi Kamide
Understood and so just overall for sort of the CapEx plans going forward for March 2020, with additional capacity plans such as Mexico do you think CapEx will be flat going forward? Or slightly up?
Slightly down? Thank you.
Masahiro Nagayasu
I'm saying that it’s going to be flat, maybe JPY 150 billion in the fiscal year 2019.
Hiroshi Kamide
Understood. Thank you very much.
Masahiro Nagayasu
Great, thank you very much. Next question please.
Operator
We will now take our next question from James Fulford from Eagle Research, please go ahead your line is open.
James Fulford
Thank you, good evening. I’ve got one follow up question, if I may just on the HDD area.
And I think the overall average ASP that fell in dollar terms quite sharply sort of Q3 relative to Q2 was that mix of prices? Is it possible to sort of break that given the total and break it down by area so you can understand what's changing and why?
Thank you.
Akira Sato
Okay. That change clearly by mix.
So usually, when you are looking at a revenue share of the server that means a 2.5-inch high-end and near line? So among the total revenue, those 2.5- inch high-end and near line share was something like a 44% in September quarter, but down to 38% – 38.3% in the December quarter.
So that means the mix deteriorate then ASP is coming down. So ASP for second quarter $5.49 and December $5.21.
So clearly, which I said was those are inventory adjustment, then your number came down, especially the helium number also came down that's going to be making the ASP down and thereby the margin down, okay?
James Fulford
Okay. Do you by any chance have the average ASP by area near line to the hard disk for the comparison; do you or not?
Akira Sato
So when we're looking at ASP of the each form factor like a 2.5-inch high-end is 7.73, which is higher down the September quarter the near line 13.2 which is lower than 13.36 in September. Then 3.5-inch is a little bit higher by $0.03 and 2.5-inch is something also $0.03 higher.
But overall if you're looking at same form factor quarter-by-quarter most of those numbers up, only a near line ASP down. But the most important thing is not the form factor-by-form factor, but the mix is changing.
That's going to be lowering entire average selling price from $5.49 down to $5.21.
James Fulford
Thank, great. And the decline in the – over the last couple of quarters in the helium percentage, that's just inventory adjustment rather than any change in trend that we are seeing.
Akira Sato
Yes, as we understand that, Helium will be a majority already, but almost the entire hard disk drive will be using helium because the new technology coming like MAMR or HAMR, the Microwave Magnetic Recording or Heat Assisted Magnetic Recording. For most of those recording the helium could be a better to be used rather than the normal air.
So thereby, entire hard disk drive could go in down to the helium drive in the future. So that is going to be another technological change.
It may cost, but still that's going to be given us a higher ASP. That's what I'm saying.
Okay?
James Fulford
And lastly, is it possible for Q3 to give me the hard disk drive Emerson margin? And also, perhaps the pre-restructuring margin, the underlying one, that would be very helpful thank you.
Akira Sato
So as we said, as we do take a so-called structural reform cost. So on the nominal basis, the hard disk drive for a spindle motor hard disk drive is something like a 20.8% but adjusting the one-time factor that's going to be 22.9%.
James Fulford
Okay, thank you very much.
Akira Sato
Thank you very much, next question please.
Operator
We will now take our next question from [indiscernible] from JPMorgan Asset Management, please go ahead your line is open.
Unidentified Analyst
Hi, thank you for taking my question. First question I have is, I understand that you’ve planned to take JPY 24 billion of restructuring costs for the second half of fiscal 2018.
Do you expect that some of these will recur in fiscal 2019?
Akira Sato
As I already mentioned, I don't expect the JPY 24 billion that big amount of the reforming structure – reforming expenses will recurred in fiscal year 2019. But on the other hand, we have to continue some restructure the European operation so that maybe we will see some amount of the restructure reforming expense.
For instance, in Q1, June quarter or September quarter last year, around JPY 2 [ph] billion of the restructuring reform expenses. So that maybe I expect that level of the expenses would be okay in the fiscal year 2019.
But I don't expect the JPY 24 billion of that big amount of the expenses will be awarded.
Unidentified Analyst
Thank you. My second question is in regards to the plan to reduce cost by JPY 14 billion in third quarter of fiscal 2018.
So if we assume that the quick condition persists in fiscal 2019 will there be any scope for further scope for further cost reduction in addition of the JPY 14 billion?
Akira Sato
Okay. So we are always trying to reduce our cost as always, that's number one.
But the current situation is little bit serious. So that we are going to set a very clear so-called numerical target, right?
And how to achieve it, then everybody have to think about how to achieve it and everybody will contribute some idea how to do it. Then we are going to achieve whatever the targets are.
So those are for WPR. So we're going to – it’s not only this quarter and next, but it's going to be a more day-by-day or day-to-day type of effort to reduce our cost, but at this moment, we just try to say this is a little bit new so-called approach involving every employees and soliciting the idea to cut the cost from every employees, then maybe checking the cost reduction situation by those new member target.
Those are little bit different from the day-by-day or day-to-day cost cuts. You understand what I’m saying?
Unidentified Analyst
Yes, thank you. My next question is in terms of based on the expectation that you see right now for fiscal 2018, does it have any impact yet on what you have for mid-term plan through fiscal 2020?
Akira Sato
So we are keeping our commitment to deliver featuring ourselves JPY 2.300 trillion OP. So saying that, clearly, we have to admit the current number okay, fiscal year 2018 number may be short to our original expectation.
So thereby, in the long run, we have to, maybe accelerate the growth more into 2019 and 2020, only two years. Then some of the measure we can take is as you understand that, that we have been using this measure for long time M&A.
So clearly, we were looking at 7%, 8% overall growth for 2018, 2019, 2020, every year. Then the difference between our target 15% and 7% to 8% should be down by M&A.
Now we say this 7% to 8% growth is coming down to say for example, 4% to 5%. So thereby, we have to fill the GAAP by maybe raising our M&A target.
That's one way that we could keep our promise to give you JPY 2.300 trillion, but the reality is fiscal year 2018 number may be a little bit short of our original expectation. Did you get it?
Unidentified Analyst
Yes. Thank you.
My last question is – if I may, last question is in regards to the plan you said you wanted to keep the fiscal 2020 mid-term plan, and you may need to presume more M&A to keep the target. In terms of your financial metrics, credit metrics and you are also ramping in the mid-term plan, you mentioned you wanted to maintain financial soundness and rating now is A3 by Moody’s.
What’s your thought on the rating do you intent to keep arbitrating?
Masahiro Nagayasu
Yes, sure. Maybe we're going to include that rating.
And probably, if we make some more M&A probably we don't need to make JPY 150 billion of capital expenditure in-house. That’s why we will keep our financial position very healthy.
That's our plan. That's why we'll be able to keep or improve our rating even by Moody’s.
Unidentified Analyst
Okay, thank you.
Masahiro Nagayasu
Thank you very much, next question please.
Operator
We'll now take our final question from Mehdi Hosseini from Susquehanna financial group. Please go ahead.
Your line is open.
David Ryzhik
Hi David Ryzhik for Mehdi, again. Thank you so much for the follow up.
Just two if I could. Regarding the HDD factory closure, one of your customers was that impacting the near line inventory or the client HDD inventory?
And I have a quick follow up.
Akira Sato
Client.
David Ryzhik
Client okay. And just broadly speaking on overall China demand across your segments, in your conversations with customers, is the expectation for demand to rebound after Chinese New Year?
Are they seeing any signs of benefit from some stimulus measures from the Chinese government? Just love your thoughts on what you're seeing from customers and your conversations with customers.
Akira Sato
Okay. So still the overall situation is not so clear and it's not so much transparent.
But what we can say is may be some signs are there that some of our customers is may be starting to order some products more than we expect. So that could mean that they might have some idea.
The government Chinese government may take some action. Then expecting that, they might be starting to build up inventory or starting up some higher production level, we don't know.
But still, those are very small signs, but still not there. Okay?
Does that answer your question?
David Ryzhik
Thank so much for again.
Masahiro Nagayasu
Thank you very much.
Operator
Mr. Abe, there are no further question today.
So at this time, I would like to turn the conference back to you for any additional or closing remarks.
Abe
Thank you. We would like to conclude this conference call.
Thank you very much for your participation today. Should you have any inquiries, please do not hesitate to contact Nidec Corporation or your sales representatives at Mitsubishi UFJ Securities.
Thank you very much and have a good day.