SWCC Showa: rewiring Japan

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Before Japan was unified under the shogun in the 17th century, it was ruled for centuries by a patchwork of feudal lords. Their reluctance to cooperate and insistence on ancient privileges held back national modernisation and development for generations.

That history comes to mind when Praveen Kumar, investment manager of Baillie Gifford Shin Nippon, describes Japan’s “weird” national power infrastructure and the opportunity it presents for electrical company SWCC Showa.

“Japan is one of the few leading industrial countries without a central national grid,” he says. “It’s got this unusual, regionalised setup where the east of the country operates on a different mains frequency from the west.”

It’s a legacy of the country’s adoption of different generator systems from the US and Germany in the late 1800s. In the past, it meant some lights and other electrical equipment would work in Tokyo but not in Osaka.

Nowadays, almost all products can overcome that difficulty, but it still restricts how much electricity can be transmitted around the country. During emergencies or periods of high demand, it’s a problem.

As Kumar describes it, the archipelago’s energy market is divided up between 10 electric power companies, or EPCOs, each with a local monopoly and cosy political connections. The lack of a streamlined, standardised structure was exposed by the 2011 Fukushima nuclear catastrophe, which left some regions lacking power while others had plenty.

Even after that, lobbying and foot-dragging by the EPCOs have left resource-poor Japan badly in need of an infrastructure upgrade. It must accelerate a transition to renewable energy that matches politicians’ rhetoric, meets soaring demand from new sectors, such as AI-related data storage, and trains engineers from an ageing, shrinking population.

“The current system is a nice business for local companies as they control everything from generation to transmission to sales,” says Kumar. “The government is trying to break that up so there can be a more unified system nationwide using state-of-the-art components. That would be good for Japan but not necessarily for the EPCOs, which don’t have much incentive to modernise outdated infrastructure.”

Diamond amid the dull

Kumar discovered SWCC through a magazine article and bought a stake last year after meeting management. He holds the company up as an illustration of how being open to new ideas helps him find undervalued ‘diamonds’ even within Japan’s most stagnant sectors. SWCC’s strategy, he says, is to “focus on the nuts and bolts necessary to allow Japan’s renewable energy revolution to take off”.

Kumar praises the “visionary leadership” of SWCC chief executive Dr Takayo Hasegawa. Before taking charge in 2018, Hasegawa worked in research and development for decades before shattering Japan’s extra-tough glass ceiling to assume the top job.

“I got in touch on the strength of that article, and I’ve since met her a few times,” he says. “With a PhD in superconductivity, she has immense technical knowledge as well as a good focus on return on capital, shareholder returns, etc. Most importantly, she has strong views on how the industry might evolve and is prepared to bet on this through internal changes.”

Kumar credits Hasegawa with spotting an opportunity in the country’s goal of almost halving greenhouse gas emissions by 2030 compared to 2013’s levels and achieving carbon neutrality by 2050. This requires a shift to a ‘smart grid’, which will use software, sensors and smart meters to regulate the supply and demand of energy, resolving the intermittency problems associated with renewables.

Hasegawa has positioned the firm as the handiest supplier of tools essential for this long-term change. These components are the ‘picks and shovels’ of Japan’s infrastructure overhaul and are plugged into the rising demand for data storage capacity and a need for better batteries.

Reducing dependency

The stakes are high. Japan has to import 90 per cent of its energy needs, compared to 41 per cent in the UK and 20 per cent in China. Upgrading and restarting the nuclear power plants shut down after Fukushima has taken longer than planned.

“The Japanese rely on others to keep the lights on,” says Kumar. “They must pay whatever suppliers demand, and disruptions such as Ukraine can send energy bills through the roof.

“Renewables are the biggest opportunity in the long run, as Japanese geography suits them. If the government follows through on its plan to install or increase renewable capacity and people start working in that direction, SWCC’s products and services can play a crucial role. Hasegawa San’s genius lies in exploiting a very real and exciting long-term opportunity.”

Hasegawa has sold off loss-making divisions and cut non-core manufacturing. She consolidated divisions previously isolated from one another and got the research and sales divisions to talk to each other.

She set new performance benchmarks and made division managers accountable for shareholder returns and improved profitability.

Diehard workplace sexism means female leaders are still rare in Japan, especially so in engineering. As well as being a role model, Hasegawa has promoted talented women into decision-making roles.

“Energy infrastructure isn’t something we normally invest in as we don’t see attractive growth companies there,” Kumar says. “But SWCC is a company helping to modernise an entire industry.”

Star product

SWCC’s business model leans heavily on its star product, SICONEX. The family of branded components connects cables to equipment such as switches and transformers in electricity substations, which adjust voltages to ensure the reliable delivery of electricity to businesses and homes.

Its earthquake-resistant connectors are more compact than competitors’ and easier to install. “They’re almost plug and play, like a USB stick,” Kumar comments.

“Hasegawa San has done a fabulous job of turning a traditional electrical cable and wire manufacturer into a fast-growing component provider and consultancy,” he adds.

“With SICONEX, she doubled capacity in an established product that management had failed to push, having identified it as a product that lots of people wanted and no one could copy.

“But the strategy is not just to sell the product. It’s also to train customers on how to install it via augmented reality and other technologies. Adding this consulting element further increases revenue.”

Other key products include e-Ribbon, bundles of ultra-thin, easy-to-install optical fibre, which meets increasing demand from datacentres, and MiDIP, SWCC’s oxygen-free copper wire, largely for use in electric vehicle batteries.

As Kumar describes it, the ‘Hasegawa effect’ exemplifies Baillie Gifford’s belief that individual leaders can transform a business’s culture – and growth prospects.

“We spend lots of time trying to speak with them, understand them and be as supportive as possible because they see opportunity before others,” he explains. “It’s no good if you go after the opportunity that everyone knows about – you’re not going to make any money.”

Important information

This communication was produced and approved in September 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the FCA.

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