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The hidden growth story within Japanese technology is one of our highest conviction and most differentiated investment ideas. And in the wake of the COVID-19 crisis, we believe some of our more compelling long-term themes in Japan — like digital transformation, payments and work-from-home (WFH) capabilities — are increasingly relevant. For example, fewer than 20% of Japan’s companies are set up to work remotely and just 10% of workers have WFH experience, creating a long runway for growth.1
Still, Japan is not typically a market associated with high growth, and many investors are apathetic on Japanese equities or believe there are only a few large multinational hardware companies worth investing in. In our view, demographic trends and idiosyncratic cultural factors are among the powerful long-term growth drivers fuelling the strong case for a wide range of Japanese technology companies, including distinct and persistent software opportunities like fintech and online recruitment.
More than consumer electronics
Japan has long been known for high-quality and precision technology manufacturing, having honed this skill set since early in the history of the sector. Through years of manufacturing experience as an outsourced supplier, Japan built sophisticated supply chains and began to specialise in manufacturing high-end tech.
Electronics, consumer appliances, cameras, laptop computers and industrial robots were among the products that drove Japan’s tech success in the 80s and 90s. But most of the large Japanese tech conglomerates may have seemed less exciting in recent years as US, South Korean and Taiwanese companies have fuelled smartphone innovation.
We believe Japanese tech is much more than consumer electronics and will see significant growth in the 2020s, both from local trends and from its status as a high-quality-component manufacturer.
The rapid, locally driven shift to digital
Japan has an ageing population that needs to gain efficiencies and productivity as its workforce shrinks. The elderly population is at its highest level ever while the percentage of children is at its lowest.2 The country’s work culture has also historically been very manual-process (and paper) driven. The digitisation of its industries is critical to success in a global marketplace, especially given these demographic shifts.
Fintech and online recruitment are two areas that are helping society shift to digital and catch up to global trends. For example, we think the growth of digital payments can enable other industries to follow suit. The government spends nearly US$10 billion on paper billing and businesses spend approximately US$74 billion to process cash transactions each year.3 At 20%, Japan’s percentage of digital payments lags significantly behind its neighbor, South Korea, which conducts 96% of transactions digitally. This offers a substantial growth opportunity as Japan seeks to double its share by 2025 (Figure 1).4
Importantly, not all companies are able to achieve digital transformation on their own. Consulting firms are therefore increasingly helping small- to medium- sized companies make the leap into the digital era and the Cloud. This helps firms increase efficiency and shift paperwork into an online process. Notably, we believe the winners in this growing space will be local firms, as a strong understanding of Japanese working culture and language are key barriers to entry for foreign competitors.
One digitisation example that we’re intrigued by is a Cloud and IT outsourcing company that seeks to raise companies’ operational efficiency and thereby help address several societal pain points (such as a declining population, labor shortage and increasing demand for work-life balance). By using its Cloud-based platform to take organization, filing and reporting of expense management out of companies’ hands, the firm has enabled its clients to focus on their own areas of expertise. This has the potential to reduce time spent on these activities by 80% and management costs by 65%.5
The exponential growth of high-end components (and other opportunity sets)
Japan is one of the foundations of the semiconductor industry with significant market share in semiconductor capacity (26%), CMOS sensors (42%) and semiconductor equipment (33%) and materials (>50%).6 The growth of connected devices and smart tech is therefore another potential tailwind for Japanese technology. For example, as autonomous and electric vehicles advance, automobile supply chains evolve along with them. And with this burgeoning opportunity set’s keen focus on safety — as these digital components are increasingly critical to a car’s functionality — we think Japan’s reputation as a high-end tech manufacturer is a key differentiator for buyers of components like computer chips.
Notably, new markets for high-end components are not limited to the auto industry. Smart tech’s use cases are constantly expanding. For instance, a Japanese company is helping to supply machine vision cameras for predictive maintenance on everything from train tracks to elevators. This is one of many examples of Japanese tech that is increasing efficiency and safety while reducing cost. We believe these Japanese component suppliers have huge potential as the connected device market grows.
Finally, we believe Japanese tech will be a key beneficiary of the rapid growth of the gaming industry, a trend that has accelerated during the COVID-19 pandemic. Japan is home to two of the largest players in gaming, with nine of the top-10 selling consoles in the history of the sector.7 As the industry shifts to mobile and cloud-based gaming, we believe Japanese gaming companies will evolve along with it and continue to be industry leaders.
Japanese tech is among our team’s highest conviction themes. We believe it offers an increasingly compelling opportunity set that is fuelled by lasting secular and demographic trends, a strong local tech industry with high barriers to entry and rapidly expanding opportunity sets.
The critical nature of technology has never been more evident than amid the COVID-19 pandemic. We think Asia tech is at the forefront of innovation in nearly every segment of the economy. In our view, the sector will continue to thrive, powered by four key growth drivers: more powerful computer chips, increasingly pervasive technology, local solutions for local markets and the hidden tech story in Japan.
1Japan Ministry of Internal Affairs and Communications, Fortune.com, as of 2018. | 2Statistics Bureau of Japan, 2019. | 3BBC, Nomura Research Institute, Mizuho Financial Group, March 2020. | 4“Japan wants to go cashless, but elderly aren’t so keen”, Reuters, November 2019. | 5Company reports, estimates as of March 2019. | 6“Japan – A thriving, highly versatile chip manufacturing region”, Semi.org, October 2018. | 7VGChartz, September 2017.
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