Japan has long been celebrated for its rich culture, culinary delights, and efficient transportation networks. However, one aspect that frequently surprises visitors is the country’s advanced toilet technology, particularly the prevalence of bidets with a range of features including sound effects and high-powered cleaning jets.
In a notable industry shift, Toto, Japan’s largest bidet manufacturer, is intensifying its efforts in semiconductor production, specifically AI chips. This move stands in stark contrast to recent developments at Allbirds, the sustainable shoe brand that recently transitioned to chip manufacturing after facing significant financial setbacks. Unlike Allbirds, which has jettisoned its original mission, Toto has been fabricating components for AI infrastructure for decades, making its pivot a continuation of its long-standing business rather than a complete departure.
The so-called “Allbirds Effect” came into play recently when the shoe company, after losing 99% of its stock value, rebranded itself as NewBird AI and garnered a staggering investment that propelled its market cap significantly, albeit temporarily. This latest trend, where companies incorporate “AI” into their branding to attract investor interest, can be seen through Toto’s recent success. The firm reported record annual earnings, with operating profits reaching ¥53.8 billion (approximately $338 million) and net sales soaring to ¥737.4 billion (around $4.6 billion).
Toto’s advanced ceramics division, which specializes in manufacturing precision components used in semiconductor fabrication, contributed an impressive ¥28.9 billion ($181 million) to operating profits, further solidifying the company’s role in the AI chip supply chain. In response to this growth, Toto announced plans to invest ¥30 billion ($188 million) in expanding its capacity and R&D initiatives related to semiconductor ceramics through fiscal year 2028.
Palliser Capital, a London-based activist investor that recently acquired a stake in Toto, labeled the company as “the most undervalued and overlooked AI memory beneficiary.” Their analysis suggests that Toto’s ceramics segment presents a multi-year growth opportunity linked to the AI sector, predicting over 30% annual growth potential.
The AI chip supply chain is often overlooked, populated by smaller and lesser-known companies that have pivoted from unrelated industries into semiconductor manufacturing. For instance, Ajinomoto transitioned from food production to the electronics sector, while Lasertec and SCREEN Holdings have become vital players in the AI chip manufacturing process. This reflects a broader trend where Japanese companies have carved out significant monopolies in semiconductor-related fields.
Despite the current optimism surrounding corporate governance reforms in Japan, there are concerns about the market’s future. Initiatives aimed at improving shareholder value, driven by the Corporate Governance Code introduced in 2015, have resulted in better returns and enhanced board independence. Nevertheless, many Japanese companies still maintain high cash holdings relative to assets, creating a disconnect with foreign investors who are eager for a more aggressive reinvestment strategy.
Prime Minister Sanae Takaichi has indicated intentions to revise the Corporate Governance Code to encourage companies to focus on reinvesting surplus cash into the economy—targeting improvements in wages and capital expenditures instead of stock buybacks and dividends. The intersection of these factors positions Toto, and potentially other Japanese companies, to take advantage of both the burgeoning AI market and the evolving corporate governance landscape, but it remains to be seen how these dynamics will unfold.
