Dragoman Digest

Japan’s quiet tech champions become acquisition targets

Specialisation in complex components has made mid-sized firms simultaneously indispensable and vulnerable

Two decades after abandoning large areas of the consumer electronics market, Japan’s mid-sized technology companies have achieved remarkable market dominance in critical niches of advanced technology supply chains. Ajinomoto’s umami-derived resin now insulates over 95 percent of advanced semiconductors, while Fujikura is a leader in optical fibres which are vital for cables used in data centres. These companies have succeeded in winning market share through technical superiority rather than scale. Similar dominance of these “pocket champions” extends across industries and is particularly pronounced in the semiconductor sector. Tokyo Electron holds a monopoly on coater-developer machines essential for extreme ultraviolet lithography in advanced chip production. Overall, Japanese corporations maintain market shares above 60 percent for 224 niche products across five major industries.

Foreign interest in acquiring these unassuming technology champions has intensified since Japan introduced M&A guidelines in 2023. The revised guidelines are designed to encourage consolidation and improve governance through greater openness to hostile bids. Taiwanese electronics component manufacturer Yageo’s US$465 million bid for temperature sensor maker Shibaura Electronics in February – offering 97 percent above its pre-bid share price – marks the second unsolicited foreign takeover attempt since the new rules began. The weak yen has only made acquisition targets more enticing. Meanwhile, Chinese competitors are systematically narrowing technology gaps once considered insurmountable. This technological displacement is already visible in Apple’s supply chain, where Japanese suppliers’ share of iPhone component value has plummeted from 30-40 percent in 2007 to below ten percent today.

Tokyo faces sometimes conflicting pressures to both support M&A whilst protecting its strategic industries. Industry leaders argue Japan’s 3.5 million SMEs must consolidate to compete globally, with US$2.4 trillion in corporate cash sitting idle that could fund domestic mergers. To strike a balance in protecting the most sensitive technologies, new consultation mechanisms will require companies producing 15 advanced technologies to report foreign joint ventures and information sharing, with officials explicitly preferring domestic consolidation to “avoid unintentional technological leakage”. Japan’s defensive stance cannot change the underlying reality that its model of technical perfection in narrow fields increasingly depends on customers who would rather own these capabilities than buy from them.

AI’s extraordinary gap between capex and revenue marks the greatest economic experiment in over 150 years

Trillion-dollar infrastructure bets clash with minimal returns as monetisation timelines remain unknowable

The AI boom presents a striking economic disparity that defies historical comparison in the modern era. Annual revenues accruing to leading Western AI firms total approximately US$50 billion. This stands against projected US$2.9 trillion in data centre construction costs alone through 2028 – a figure that excludes energy expenses and broader technology investments. This 60-to-1 ratio between infrastructure spending and current revenues comes as research shows 95 percent of companies are currently achieving “zero return” from generative AI investments. Even so, AI enthusiasm has driven the US’s stock market up US$21 trillion since ChatGPT’s release in November 2022, with just ten firms accounting for 55 percent of the rise. OpenAI’s chief executive Sam Altman’s recent comments that investors were “overexcited” – despite himself being famously bullish on the technology’s transformative potential – embody this apparent contradiction.

Historical precedent offers no firm guidance about whether such disparities are resolved favourably. Analysis of 51 technological innovations since 1825 found 37 accompanied by speculative bubbles. Yet, despite initial investor losses, most bubbles left behind useful infrastructure that enabled the technologies’ eventual adoption. The UK’s railway mania of the 1840s saw investment surge from five to 13 percent of GDP before plummeting but ultimately created the nation’s transport backbone. The dotcom era’s tens of millions of miles of excess fibre-optic cable now enables streaming and video services. However, AI’s economics face distinct challenges that may prevent similarly positive outcomes. Data centre equipment – especially cutting-edge chips – depreciate far more rapidly than previous infrastructure investments. Currently, Nvidia’s most advanced processors become obsolete within years, compared to 15-year lifespans for telecommunications equipment installed during the fibre-optic boom.

Major technology firms are funding expansion through cash reserves rather than debt, which limits systemic risk. However, any significant correction would still destroy wealth directly through equity losses. Simultaneously, companies cannot articulate concrete returns. A recent study found that 87 percent remain wholly positive on earnings calls about AI’s profit potential whilst struggling to point to specific benefits beyond “productivity” or “differentiation”. This disconnect suggests either that AI requires more foundational business model reinvention over incremental adoption, or that practical applications at scale remain elusive. Markets nonetheless continue committing extraordinary amounts of capital to a technology whose path to value remains unknown.

China makes rapid gains in electrifying trucking

Domestic success fuels overseas expansion ambitions

Sales of electric trucks in China are growing rapidly, mirroring the country’s earlier push into passenger EVs. Sales of electric trucks in China have jumped from just four percent of new truck sales two years ago to around 24 percent this year. Concurrently, diesel truck sales have declined from 75 percent in 2023 to 51 percent this year. Industry executives suggest electric trucks will ultimately capture 50 percent of the Chinese market within three years, driven partly by state-backed support, including subsidies and local policy incentives like dedicated travel lanes. Another major factor behind growing uptake is the precipitous decline in battery costs. As has occurred with EVs, the sector is already facing significant overcapacity pressures.

Chinese companies are already beginning to export electric trucks, chasing higher prices and profit margins. Chinese electric-truck maker Sany is at the vanguard of the export push. It expects to sell around 30,000 electric trucks in 2025. Though most of these sales will be domestic for now, Sany has set a target for half of its sales to come from international markets by 2030 – up from ten percent today. Anticipating some of the trade barriers which have curbed rapid growth in Chinese EV exports, Sany has already set up a factory in South Africa and is moving to establish a facility in Brazil. Sany has also suggested it will focus on higher-priced models to avoid allegations of dumping.

Europe is expected to become a key growth market for Chinese companies. Currently, electric trucks account for only 3.6 percent of new truck sales in Europe. EU mandates require 90 percent of new trucks sold in 2040 to be zero-emissions – with interim targets of 45 percent by 2030. EU electric truck uptake is lagging well behind these targets, primarily due to inadequate infrastructure and insufficient government incentives. Failure to meet climate targets could mean fines of up to one billion euros per manufacturer, a potentially disastrous dynamic for the industry when combined with anticipated competition from lower-cost Chinese producers.

EU and Indonesia seal trade deal text amid rising trade pressures

Brussels is on a mission to diversify European trade

On 23 September, the EU and Indonesia finalised the text of a Comprehensive Economic Partnership Agreement (CEPA) after almost nine years of negotiations. The conclusion of the agreement was expedited by the desire of both parties to reduce dependence on the US and, perhaps to a lesser extent, China. The US has imposed tariffs of 19 percent and 15 percent on Indonesia and the EU, respectively. The implementation of the deal is targeted for the start of 2027 pending ratification by a weighted majority of EU member states, the European Parliament and the Indonesian parliament. Under the agreement, tariffs will be removed on about 80 percent of Indonesian exports to the EU. Jakarta will grant protections to European investors and lower import duties on EU exports of machinery, cars, and high-value farm goods.

The Indonesia agreement is part of Europe’s broader trade diversification efforts, including recent trade deals with Mercosur and Mexico, and ongoing negotiations with India, Australia, Thailand, Malaysia, and the Philippines. These agreements are all aimed at mitigating the impact of unpredictable unilateral trade measures and safeguarding free trade. The EU has previously opted for a maximalist approach in securing market access and regulatory harmonisation, whilst also reserving the right to exempt its agricultural sector from full liberalisation. The shock engendered by President Trump’s tariffs appears to have led to a much more pragmatic approach in Brussels.

The deal is far from final and there remain significant hurdles that could complicate ratification. Indonesia’s ban on unprocessed nickel exports to promote domestic processing has already drawn EU challenges at the World Trade Organisation. Another point of contention is the EU’s tariffs on palm oil and the EU Deforestation Regulation (EUDR). The EUDR will be applied from 30 December (though there has been recent talk of delay) and will ban imports of commodities that contribute to deforestation. These issues will provide fodder to interest groups in both Indonesia and the EU who may seek revisions to the existing text. If realised, the deal would nonetheless be a significant development in global trade, creating a market of over 450 million consumers.