Start me up

The old Japanese saying Ku areba raku ari (苦あれば、楽あり'There are hardships and there are delights') is an apt one for the world right now.

We have a fragile and volatile global economy with elevated post pandemic debt levels all occurring amid a rapid energy transition. At the same time the world is dealing with the rise of authoritarianism and military adventurism from Russia and China and a politically divided United States focused on its internal and cultural issues.

There are no shortage of challenges, but as the saying suggests, periods of hardship often throw up just as many opportunities as threats. And Japan, with its focus on a new capitalism with environmental and social dimensions, is attuned to these external forces.

Australia, too, accepts it must focus on growth beyond traditional raw material exports and has updated its trajectory on decarbonisation.

Australia and Japan have been firm partners in trade and investment, energy, defence and other areas. We think the bilateral relationship can deepen further in the current climate and expand into exciting new areas. In fact, that’s already occurring with the two countries striking new accords on critical minerals and defence co-operation.

PwC’s Opportunity Knocks series is about looking past the turbulence and the noise to identify areas in which Australia and Japan can collaborate in solving some of the problems of our age in the areas of startups and innovation, critical minerals, decarbonisation and infrastructure and defence.

Progress on these fronts will enhance both nations’ prosperity and security, and contribute to sustainable development on a global level. Broadening the focus of the bilateral relationship to incorporate these elements will bring us even closer together and forge a brighter future for both countries.

In parallel, Japan and Australia have fostered the creation of vibrant technology sectors in which ideas born out of a garage or shared working space can wind up becoming $1 billion plus companies.

In Australia, think Atlassian (SaaS), Canva (design), WiseTech (logistics), Seek (online marketplace), REA (online marketplace), Airwallex (fintech), SafetyCulture (operation tech), Go1 (online learning), Culture Amp (HR tech) and Employment Hero (HR tech).¹

In Japan, think Preferred Networks (AI), SmartNews (media), SmartHR (HR tech), TBM (limestone-based materials) and Spiber (Biomaterials).²

Investment in the technology sector is growing rapidly in both countries, as is the share that tech accounts for of the main stock indices.

The technology sector also accounts for a growing share of employment and, increasingly, in both countries, is a career destination of choice for young professionals.

In this report we look at the strengths of Australia and Japan’s technology sectors and ways in which the two countries can support each other in innovation.

While Australia’s strengths are seen as being in financial services, mining and energy and agriculture, the country does punch above its weight in technology.

Australia is responsible for 2.3% of the world’s technology unicorns ($1b plus valuation companies) but just 1.6% of global GDP.

Within the technology sector, Australia’s strengths have been in business software, biotech and medical devices, media design and paytech.

That reflects the areas of specialisation of the current giants - local companies with global footprints: Atlassian, CSL, Cochlear, Canva and Afterpay.

The Tech Council of Australia suggests that mix may change with Australia excelling in creating startups in areas of industrial strength such as mining tech, ed tech, diversified fintech, gaming and esports, blockchain and crypto and virtual reality/augmented reality.

'These are the sectors on track to produce and attract the next round of Australian high value companies because Australia has domain expertise and there is a favorable incubation path,' the Council says in its recent report Turning Australia into a regional tech hub.

^{Source: Turning Australia into a regional tech hub, August 2022, Tech Council of Australia}

Japan’s technology sector has undergone rapid growth in the past five years. It is a key driver of investment and growth, and technology firms now account for 10% of the value of the Nikkei 225 index of Japanese stocks.

Venture capitalist Akira Kurabayashi, a managing partner at DNX Ventures, says startup firms are attracting the best young talent in Japan as more graduates reject the work practices and seniority-based hierarchies of establishment companies.

'The model of traditional employment has already collapsed, especially for younger generations. These guys are eager to control their own destinies and be more connected to the core purpose of the company.'

That view is echoed in a recent report from the Carnegie Endowment titled Ready for Prime Time: Japan's Maturing Startup Ecosystem says that startups now boast graduates from Japan’s top universities, who have historically sought employment in large, prestigious companies or within the civil service, among their leadership showing the change in social legitimacy of entrepreneurialism in Japan.

Like employees, investors are also warming to startup and technology companies.

That support is now available at all stages in the startup journey, Kurabayashi says, with VC investors supporting backyard startups with $1m or $2m in initial capital and large domestic and international VC firms supporting companies as they progress.

'It’s possible to grow a company from a startup to a $1b valuation in Japan now,' Kurabayashi says, citing construction management software company Andpad - which raised money from Sequoia Capital China and Salesforce Japan - as an example.

'Japan is having a lot of success in business-to-business space disrupting the tech functions of large Japanese firms with SaaS offerings,' he says.

Emre Yuasa, partner at Globis Capital Partners, says activity in the Japanese tech sector is growing rapidly and Japan was now producing two or three unicorns each year.

'In 2021 the amount raised by startups was $7b - that’s a more than six fold increase on 2013.' This level of investment is still small by Silicon Valley standards, but puts Japan on track to catch up to G7 players including France, Germany and the UK in terms of the scale of tech sector investment.

Globis has invested in 250 Japanese startups from initial funding through to IPO with more than 40 having publicly listed including Gree, Mercari and SmartNews.

Yuasa adds that Japan has considerable 'deep tech' expertise in satellites, robotics and AI that has not necessarily been commercialised. But he thinks investors are warming to the long-term but lucrative returns in deep tech and this an area where that may be appealing to investors and collaborators.

Yuasa says while the Japanese technology sector has been largely domestic focused, that is changing.

'Now there are some startups emerging that are targeting other markets and they have bilingual and diverse work forces.'

'One example is CADDi - it's an all-in-one platform for fabricated manufacturing parts - they have expanded to Vietnam, Thailand and the US in just a year.'

He says with the strong supply of investment capital for expansion, what startups really need to go abroad is human capital with a shortage of leaders who have successfully managed an offshore expansion.

'What they need is human capital. It is very rare to find those who have experience expanding their business overseas.'

Japan's top fastest growing sectors (2021)

Japan's top slowest growing sectors (2021)

^{Source: 1 Trillion Yen Milestone Within Sight, Japan Startup Funding 2021, INITIAL}

2022 saw a significant uptick in collaboration between Australia and Japan in technology.

Japan’s Suzuki Motors recently purchased a strategic stake in Melbourne-based vehicle maker Applied EV.

The funding from Suzuki enabled the company to defer plans for an IPO, while it gave Suzuki access to Applied EV’s autonomous vehicle technology.

Applied EV’s 'digital backbone' allows for the production of 'software defined vehicles' where technology controls steering and braking and acceleration, as well as windows and wipers and more. The backbone allows for manufacturers to sell add ons such as self parking and autonomous driving via software upgrades or apps.

Japanese microchip giant MegaChips recently invested $100m in Morse Micro as the lead investor in a series B funding round that raised $140m.

Sydney-based Morse Micro makes energy efficient long-range HaLow wifi chips. These chips allow for 10 times the reach of conventional wifi technology with less energy consumption. The chips are used in smart devices in homes and commercial premises in motion sensors, lighting controls, surveillance cameras, door locks, gates, ventilation and heating and cooling systems and supply chain tracking.

The deal has many synergies for the two companies. Japan is a large market for these chips, which are in short supply.

Morse Micro’s Michael de Nil says MegaChips brought significant expertise to the table along with capital.

'As well as being a customer they have very strong experience on the manufacturing side and in quality control,' he says in an interview with the Australian Financial Review.

'And the Japanese market is pretty massive with the strongest demand from industrial IoT applications that deploy thousands of devices in warehouses with sensors and actuators.'

Australian stem cell company Mesoblast took advantage of Japan’s modern regulatory regime in this area to establish a joint venture with Japanese pharmaceutical company JCR.

Under that arrangement, JCR has been granted the exclusive right to use Mesoblast’s cells to treat acute graft versus host disease, a potentially life-threatening complication of an allogeneic bone marrow transplant.

The cellular product, marketed as Temcell, is seeing increasing uptake as a treatment option and Mesoblast is pursuing approval to use it for paediatric patients in the US who have not responded to steroid based treatments.

There is an increasingly strong pattern of technology collaboration between Australia and Japan at an academic level that is borne out through the growth in applications to the Foundation for Australia-Japan Studies (FAJS) research grants.

These grants, sponsored by Rio Tinto, are designed to fund innovative bilateral collaborations that solve important problems and have good potential to attract expanded financial support from the public and private sectors in Australia and Japan.

The program has been in existence since 2018 and has seen growing interest in applications, although funding constraints cap the number of projects directly funded at a small number per year.

FAJS grant application by field (2020)

^{Source: FAJS Annual Report 2019-20}

Recent collaborations to receive funding include:

• University of Queensland and the University of Tokyo: Improving Future Energy Storage Systems at the Molecular Level (2020)
• Monash University and Cross Labs: Socially Conformant Behaviour for Autonomous Robots in Dynamic Environments (2020)
• RMIT University and National Institutes for Quantum and Radiological Science and Technology (QST): Quantum Diamond-Based Geophysical Sensor Technology (2020)
• Australian National University and Tohoku University: Contributing to Global Freshwater Security with Novel Solar Driven Desalination Methods
• RMIT University and the KAITEKI Institute (Mitsubishi Chemicals): Antibacterial packaging solutions (2021)
• Australian Nuclear Science and Technology Organisation and National Institutes for Qantum and Radiological Science and Technology: Neutron Capture Enhanced Particle Therapy (NCEPT) for Poor-Prognosis Cancers (2021)

FAJS chairman Murray McLean says, 'The FAJS grant rounds for collaborative research projects between Australian and Japanese partners have tapped into a deep reservoir of potential for research, and commercialisation of that research, in cutting-edge sectors that embrace health and medicine, new energy, decarbonization, specialist water treatment and computer and digital technology.'

Australia’s peak government research body, Commonwealth Scientific and Industrial Research Organisation (CSIRO) has historically been active in collaborating with Japanese industry and academic institutions.

CSIRO collaborated with Japan’s Furukawa Battery to create the UltraBattery back in 2009 combining a supercapacitor and a traditional lead acid battery to provide a power source for early hybrid electric vehicles.

More recently the CSIRO developed high fibre barley, BARLEYmax, has been incorporated in products produced by Teijin for Japanese supermarkets and convenience stores.

Yuko Wakamatsu, Senior Advisor, Global Partnerships at CSIRO told a recent Asia Society Australia forum that there was a huge opportunity for Australia and Japan to work together in research to solve decarbonisation and clean energy (which will be the subject of a separate specific report in this series) and other important challenges.

In that context, scientific collaboration between the two nations is now on the agenda of high level multilateral forums such as the Quad (the four-way partnership involving Australia, Japan, India and the United States). 

Australia and Japan’s deep and genuine bilateral relationship - with its underpinnings in trade and investment - provides a bedrock for increased collaboration between governments, academic institutions and private companies.

Australian players see big opportunities for collaborating.

The Australian Japan Business Co-operation Committee (AJBCC) CEO Richard Andrews says member companies see room for collaboration in areas ranging from renewable energy and decarbonisation to medtech, agtech, AI, robotics and space.

'There is a great fit between Australia’s high-quality research sector, innovative startup companies and population of avid technology early adopters and Japan’s proven capability to take technological innovations through to large-scale commercialisation. But to date, we have not necessarily had each other as top-of-mind innovation partners. That is rapidly starting to change,' he says.

He notes that the scientific collaboration lags the economic relationship. Japan is Australia’s 7th most common collaborator in scientific papers; Australia is Japan’s 11th. Whereas, on 2020 figures, Japan is Australia's 3rd largest trading partner, 2nd largest export market and source of foreign director investment.  

There is enthusiasm, too, in Japan in collaborating with Australian institutions and companies.

Silicon Valley is the first place Japanese firms will look to for partners or expansion, but it’s hard to break through given the scale of activity and the hustle culture of the US startup scene being the antithesis of the Japanese way.

This creates opportunities for collaboration in other Asia countries, as well as Australia.

'I do see a future there - in some sectors it makes sense,' Global Capital Partners' Emre Yuasa says.

'Australia is very strong in the use of drones. You have a huge area and a population that’s very spread out. It makes sense to use drones to monitor infrastructure. Japan is having similar issues.'

'We have huge infrastructure that needs to be monitored and maintained and increasingly few people to do it.

'We are using drones to monitor and maintain infrastructure - that’s one area where we can collaborate.

Yuasa says a lot of Japanese startups are now tackling Asian markets except China. 'Some want to get into Southeast Asia and Australia would be a good joint venture partner,' he says.

'Another advantage is that we don’t have much of a time difference. A lot of startups in Japan are now doing remote work. Japan has a dire shortage of engineers and there is the possibility for Australian engineers to work remotely for Japanese startups.'

Both governments are keen to create the conditions for these sort of collaborations to thrive. Japan’s Japan Financial Services Agency and the Australian Securities and Investments Commission established an MOU in 2018 to simplify technology investment across borders.

Fintech investment shapes as a shared focus with Fintech Australia and the Fintech Association of Japan signing an MOU in November 2022 to foster collaboration. The signing of the MOU was accompanied by Austrade’s release of its Fintech Playbook: Japan. 

Both countries have a strong interest in decarbonisation with Australia supplying two thirds of Japan’s energy needs from fossil fuel sources, and both nations committed to deep cuts to emissions.

Australia, with its potential in wind and solar and carbon capture and storage, offers opportunities for hydrogen production with the right technology and investment.

Lachy Haynes, a PwC partner specialising in energy transition, says Australia 'has all the building blocks to produce clean hydrogen at scale to service growing domestic and international markets.'

'Leveraging this scale, its natural resources, and emerging technologies will ensure Australia produces at low cost,' he says. 'Developing robust and reliable supply chains with hydrogen trading partners will place Australia at the forefront of the clean hydrogen industry.'

The recent meeting of the peak bilateral business body, the AJBCC, featured extensive discussion and interest in a joint approach to clean energy and decarbonisation.

The Australian and Japanese governments in 2020 signed a statement of co-operation on hydrogen and fuel cells, which was followed in June last year by the formation of a partnership on decarbonisation.

The OECD estimates that we need to invest $6.9t annually in low-carbon, climate-resilient infrastructure to reach a net zero economy. While the challenge is substantial, it also represents a huge technology and infrastructure opportunity.

Hydrogen is increasingly coming into focus with $160b of projects globally involving this clean-burning fuel source already having been launched, according to recently released research.

Joint Australian and Japanese efforts to establish a seaborn hydrogen trade passed a major milestone earlier in 2022 with the world's first liquified hydrogen tanker, built by Kawasaki Heavy Industries, picking up a test shipment of hydrogen produced in Victoria’s coal rich Latrobe Valley and transporting it to Kobe in Japan.

Backers of the Hydrogen Energy Supply Chain project, which requires the extracted carbon to be used or buried, believe it signals the potential emergence of a new low-carbon trade with Japan. The intention is to store the carbon produced in the process in depleted offshore gas fields in nearby Bass Strait.

Japanese fuel company Eneos’ collaboration with the University of Queensland has begun producing clean hydrogen via solar energy, but is yet to scale to commercial levels.

In South Australia, Mitsubishi Heavy Industries recently signed a statement of co-operation on developing a local hydrogen industry through research and application of technology. 

The challenges – and the opportunities – in the current environment are significant.

Australia and Japan have a big stake in solving some of the problems discussed here, along with considerable intellectual and financial capacity to deploy.

Perhaps the biggest risk is inertia and complacency with other nations mobilising to tackle these problems and reap these opportunities themselves.

We hope through this series to lay out a roadmap to accelerate progress together and foster collaboration and exploration to tackle the substantial issues that confront us.

As another Japanese proverb Anzuru yori umu ga yasashii 案ずるより産むが易し notes, giving birth to a baby is easier than worrying about it.