Soon after Shibaura Electronics received a $465mn hostile takeover bid in February, the manufacturer of temperature sensors used in products from rice cookers to missiles fired off a list of 50 questions to its pursuer, Yageo.
One of the enquiries it directed at the Taiwanese company, which has business links to China, concerned how much of its sales are to the Chinese military. Yageo declined to answer, offering a conversation behind closed doors instead.
A Japanese group, MinebeaMitsumi, emerged as a rival suitor, but has twice been outbid by Yageo, whose current offer of ¥6,200 is 97 per cent above Shibaura’s share price before the tussle began. Shibaura’s board has now dropped its opposition to Yageo’s offer.
Yageo is the second foreign company to attempt an unsolicited takeover of a Japanese rival since new guidelines on mergers and acquisitions came into effect in 2023.
Its bid has attracted far less attention than last year’s near-$50bn proposal from Canada’s Alimentation Couche-Tard for convenience store operator Seven & i Holdings.
But it is part of a rush by foreign rivals and private equity firms to snap up small and medium-sized companies that dominate technological niches. While giant companies such as Toyota, Sony and Nintendo are well known outside the country, Japan has a thick middle layer of so-called pocket champions with startlingly high shares in niche markets.
Shimano makes about 70 per cent of the world’s high-end bicycle components, for instance, while Shoei’s motorcycle helmets account for 60 per cent of the premium market and Yamaha supplies almost half of the world’s digital pianos.
Some of these companies are central to the geopolitical tussle between the US and China for control over emerging technologies such as artificial intelligence, semiconductors, humanoid robotics and facial recognition.
Japanese materials and equipment suppliers, such as JSR, Advantest and Tokyo Electron, are indispensable cogs in the semiconductor supply chain. Deep inside data centres, smartphones and aeroplanes, Japanese groups still have technological superiority in areas such as fibre-optic cables, capacitors and carbon fibre.
Others are kings of the so-called mother machines — manufacturing technology used to make jet engine parts or miniature circuit board components. For Beijing, Japan still holds some critical missing pieces that could help it gain full control of strategic technology supply chains.
Foreign bidders like Yageo say they can help Japan’s notoriously inward-facing companies to expand globally and bring valuable investment into the country.
A pedestrian crossing in Tokyo. Foreign bidders like Yageo say they can help Japan’s notoriously inward-facing companies to expand globally © Eugene Hoshiko/AP
“We think we can help them to promote their technology in the worldwide market, which is in the interest of Japan,” says David Wang, chief executive of Yageo. He also states, for the first time publicly, that it does not knowingly sell its products to Chinese military contractors.
“By supporting this deal, it is an opportunity for Japan to show the world that greater economic success is possible through collaboration with foreign companies without compromising its technology and security,” he tells the FT.
But critics say that Japan’s newfound openness to hostile M&A risks ceding an indispensability to global supply chains that has been carefully built up over decades.
“Japanese people can no longer buy apartments in Tokyo, as foreigners have bought them up . . . the same thing is starting to happen to our companies,” says Minebea chair Yoshihisa Kainuma.
“If it’s OK for anyone to buy our companies and we sell everything to foreigners at a high price, then what’s left at the end?” he asks.
Hostile bids pose both a threat and an opportunity for Japan’s government, which views M&A as a way to encourage consolidation in fragmented industries, shake up complacent boardrooms and improve corporate governance.
But officials are also rushing to prevent the nation losing control over its most advanced and sensitive technologies. Foreign rivals are moving quickly, seeing the door may soon slam shut.
“The top policy priority from the perspective of economic security for the Ministry of Economy, Trade and Industry is how to secure Japan’s current indispensability,” says Takashi Shimada, who served as a top adviser to Fumio Kishida, a former Japanese prime minister.
“For foreign investors or Chinese companies, Japanese companies are cheap, especially considering the exchange rate, and so they want to buy them quickly,” he adds.
“It has become a race against time for how the government can defend them.”
During the 1990s, Shuhei Mainoumi stunned the sumo world. He had to have silicone inserted into his scalp to pass the Sumo Association’s minimum height rules. But his superior waza, or technique, helped him defeat far larger and more powerful opponents.
Ulrike Schaede, professor of Japanese business at University of California, likens the strategic pivot that has taken place among Japanese companies over the past two decades to Mainoumi’s strategy.
Japanese groups knew they could not win a head-on confrontation in consumer electronics against emerging lower-cost rivals such as Taiwan, South Korea and China. So they focused instead on complex, higher value parts in the supply chain.
“The end products are no longer made in Japan, so people say Japan is dead,” says Schaede, who authored Japan Re-Emerges. “But today, who is making the input materials for the iPhone or packaging materials for semiconductors below 40 nanometres? It’s Japanese companies. Without Japan, the world wouldn’t be able to make these things.”
Naoki Okada, CEO of fibre-optic technology group Fujikura, says the key to the company’s success was giving up on ‘low-end’ products © FujikuraJapanese groups still have technological superiority in areas such as fibre-optic cables, capacitors and carbon fibre © Fujikura
Japan has consistently ranked in the top three in Harvard’s Atlas of Economic Complexity, which measures the sophistication of goods that a country produces and how many other nations can make them.
Its indispensability is highlighted by a 2022 study conducted by Nedo, a government-backed think-tank, which shows Japanese corporations hold market shares above 60 per cent for 224 products across five industries, centred around electronics and automotive, that were selected by Nedo.
Naoki Okada, chief executive of fibre-optic technology group Fujikura, says the key to the company’s success was giving up on the “low-end” products and targeting cutting-edge technologies. The 140-year-old group can pack 6,912 optical fibres into wires only 3.5 centimetres in diameter, four times the density of traditional technology.
“We focused on where our technologies could be useful. The result of that was taking big market share by combining high-end fibres and connectors at a time when data centre capacity was rapidly growing,” Okada explains.
The six-fold rise in its share price since the start of last year has encouraged fund managers, activist investors and buyout funds to look for the next Fujikura, either by breaking up unwieldy conglomerates or injecting a more commercial mindset into the boardrooms of mid-cap technology champions.
Oleg Kapinos, head of global distribution strategy at Asset Management One, a Japanese asset manager, says that Japanese companies with niche expertise driven by a “spirit of getting to perfection” are a “natural target for managers trying to outperform the rest of the market”. Some of the technologies are hidden in bigger conglomerates.
One example is Ajinomoto. The ability of the world’s biggest tech companies to shrink computing devices and process ever more data depends on this 116-year-old company better known for soup stocks. Its resin derived from its expertise in umami flavourings has become the de facto insulation material, sandwiched in layers a tenth the thickness of a human hair, between chips and motherboards.
“At the moment, it is just about only us that can do this in the world,” says Sumio Maeda, senior vice-president at Ajinomoto. “But we need to keep an eye on China’s technological progress.”
Apple’s latest iPhones carry a salutary warning for Japanese companies about how fierce east Asian competition is on high tech componentry.
Japanese groups supplied 30 to 40 per cent of the value of the first iPhone model in 2007, according to Fomalhaut Techno Solution, a Tokyo-based research firm. But that has shrunk to below 10 per cent on the iPhone 16 as Taiwanese, Korean and Chinese suppliers have supplanted them.
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The “Made in China” plan launched by Chinese President Xi Jinping a decade ago sought to achieve 70 per cent domestic market share across Chinese manufacturing in “core basic components and key basic materials” by 2025.
As China’s economy veers towards deflation, Xi’s vision for economic growth has pivoted towards advanced manufacturing and exporting, rather than subsidies to boost domestic consumption and infrastructure.
“Chinese companies are moving aggressively to secure information and are receiving large support to make big investments in their home country,” says Norio Nakajima, president of Murata, which supplies 40 per cent of the capacitors that stabilise power supply in the world’s smartphones.
“There’s about 10 years of technological difference between us and Chinese companies,” he estimates. “Unfortunately, the mobility of people and information has risen considerably, so I think the speed to catch up is getting quicker than before.”
A 7-Eleven convenience store, operated by Seven & i Holdings, in Tokyo. Last year, Canada’s Alimentation Couche-Tard made a near-$50bn proposal for the company © Bloomberg
In response, the Japanese government is shoring up measures to prevent takeovers by possible “front” companies, economic espionage or the accidental transfer of intellectual property to rival nations.
A new consultation mechanism came into force at the end of last year that requires Japanese groups to report on plans to share sensitive information overseas or establish foreign joint ventures. If concerns remain after the consultation, officials can demand an export licence application.
The rules apply to companies producing 15 advanced technologies including capacitors, magnetic sensors and photoresistors. These mirror many of the 14 most acute import dependencies identified by Chinese state-backed media in 2018.
“We really do want to maintain our superiority and indispensability in these fields,” says one government official involved in the scheme. “We have to figure out how we could address any sort of challenges for companies that own these types of technology and are being targeted for buyouts,” the official adds. “We’d rather encourage Japanese competitors to think of [domestic] mergers or acquisitions to avoid any sort of unintentional technological leakage.”
Such fears were stoked by a financial crisis at Nippon Denkai, operator of the only electrolytic copper foil factory in the US and a supplier to the US military. Its output is vital for electric vehicle batteries and 5G technology, but it entered bankruptcy in November amid a downturn in EV sales.
According to two government officials familiar with economic security matters, this prompted concerns that Tex Technology, a little-known Tokyo-based equipment supplier that had built up a 29 per cent stake, could take control of the company. Officials were concerned that Tex might be acting in the interest of a foreign party, but because it is based in Japan it was not subject to the Foreign Exchange and Foreign Trade Act, which requires screening of overseas investment in certain sectors.
In a statement, Tex denied working for any foreign entity and said it could have acquired Denkai “without relying on any sort of outside fund”.
MUFG Strategic Investments, a fund specialising in buying companies struggling financially or with succession issues, eventually bought Nippon Denkai in April for an undisclosed sum.
Japan plans to introduce a new investment screening law next year, but this needs to be balanced with the drive to consolidate Japanese industry. Ministers want national champions with economies of scale to fight back against Asian competition. No country needs seven listed car companies or a dozen world-beating ball bearing manufacturers, analysts say.
“We have 3.5mn small and medium enterprises. That’s too many. We need efficiency in SMEs,” says Tak Niinami, chair of the Japan Association of Corporate Executives. Citing corporate Japan’s $2.4tn cash pile, he adds that “in an era of inflation, we can’t keep it in the bank . . . now is the time [to decide] where the money should go. Into the pockets of shareholders . . . or to growth and the consolidation of industry?”
Ajinomoto’s senior vice-president, Sumio Maeda. The ability of the world’s biggest tech companies to shrink computing devices and process ever more data depends on his 116-year-old company Ajinomoto Build-up Film is rolled. ABF is used as an insulating layer in semiconductor packaging © Ajinomoto/Edelman
Amid this debate, private equity groups are jostling to position themselves as responsible owners. In January, Bain Capital agreed to buy Jamco, which makes half of the world’s aeroplane toilets and supplies parts to combat jets, for $634mn.
Striking a balance will not be easy. “Japan has to find a middle ground. It can’t go back to a closed capital market,” says one banker in Tokyo. “But it also has to find a way to better protect itself.”
In Muroran, in northern Japan, two gigantic 14,000-tonne presses are gearing up for the nuclear renaissance.
Their owner, Japan Steel Works, is one of a handful of companies that can currently forge supersized parts for nuclear reactor vessels. But the company’s chief executive, Toshio Matsuo, acknowledges that Chinese rivals are almost certainly going to strive to catch up and replicate JSW’s technologies.
“China’s supply chain indigenisation is making progress, but there are still some components that simply cannot be made in China,” said Matsuo. His company is less exposed, because its customers in Europe and the US are wary of buying technology from China and the Japanese government would never permit a takeover of JSW by a foreign power.
Japan’s preoccupation with economic security goes beyond just maintaining indispensability. It also wants to become a global leader in next-generation technologies such as quantum computing, solid-state batteries and synthetic biology, while reducing its over-dependence on China for critical minerals and legacy semiconductors.
Okada, of Fujikura, says Japan needs a fundamentally different model to the US or China and should not rely too heavily on state-led strategies — as is arguably being done by pouring huge subsidies into Rapidus, a venture for making cutting-edge chips.
“If Japanese companies go in the same direction as US or Chinese companies, then that will be a failure,” Okada says. “As our population shrinks, it’s difficult to succeed in a platform business like GAFA [Google, Amazon, Facebook and Apple] or the Chinese tech giants,” he adds.
Japan needs to keep focusing on niches and create “high-class technologies that underpin the world”.
