Is Japanese manufacturing in the toilet? Absolutely not — though it might be the first place to look to understand how the country’s firms are changing.
One of the most surprising stories in corporate Japan in recent months has been the emergence of semiconductor materials as a significant profit driver at the most unlikely of companies: Toto Ltd, better known as the maker of Washlet high-tech toilets.
While the firm has been making headlines since the COVID-19 pandemic as the popularity of its heated, water jet-equipped thrones grew overseas, a far smaller division that makes high-quality ceramics for the semiconductor industry has been growing to contribute more than 30 percent of Toto’s profit. The segment has an enviable margin of more than 40 percent, compared with just 5 percent in its mainstay sales of toilets in Japan. While the company has been involved in the semiconductor business for decades, the segment has only recently become a profit center.
But it is not just Toto: The episode highlights an underappreciated facet of Japanese companies which, far from sliding into irrelevancy, have instead pivoted to new industries that are often far more lucrative.
There is a popular perception that Japanese innovation is dead, or has been superseded by China. It is not hard to see where that comes from: Many consumer brands are less visible than they used to be. Just as there was no Japanese iPhone, there is no ChatGPT or Deepseek grabbing news headlines.
It was not that long ago that Japanese brands were everywhere: Premier League teams carried sponsors on their shirts, and major sporting events like the Olympics were full of advertisements for the likes of Fujifilm Holdings Corp or Panasonic Holdings Corp. However, what struck me while watching last summer’s Euro 2024 soccer tournament— whose final attracted about 320 million global viewers —was that the majority of branding came from Chinese firms.
Television ads by Hisense Home Appliances Group Co had replaced the likes of Panasonic. The lack of visibility is only set to deepen with Toyota Motor Corp and Panasonic, the last remaining Japanese top-tier Olympic sponsors, pulling their endorsement. However, it is a mistake to think that lack of visibility means declining relevance. Toto is just one example of how many successful firms have sought to reinvent themselves, entirely or in part, by moving out of easily imitated consumer-facing brands and rising up the value chain into specialized, hard-to-make materials.
This shift is one of the themes of Japan Re-Emerges, a recent book by Ulrike Schaede, professor of Japanese Business at the University of California, San Diego’s School of Global Policy and Strategy. More than anyone, she has been highlighting something little understood even locally — that just because you do not see technological innovation, it does not mean it is not there.
Schaede terms this “Japan Inside,” in a nod to the “Intel Inside” stickers that used to adorn generic PCs to inform you that they contained what was then a coveted microchip.
“Hardly a day goes by that we do not use a product with a critical input material or component that is made in, by or with Japan,” she writes.
However, this change has made the nation’s technology leadership “much less visible.”
Once-ubiquitous camera makers such as Fujifilm and Olympus Corp didn’t collapse like Eastman Kodak Co; instead, they moved into other industries — chip materials, but also cosmetics healthcare and advanced medical equipment. These days, profit at both firms dwarf what they made when they were household names in the West.
Examples abound of these companies and components: Ajinomoto Co is another that has seen profit surge, not because of demand for the MSG seasoning that it invented, but because of its dominance in a product known as Ajinomoto Build-up Film, the primary insulation material for semiconductors, stemming from its research into amino acids. The firm’s net income has doubled in the past decade, with shares recently hitting a record high.
On a recent trip, I stayed at a hotel in Akita clearly built in the bubble era of the 1980s, where the slightly decaying bathroom sink carried a familiar logo: that of Hitachi Ltd. The conglomerate has long since sold off its housing-equipment operations, and these days at the core of its business is Lumada — a digital solutions segment you are unlikely to have heard of unless you are in the industry, but one that contributes more than one-third of the company’s revenue. Its stock has risen more than threefold over the past 24 months.
Of course, these transitions are not always successful. To continue the toilet theme, and perhaps with a more apt metaphor, that same Akita hotel where I stayed had one that was manufactured by Toshiba Corp — a firm whose transition to nuclear energy triggered its downfall. And companies will have to continue to innovate to maintain their success.
Toto itself might one day be an example; it faces competition for high-tech toilets these days, mostly from other domestic rivals, but if the segment truly takes off overseas, expect more foreign imitators. But for now, as Toto shows, many companies are still flush with innovation.
Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia and was the Tokyo deputy bureau chief. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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