High-priced drones and Japan’s hidden AI champion

Hello, this is Kenji in Tokyo.

Since Donald Trump began his second term as US president in January, most of us living in this part of the world have probably got into the habit of checking first thing in the morning what he said, wrote or did while Asia was sleeping. This may have already led some of us to develop a sort of immunity to being shocked by his words and actions.

But the surprise attack against three nuclear sites in Iran by the US on Sunday morning surely came as a rude awakening for a lot of people, as it clearly escalated the war between Israel and Iran, deepening the crisis in the Middle East — and potentially for the entire world.

While a ceasefire was proclaimed by Trump and later confirmed by Iran and Israel, the “12-day war”, as it’s being called, has only underscored the need to enhance security, including on the economic front.

A number of forums and symposia discussing economic security have been held here recently, reflecting a rising sense of urgency among politicians, bureaucrats, academics and business leaders.

One of these was on June 20, hosted by the University of Tokyo with experts from Rand. The forum focused on securing a critical mineral supply chain, under the premise of a trilateral alliance between Japan, South Korea and the US Fabian Villalobos, senior engineer and professor of policy analysis from the American non-profit research institute, said critical minerals — including rare earths predominantly controlled by China — form the “bedrock of the value chain” for both civilian and military applications.

He said he is often asked, “What is the most important mineral?” But to him, that’s the “wrong question to ask”, because if any piece of the supply chain goes missing, the entire system becomes dysfunctional.

We’ve recently seen this in the auto industry, where American and Japanese makers were forced to halt production lines as China’s curbs on rare earth exports kicked in. This is not the first time China’s export restrictions have caused disruptions in global supply chains, either.

Potential bottlenecks of a different nature, meanwhile, may emerge from an entirely different source: the fact that vital tech components and materials are controlled by a small number of lesser-known companies in Japan.

Drone-flation

Chinese government regulations adopted in September requiring export permits for dual-use goods have more than tripled the price of drone components shipped to the US, according to a report by Nikkei’s Itsuro Fujino.

The analysis of Chinese customs data shows that the overall export volume of infrared devices, a key drone part enabling visibility in the dark, fell roughly 30 per cent between last September and April, while the export value rose nearly 50 per cent. The price per unit doubled during this period, stemming mainly from a tightened supply-demand balance. Exports to the US, which is the largest destination, dropped roughly 60 per cent by volume while the unit price jumped 3.5 times.

“Today, China has captured 90% of the U.S. market for commercial drones.” This statement comes from a 2024 report from the office of then-senator Marco Rubio, now the secretary of state, on the Chinese manufacturing sector. Rubio is surely well aware that Beijing could use drones as effective leverage in trade negotiations.

Essential threads

Nitto Boseki, or Nittobo, for short, may not be a household name, despite having a history that stretches back more than a century. But its products are so crucial for the AI supply chain that executives from Nvidia, AMD and Microsoft have been coming to Japan to pay it a visit.

In a collaborative work by Nikkei Asia’s Lauly Li and Cheng Ting-Fang in Taipei and Ryohtaroh Satoh in Tokyo, they explain how this relatively little-known AI-enabler is currently the only company in the world able to provide the highest-end glass cloth, a material essential for making high-powered AI servers.

Japan boasts several examples of seemingly obscure material makers that underpin the global tech supply chain. Nittobo, however, has a particularly interesting history. It was one of the “top 10 cotton-spinners” in Japan before second world war and helped lead the country’s economic reconstruction in the postwar era. As competition from other Asian economies pushed the entire industry to the corner, Nittobo became one of the most successful examples of a company transforming itself away from a sunset industry, while many of its peers perished. The boseki in its name, meaning cotton-spinning, is a reminder of that history of adaptation.

Low altitude, lofty ambitions

China is betting on its army of civilian drones to help it drive new sources of growth, writes the Financial Times’ William Langley.

The country dominates the production of commercial drones, accounting for 70-80 per cent of global supply, according to analytics provider Drone Industry Insights.

There were about 2.2mn drones registered with the Civil Aviation Administration of China by the end of last year, deployed to do everything from controlling crowds to fighting fires.

But Beijing’s ambitions go much further than that. The CAAC expects the market size of the low-altitude economy — which refers to airborne activities occurring less than 1,000 metres above ground — to grow fivefold to Rmb3.5tn by 2035.

That means finding new uses of the technology from private companies. The logistics and food delivery sectors are early adopters, with Meituan and its rivals already employing unmanned aircraft on some routes.

The country’s farms are also big users. About a third of industrial drones are also used in agriculture or forestry, according to 2022 figures from the Guanyan Tianxia Data Center.

But some in the highly competitive UAV industry say that it will be difficult to replace the buying power of big government and military buyers, while strict export controls have limited their potential reach overseas.

Double talk

Executives of two European tech companies recently sat down with Nikkei Asia to discuss their respective strategies.

Marc Biron, chief executive at Belgian chipmaker Melexis, explained how his company is leveraging its production capacity in “neutral” Malaysia to navigate geopolitical headwinds.

Speaking to Norman Goh in Kuala Lumpur, Biron said his company’s facility in Kuching, Sarawak, has been shipping chips to both the US and China as a “deliberate hedge” against mounting global trade fragmentation.

Biron is counting on Malaysia’s neutrality which he likens to Switzerland. “That neutrality allows us to manufacture for Asia, China and the US, from a single base.”

Meanwhile, Cheng Ting-Fang spoke with Jos Benschop, executive vice-president of technology at ASML, on the development of the next generation of cutting-edge lithography machines that would be advanced enough to serve the chip industry’s needs from 2035 and beyond.

The world’s largest semiconductor equipment maker is partnering with Carl Zeiss for this farsighted development push.

Suggested reads

1. How red tape amplified China’s rare earth disruptions (Nikkei Asia)

2. Taiwan has upped the ante in the cold war over chips (FT)

3. SoftBank chief pitches $1tn AI and robotics complex in Arizona (FT)

4. Alibaba to merge food delivery, travel units in ‘instant retail’ drive (Nikkei Asia)

5. India’s underused metros tap ride-hailing apps to lure commuters (Nikkei Asia)

6. Australia regulator calls to add YouTube to under-16s social media ban (FT)

7. Sri Lanka car market tilts towards EVs with BYD, other Chinese leading (Nikkei Asia)

8. Chinese cyber threat to Europe on par with Russia’s, warns Czech president (FT)

9. Trade curbs on China send US ethane prices sliding (Nikkei Asia)

10. Chinese factories rush to reduce reliance on Donald Trump’s US (FT)