Daiichi Institution Industry sees significant opportunities in the current macroeconomic environment, particularly due to the US Inflation Reduction Act and the depreciation of the JPY. The company specializes in Automated Material Handling Systems (AMHS) for the semiconductor industry and is now focusing on expanding its horizontal transportation systems and cold chain equipment.
Right now is a pivotal time for Japanese makers. Policies like the US Inflation Reduction Act are forcing corporations to diversify their supply chains for reliability and to reduce country risks, with nations such as China. Japan is known for its reliability, advanced technology, and a weak JPY, so for the time being Japan has never been a more cost-effective option. This means that Japanese firms have an opportunity to expand their existing global market shares. Do you agree with this sentiment, and in your opinion, what do you believe to be the advantages of Japanese companies in this current macroeconomic environment?
Overseas demand is indeed increasing, and this might be due to the depreciation of the JPY. Compared to two years ago it has depreciated 30% so overseas companies can essentially have a 30% discount. Regarding supply chain risks, I don’t consider Mexico or China to be the biggest risks. We have a deep relationship with China, and by having discussions with the Chinese government as well as Chinese companies we have been able to foster this relationship into a beneficial one.
This is within my understanding, but from where I stand I don’t think China is trying to increase tension between the US or Japan. Western countries and Japan are still a part of what China aspires to. Each government has its propaganda and the media follows to create the image for the country. I see China’s risk as equal to other countries, however, being reliant on overseas suppliers is always going to be a risk. It isn’t a risk in terms of China the country, rather the risk is a logistical one. During the COVID-19 pandemic, the Shanghai port was closed down and that had a massive impact. I consider the risk more associated with the idea of a huge logistics hub closing down, and since all goods went through Shanghai port there were issues.
We agree that the real risk is centralization, and this is especially true in the semiconductor field where 70% of global semiconductor exports in 2019 came from China, Korea, and Taiwan. As such, international governments tried to increase overall foundry capacity. The US is building big fabrication plants in Arizona and Europe has attracted TSMC to Germany. Here in Japan, we have Sony and TSMC opening a fabrication plant in Kumamoto, and in Korea, they are creating a mega cluster around Samsung’s factory. China additionally has huge plans to bolster its semiconductor manufacturing. From your point of view, what opportunities does this increase in global foundry capacity represent for your company, and how do you plan to position yourselves to benefit from it?
The equipment we create is installed when a fabrication plant is created from scratch. It is a positive opportunity for us with all of these new fabrication plants being built around the world. On the other hand, the semiconductor industry tends to skip ahead of trends. In our point of view, it is much better to have a more averaged-out wave whereas right now the trend is pretty volatile.
70% of semiconductor production is centered in Asia as you mentioned, and half of that 70% is in China. We feel that this market is very attractive. Leaving geopolitical concerns aside, China and the US have massive landmass, whereas countries like Japan, Korea, and Taiwan have limited landmass. Our products are widely applicable and widely used. With China and the US having so much landmass their factories tend to be more flat and spread out, therefore our products are not applicable. With this in mind, we developed a new type of transportation system Automated Material Handling System, or AMHS. In terms of vertical transportation devices, we have a 95% share which means that we don’t have much more room to grow. However, for horizontal transportation, there is a huge potential market.
In the giga fabrication plants, there are multiple material handling companies incorporating automation installation, but small-to-medium-sized foundries can’t yet incorporate automation. TSMC, Micron, and Kioxia are all fully automated, and it costs well over JPY 10 billion to install such automated systems. The midsized fabrication plants don’t have the budget for these systems. A few JPY billion is within their budget but no company could provide the packaged service. We are now launching R&D in this area.
You mentioned the potential of horizontal transportation systems, but we also know that you are diversifying into cold chain equipment as well as robotics, however, all of these fields require a lot of skills and a lot of engineers. To us, this feels difficult to do in Japan. It is the world’s oldest society with a declining population due to low birth rates, which ultimately will lead to severe labor shortages. How do you overcome the challenge of Japan’s decreasing population when you are so dependent on skilled workers?
There are two strategies that we are taking. The first is an incorporation of women in our workforce, while the other is to incorporate more foreign workers in our workforce. We are seriously contemplating how to create an environment so that female workers feel comfortable working. In standard Japanese companies, you normally take two days off, but we allow our workers to take three days off and remain a permanent member of staff. People can limit their work to six hours a day and still be classed as a full-time worker.
Life is full of cycles and there are times when you might need to go home early while there are other times when you want to stay late and earn more. Right after having a baby, many will want to get home as soon as possible. I wanted to create a scheme where each individual can base their work on their rhythm.
Conventionally in Japanese companies, if a woman has a baby they normally have to quit their job to raise their child. It is a pity that women who have worked hard to graduate from high school, graduate from university, join a good company, acquire knowledge, and then lose everything because they want a family. The biggest reason for Japan’s Lost Decades is because of this loss of labor force. We want to create an environment where female employees can continue to work while they are raising children, while at the same time, we are promoting women who had to quit their companies to come and work for us.
As I said, leveraging a foreign workforce is another focus of ours. We currently have 8 nationalities working for us, so multiple languages are being spoken in our second-floor office, so sometimes I feel like I am in a zoo. This environment allows the company to grow drastically. I feel it is very inspiring and refreshing, and we are actively scouting students to bring them to Japan, a practice that we put in place around two years ago. Before our main nationalities were Koreans and Chinese, but now we are looking to make it more open and diverse.
How did COVID-19 impact your business, and in terms of implementing remote diagnosis and operations, what developments have you put forward?
As for the impact of COVID-19, it was practically zero on us, and there were multiple reasons why. We were operating under DX operations pre-COVID and well before the pandemic, we would allot a computer to each employee. Our employees were well-versed in remote conferencing. The only issue we had was in places where people had to gather to manufacture. During the entire three-year period of the pandemic we only had four outbreaks of infections, but fortunately, we were able to contain those so that employees didn’t suffer severe symptoms.
During that period our core business was in semiconductor vertical transportation equipment and we already had a customer portfolio, all of which we had good relationships with. There was no need for salespeople to visit the companies and do sales. It meant that the impact on the company’s performance was minimal.
The kind of environments your AMHS systems are employed in are very strict in the fact that the smallest particles can compromise the integrity of the final product. In terms of the development of your products, how do you ensure that they are compatible in such high-pressure, clean environments?
Our engineers are specialists in the details of the technology. Our founder has conversed with Sony, and they requested the creation of a vertical transportation system for semiconductors. It was our first time trying that so there were many issues, with parts selection, in particular, being the first hurdle. Another issue was figuring out how to avoid abrasion during transportation. They required two systems, one was a system that didn’t generate dust and the other was a system to remove dust should that occur. Of course, it takes time to develop this kind of technology.
In the semiconductor industry safety and fire resistance are key. There are many set regulations and it is extremely time-consuming to abide by each regulation. It is one of the reasons why we don’t have much competition in terms of rival companies.
You work with mainly fabrication companies, and on top of the technical aspects, there are two very important elements. First is confidentiality, with each of the fabrication plants you work with being unique and possessing billions of USD worth of equipment that companies want to remain private. Secondly, these are complex systems, especially as the industry moves towards micro-fabrication. Some changes must be done, which require equipment companies to provide after-sales services. How does your company ensure that it can meet these two demands for confidentiality and after-services, not only in Japan but also for your customers overseas?
If you ever get to go to a semiconductor factory you will see that everything is secure, likewise for the staff too. Physically, it is difficult for us to obtain information from the customers and there are different regulations for each semiconductor fabrication plant. They will have metal detectors that can detect even the smallest microchips, so if someone tried to smuggle a small memory card out, it would be detected. First and foremost for us, it is important to abide by these regulations.
Our equipment and systems are installed before the actual production equipment is installed. We don’t have an opportunity to obtain information on the manufacturing equipment used by our clients.
The AMHS industry has an estimated global value of USD 70 billion by 2030, and you’ve mentioned how you are a leader in vertical transportation systems, possessing a 95% market share. You’ve already mentioned how you want to expand into the horizontal format. These AMHS systems have applications in clean room environments for semiconductor production, but they also have applications in pharmaceuticals, biotechnology, and precision optics, all industries that need this technology. Beyond semiconductors, do you see other market opportunities for your equipment or services?
The semiconductor industry is considered preferable compared to other industries. If we say that we have experience in the semiconductor industry, food industry companies feel assured. Serving the demands of the semiconductor industry shows reliability and means that we have a high standard of provision. The food industry, however, does have a budget for investments in facilities, so expanding into pharmaceuticals, biotechnology, and precision optics might be a good choice for our future.
In terms of developing new solutions for the 2030 greenhouse gas emissions regulations, how are you adapting to the changes in the industry?
We don’t consider Japan as a market for cold chain, and that is because in Japan what is imported is delivered within three days. Our technology is long-term freshness retention as well as refrigeration and freezing technologies. With the advanced logistics in Japan, we don’t consider the domestic market as our application. Where our cold chain technology is most applicable is with cross-ocean transportation or products transported to Japan. It is also applicable to countries like Australia, the US, and China which have massive land mass. Our solutions would be well received by those with cold chain warehouses.
This is a new approach for your company. When entering this market you face a lot of historical firms that have specialized cold chain equipment, and the same will apply in the US and China. What are you bringing to the table that is new to the industry? How does your background as a manufacturer of semiconductor equipment help you when engineering these new products in food or cold chain-related industries?
To answer your second question first, we cannot leverage the experience we have with semiconductors in the cold chain. Let me explain the background of why we want to enter this field. We first started as a semiconductor supplier and the market is very volatile. I thought about adding another business that fills in the gap of this fluctuation. A robot maintenance business is a good fit. When the investments in installations stop, that is the time for maintenance. During the period of installation our equipment is sold but once that slows down our maintenance business becomes busier, but honestly, I feel that is not enough. Both of those businesses are manufacturing, whereas I wanted a business that could continue for the next 20 or 30 years. It was here that I thought about how important food is to our daily lives.
The world’s population is currently 8 billion people but experts predict that by 2050 this will have exceeded 10 billion. Food is not distributed well among the 8 billion people living on our planet, so if it reaches 10 billion we are looking at a disastrous future. Food shortages will be a theme across the globe so it is important to create an area that transports to consumption areas. I was looking to the market for new business opportunities.
This is a little off-track but 20 years ago I met up with a classmate of mine from high school. He was saying that he could purchase wagyu beef at a very low price. His suggestion was to start an exporting business together. We have a company base in Korea, China, and Taiwan with a huge network, and the timing was good because China was considering whether to import beef from Japan. We started to get ready so that once the legal scheme was set in China we could immediately start. Whilst waiting for China we tried the business in Taiwan to see if it is viable. I visited Taiwan and approached every store I could find that had wagyu. What was interesting is that all of the wagyu I tasted in the country didn’t taste that good and so I wondered why. The issue was storage and the beef block only lasted for four weeks. Chilled meat tastes better than frozen meat, and although companies were importing the whole section of beef, only certain parts were being sold. The closer they get to the expiration date, the quicker shops would start to freeze the meat to not waste it. Once it is frozen the taste starts to deteriorate. From a Taiwanese point of view, wagyu was expensive and not that delicious. We started to think the same thing might happen to us, so we began to think and understand that the bottleneck was the expiration date. If we could extend this date to 6 months that would be better since this would create a scenario where shops would not need to freeze the meat, rather just chill it.
I took this homework and began talking with Japanese universities and venture companies. From here we developed the current technology we have for cold chain. Coming back around, this food industry is very stable and can offset some of the volatility of semiconductors.
There is an issue here however if it comes at the expense of environmental impact. This is particularly true in the food and logistics sector which are seeing a lot of regulatory changes at the moment. How do you ensure that your solutions not only meet those environmental standards but also help your clients reduce the environmental impact of logistics that are under government and public scrutiny?
The advantage of chilling the product rather than freezing it is the electricity consumption level which can be reduced to one-fifth of what is required when freezing. Products that could once only be transported by planes could now be transported by ships. That is because before the expiration date would be short so you would need to use quicker transportation but now with longer expiration dates you can use ships, which while slower, are better for carbon dioxide emissions, reducing those down to one-seventieth. There is also a food loss issue, with many foods being discarded due to the short expiration dates. The longer expiration date would reduce the amount of wasted food.
Between 2008 and 2012 your business expanded very rapidly and you started exporting overseas directly. You’ve established companies in China and Korea to catch up with the local needs of customers in those locations. Can you tell us more about what stage your current international development is at, and in terms of new markets, where do you see the most growth opportunities?
Our business is based on the Daiichi Institution Industry producing the system and the equipment whereas the other dealers and group companies take care of the sales and the maintenance. Our partnering companies play a role in doing market research and finding new applications for our technology.
Our new business emerging in Korea is the development of EV motor cores, produced under the latest technology. The market for that is in China. Our Japanese headquarters would carry out quality control and testing. Our team in Korea develops and finds markets for that product and the Japanese headquarters carries out quality assurance. This is all then taken to the Chinese market for application. This is one of the model synergies we are creating among our group companies.
Our overseas strategy is to have more joint venture business, and at this point, we have focused on the development of new bases with our capital. We can obtain all the returns but the speed is slow. Global market trends are quite fast and new trends are always emerging, so to speed up the process in the manufacturing segment we would conduct that within Japan. Sales and marketing can therefore be conducted by local partners overseas. We want to apply this model to Singapore, the Philippines, and Indonesia.
Imagine that we come back in three years and have this interview all over again. What goals or dreams do you hope to achieve by the time we come back for that new interview?
Our first goal is to enrich people’s lives, both our customers and our employees. One kind gesture should give birth to two more, and so on until the world is filled with kindness. However, to show gestures of kindness one must have space within oneself. One way this space can be created is through a financial surplus. There are also many ways to enrich one's life, whether that is through money, time, or even human relationships. We want to start that chain effect starting from the company. By showing kind gestures to our customers we provide happiness to them. To achieve that a cost is always incurred, therefore there is an importance in creating new businesses. The profits give us the capital needed to show kind gestures.
We aren’t considering an initial public offering (IPO) although we have had many offers. We declined because we didn’t think that was a good way to proceed and create happiness among our peers. Each segment’s manager is thinking about how to enlarge their business and achieve their vision. My vision as the president is to only think about making people happy. If an employee wanted to leave and start their own company we would provide them with capital for their startup. Having startup connections will ultimately strengthen our company.
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