Taking advantage of its unique know-how Sanwa Electronic has the ability to provide niche technologies to rising applications.
It is an exciting time for Japanese manufacturing. The past three years have seen large supply chain disruptions due to COVID as well as the US-China decoupling situation, and as a result, corporate groups are looking to diversify their suppliers for reliability reasons. Known for their reliability as well as their advanced technology, Japanese firms are in an interesting position. Combined with a weak JPY, many observers argue this is a unique opportunity. Do you agree with this sentiment, and what are the advantages of Japanese firms in this current macro environment?
Following the Japanese bubble burst, manufacturing firms encountered a phenomenon I would describe as "hollowing," signifying significant industry damage. As you had mentioned, former President Donald Trump enforced trade restrictions on China, prompting a shift away from over-reliance on China. The overall landscape is transforming, with certain clients relocating their factories from China back to Japan. This trend has persisted for the past two years, resulting in noticeable positive effects on the number of orders. However, these effects remain tangential to broader industry developments.
While it is accurate that some clients are repatriating their production sites to Japan, a larger number are opting for Southeast Asian countries like Vietnam. When considering the nature of the China risk, its contours are rather indistinct, but a substantial facet pertains to its political stance. The oscillating trajectory of the Communist Party introduces volatility. On delving into the strategies of companies shifting away from China, it becomes apparent that many are transferring their assembly processes to Southeast Asia. This is driven in part by a perception of significant risk associated with continuing production in that country. Despite observing a trend where companies are reintroducing domestic production and assembly processes, this does not necessarily correspond to heightened domestic procurement of components and parts for Japanese SMEs.
Some stakeholders still apprehend the risk of maintaining production sites in Japan. Consequently, they persist with production in China, acquiring components from local markets, before dispatching their products to Southeast Asia for assembly. Another emerging trend involves companies that have relocated production to Japan, but rather than opting for domestic procurement, they source components such as harnesses from Southeast Asia. These times remain uncertain for all of us in the manufacturing domain.
Japan is the oldest society in the world with a rapidly shrinking population. As a result, there is now a labor crisis, and a shrinking domestic market. What have been some of the challenges this demographic shift has presented to your company and how have you been reacting to those challenges?
Over the past decade, the issue of a declining population has become increasingly tangible, particularly in the realm of recruitment. Hiring new personnel has proven exceptionally challenging, a concern not limited solely to SMEs. This predicament has permeated companies of all sizes in Japan. To enhance recruitment efficiency, our company has undertaken efforts to elevate brand recognition. Leveraging advertisements in newspapers and magazines, we aim to heighten our visibility and, consequently, attract a younger workforce. Nevertheless, this remains a substantial undertaking at present.
To counteract this challenge, we are actively automating our manufacturing processes wherever feasible. In pursuit of this, we have introduced robots to aid in labor-saving measures. While past implementations of manufacturing robots primarily aimed at bolstering productivity, contemporary deployments focus on mitigating labor shortages. As such, the years 2022 and 2023 have witnessed the integration of robots into our production sites.
As you had noted, the declining population also exerts pressure on the domestic market. This ineluctable scenario has led to a notable shrinkage in Japan's domestic market over the past decade. Accurately gauging the direct impact of this decline on our business is intricate. However, I would assert that the market has attained a level of maturity. This maturity signifies that as the population wanes, many companies are redirecting their focus overseas to source components from countries like China, Taiwan, South Korea, Indonesia, Malaysia, and Vietnam, rather than Japan.
Adapting to a contracting market share is not foreign to us. Sanwa Electronic Circuit believes in its capability to thrive within this context due to our specialized technologies applicable to niche fields. I contend that in these specific niches, we maintain competitiveness when juxtaposed with international counterparts. Consequently, I anticipate that the impact of the declining population within this niche will be limited. While industries like food and travel will experience a direct hit, the same does not hold true for our domain of electronic components.
You mentioned how your products are used in niche fields, but we also know that your products are used in the automotive industry, a sector that is going through a once-in-a-generation transformation with the switch to EVs. When it comes to the Connected Autonomous Shared Electric (CASE) era, cars are essentially becoming computers on wheels. In fact, the cost share of electronic components in relation to the total value of the car is expected to grow to about 35%. What opportunities do you see for your firm as this emphasis on electronics continues to take place?
We have observed a surge in orders from the automotive sector, with customers indicating an anticipated 5% growth in the number of vehicles over the next decade. Concurrently, the utilization of circuit boards in vehicles is poised to double. The shift toward electric vehicles (EVs) further propels the demand for printed circuit boards (PCBs). In the past two years, industry stakeholders have expressed concerns about the capacity of PCB supply. In light of this transition, we hold high expectations and are channelling our efforts into enhancing our capacity to meet these escalating requirements.
Regarding conventional PCB use within the automotive sector, I foresee an escalation in their volume. Moreover, I anticipate an increasing demand for a wider array of PCB types moving forward. I envision the emergence of requests for more diversified structures and designs. Our technological capabilities encompass specialized circuit boards suitable for these PCBs. However, these advanced technologies have yet to find application within the automotive sector. Nonetheless, we are actively presenting proposals to the automotive industry, aiming to contribute to the efficiency and performance of new-generation vehicles. Upon the integration of this specialized technology in the automotive sector, I am confident that our industry-wide influence will expand.
What are those new technologies for specialized PCBs? What specializations or adaptions do you have to do to suit the harsh environments of the automotive industry?
While I do not have a specific instance to cite, consider the scenario where we supply PCBs for components around an engine. These PCBs necessitate robust heat resistance properties. Diverse applications inherently demand distinct functionalities and performance. Our endeavors extend to refining board structures to facilitate easy mounting and seamless device bonding. Our objective goes beyond mere performance enhancement; we strive to optimize the structure to leverage our strengths. While precision performance remains pivotal for engines and motors, structure refinement holds the potential for greater advantages, particularly in the case of peripheral devices.
We have talked at length about your competitiveness when it comes to automotive, but we also know that you have other applications such as smartphones, robots, and computers. Are there any other new applications or industries that you are looking to introduce your products to?
We have showcased our specialized technologies, such as our plated half-hole boards on our homepage. However, these specialized innovations do have limited applications. The bulk of our PCBs, roughly 90%, cater to the smartphone industry. In the past year, several new clients contacted us via our website and said that they recognize the potential of integrating our PCBs into their electronic devices. This serendipitous connection has led to the acquisition of three new customers. Our PCBs possess distinct characteristics, which, to date, have offered limited avenues for utilization diversification. Presently, it is the customers that dictate the possibilities of our products. To augment this strategy, we are actively engaging with potential new clients to explore prospects for fresh applications.
In terms of R&D, the electronics industry these days is driven by miniaturization. Moore’s Law dictates that the number of transistors on a circuit board doubles every two years. We have now reached a limit, and are seeing stacking take place, which puts a very high demand for developments in the electronics industry. How is your firm catering to those high requests for miniaturization? Are you looking for partnerships, perhaps with international players, to help you develop technologies to fit the market needs?
My observations regarding the ongoing trend of miniaturization lead me to saying that Moore's Law remains pertinent. Over time, devices have indeed become smaller. However, for chips, it appears that we are now encountering limitations in terms of size reduction. Some customers have expressed dissatisfaction with this trajectory and inquired about the feasibility of making components thinner and augmenting chip layers. They are grappling with this evolving landscape. Unlike semiconductors, where precise design-based manufacturing is possible, achieving miniaturization in electronic components proves considerably intricate. For circuit boards, the challenge doesn't primarily revolve around the 100-micron scale. On a personal note, I'm curious about the future sustainability of Moore's Law.
Regarding PCB miniaturization, we have progressed from 100 microns to 60 microns and now as small as 40 microns. Customer demands for dimensions smaller than this have subsided. The robust drive for electronic component miniaturization has shown signs of deceleration in recent years. As seen in smartphones, they initially followed a trajectory of shrinking proportions, only to subsequently expand with the goal of enhancing performance and functionality. While the quest for enhanced performance will undoubtedly persist, I anticipate that size will maintain a certain threshold.
In addition to your domestic factories, we know that you work with overseas partners such as in China. Moving forward, are there any countries or regions you’ve identified as key to the growth of your firm? Could you elaborate on your international business strategy for us?
As you pointed out, we do have partnerships in China. Upon reviewing their production, it is evident that their performance is faltering, which I believe is closely linked to the prevailing market dynamics there. Certain clients are actively seeking to disengage from Chinese involvement. While we currently have no intentions of establishing production sites in Southeast Asia, we are actively exploring collaborations with partners in the region to cater to customers aiming to distance themselves from Chinese operations.
The majority of our business groups have established sales hubs in Southeast Asia. Leveraging these existing bases, we aspire to extend our reach to the global market. Historically, inter-group cooperation was somewhat limited, but this trend has taken a turn in recent years. Our efforts in enhancing collaboration have gained traction. We have initiated cross-networking among sales teams to reinforce cohesion and effectiveness across our enterprises.
Imagine that we come back on the last day of your presidency to interview you all over again. What goal or ambition would you like to have achieved by then?
I would gladly hand the baton to my successor upon resolving all of my concerns about the future of the company so that the transition would be smoother.
Interview conducted by Karune Walker & Paul Mannion