［Podcast］ How to sell innovation in cut-throat, low-margin industries

Some industries need to be dragged kicking and screaming to innovation.

When margins are tight and profits are small, CEOs often don’t want to spend a dime on the promise of increased efficiencies or long-term savings, and so external leverage is needed.

Today we talk with Shinya Shimizu, founder and CEO of Elephantech, who explains how he found that leverage in his mission to make the global technology supply chain more environmentally friendly.

We explore how Elephantech and other startups are helping the world meet net-zero targets, strategies for scaling manufacturing startups, and how you can make money while doing good in the world.

It’s a great conversation, and I think you’ll enjoy it.

Welcome to Disrupting Japan. Straight Talk from Japan’s most successful entrepreneurs.

I’m Tim Romero and thanks for joining me.

Circuit boards are one of those things that are everywhere, but that we really don’t think about very much. Personally my only direct experience with circuit boards was years ago and involved a fair amount of cursing and a lot of solder burns.

But printed circuit boards or PCBs, or a $90 billion global industry that is highly standardized, tightly controlled, and surprisingly damaging to the environment.

Well, Shinya Shimizu and the team at Elephantech are changing that, they’ve not only developed the technology to re-engineer PCB manufacturer to be more environmentally friendly and less expensive, but they’ve also built their first factory and are now selling to some of the world’s largest manufacturers.

Elephantech is a great example of how startups can succeed while making a positive contribution in this world. And Shinya also gives some great practical advice about how to sell to large enterprises as a new startup. How to raise money for capital intensive growth, and how to introduce new innovation into a low margin cutthroat industry. It’s really quite an amazing story of their journey from a small Kickstarter project 10 years ago to make a pen that lets you draw working electrical circuits to selling PCB technology to some of the world’s largest manufacturers today, to just maybe fundamentally changing the way circuit boards get made tomorrow.

But, you know, Shinya tells that story much better than I can. So, let’s get right to the interview.

Tim: So, we’re sitting here with Shinya Shimizu, the CEO and founder of Elephantech. The first company in the world to mass produce printed circuit boards using an inkjet printing, echo friendly, sustainable manufacturing process.

Shinya: Yeah. Sure.

Tim: That’s longer to say than I thought. But thanks for sitting down with us.

Shinya: You’re welcome. So, I’m really happy to be here.

Tim: Well, I try to explain what you do in that big mouthful of an introduction, but I think you can probably explain it better than me. So, what does Elephantech do?

Shinya: So, Elephantech is going to completely change the way of manufacturing electronic circuits, completely changed with drastically, environmentally better, of course, and cost effective way. And our goal here is like probably in 10 years, or at least 15 years from now, the most of the circuit boards in the world, I mean, including iPhone and laptop, any kind of electronic circuits are made by our technology.

Tim: Well, and I think kind of the core of your innovation is most circuit boards today are produced using a subtractive process…

Shinya: Yeah. Subtractive method.

Tim: And you use an additive method.

Shinya: Right. I said completely different way of manufacturing. Electronic circuit means existing way uses subtractive method and ours additive, purely additive manufacturing. That’s the biggest difference. So, the conventional way is subtractive, which means, so, circuit boards are copper wires are placed on plastic boards, that circuit boards. And to make the circuit boards existing way, like laminate the copper foil to the plastic board and then remove unnecessary part from the copper file so that you use the remaining part as wires. But during the process, 80 or 70% of copper is dispersed and not used. So, which is material efficiency is very bad, and cost-wise, it’s bad. So, that’s the existing way. Our way is completely different. So, we first print the copper with inked printing technology and then increase the thickness of copper by plating technology. Plating makes the copper crystal grow. So, it’s purely additive. So with that technology, it’s inherently good.

Tim: Right, right. Well, less waste all around. So, like you’re claiming a 70% reduction of copper use and 95% reduction of water use. And 75% reduction in CO2 emissions. And I was amazed at how much circuit board production contributes to CO2 emissions.

Shinya: Absolutely. Yeah. That’s probably bigger than anyone think. Apple, I would say, for example, Apple is one of the biggest carbon producer in the world because they are making a lot of things. But 10% of their total carbon footprint, including their travel, including manufacturing and any kind of carbon footprint, 10% of them are from circuit board manufacturing.

Tim: So, that’s not just their supply chain, that’s their total carbon footprint.

Shinya: Total Carbon footprint.

Tim: Holy Cow. That is really a big contribution. That’s big.

Shinya: That is big. And Apple is, of course aiming at net zero by 2030. So, that 10% is significant.

Tim: Yeah. Well, tell me about your customers. So, who’s using Elephantech technology and what’s their motivation for doing it?

Shinya: Yeah, the motivation is mainly decarbonization. Exactly, decarbonization. So, last year — I cannot really talk about a lot about like undisclosed client of course, but in an already disclosed clients like Litton for example. Litton is not the most famous company in the world, but it’s a big company. So, one fourth of global laptop keyboards are manufactured by Litton. So, last year we had a joint press release of MOU sign kind of ceremony with Litton and Litton motivation to use our board exactly decarbonization. The point is like Litton customers are normally Western countries. I would say it’s not their customer. It’s not normally Taiwanese companies. So, they’re European companies or North American companies. And they really choose supplier by environmental aspect.

Tim: I really want to dig in on how those consumer pressures are changing supply chain in general. But before we do that, I want to talk a little about you. So, I mean, you founded Elephantech back in 2014.

Shinya: Yeah, it’s long ago.

Tim: But it was AgIC, right? As a Kickstarter campaign.

Shinya: Sure. Oh, you know that.

Tim: Oh, I’ve been fans of you guys for a long time.

Shinya: Thank you. Yeah, thank you.

Tim: Yeah. You had that cool little marker where you could…

Shinya: Yep, yep. Yeah, it’s cool. Little marker.

Tim: Tell us about that.

Shinya: Yeah. Before starting that company. So, I was working for McKinsey as a management consultant. And while working for McKinsey, I was looking for interesting scientific things especially from the universities. And because I believed, and I now still believe that university technologies are normally underused. So, there are a lot of technology that can potentially change the world, especially in Japanese universities, I would say. So, I was looking for innovations and I found this technology that is invented by a professor Kawahara, who is now the professor at the University of Tokyo. But the circuit markers, I’d say it is definitely not directly connected to our final goal.

Tim: Yeah. Why the kickstart? So, I mean, when I first thought saw that, I was like, oh, well that’s kind of cool. But what are these guys going to do with it? So, did you know your direction from the beginning?

Shinya: No. So, this is my first company and when I founded this company I was 25 years old. And honestly, so I got lost, I would say. So, I mean, the technology itself was really, I would say immature. It’s not as sophisticated as what it is right now. So, that professor’s technology cannot directly print metal on plastic substrate. And all of the circuit boards are basically plastic substrate. And they started from printing copper on paper. It’s interesting and it’s can be a good seed, but copper printed paper cannot be used for industrial use.

Tim: Okay. So, just from the outside, I was watching you guys go from like the handheld markers for drawing circuits to a kind of an inkjet on printer and now on the circuit board. But these were different technologies.

Shinya: Honestly. Yes. Honestly, yeah. I mean, so we say like to investors normally, so it’s all connected, but scientifically, so these technologies are not directly connected, I would say.

Tim: Well, I guess there’s a lot of kind of know-how and experimentation that connect them.

Shinya: Sure. So, the first period is like not directly connected to what we are doing currently, but during the process, I found that many people, at least more than I expected, are interested in new technology of manufacturing circuit boards and real printed circuit boards can have a significant market. Honestly, before finding this company, I knew nothing about PCB industry, so during the first period that research do those things and…

Tim: Well, so, this is really interesting. So, I mean, you were coming as an industry outsider and you’re not coming with a deep technical knowledge of the technology. So, how did you develop the new technologies for each generation of progress?

Shinya: Well, honestly, I am the first author of the patent we are using currently and I’m kind of weird guy. I designed our first CPU when I was 17 years old.

Tim: Oh, wow.

Shinya: Drawing star diagram and designed our original CPU and build a formula car when I was at university. So, I can do research and those business opportunity investigation.

Tim: So, you had to spend a lot of time going mentally back and forth between the business needs and the…

Shinya: Yeah, sure. But even now, honestly.

Tim: Still?

Shinya: Still.

Tim: But it’s fun. Right?

Shinya: It is. I mean, honestly, I’m tech guy. I love technology. I love science. If I cannot do any kind of developmental research at this company, so probably I will lose 70% of my fund.

Tim: Oh, I know exactly what you mean. On your journey, you rebranded to Elephantech in 2017. So, why the rebranding and why elephants?

Shinya: The first only answer here is I had a slight trademark issue. And second is like, anyway, I want to rebrand our company because we are completely moving from those circuit marker to industrial circuit boards, which are so different. Then why Elephantech. So, it’s a globally recognizable original name. Elephantech and this logo is great. When I work in China, Thailand, India, and those Asian countries, I mean normally Japanese company name is kind of hard to remember.

Tim: Yeah. They’re not very unique.

Shinya: Yeah. And Elephant is really unique, right? So even in any of those Asian countries, they love Elephants, no one hates Elephant.

Tim: True. Only positive associations.

Shinya: Yeah. And from the beginning, our market is not in Japan. Most of that market in global, and I would say Asian countries. So, I mean, I wanted to come up with an idea, the company name that is either to be remembered by Asian country peoples.

Tim: Okay, that makes sense. So, Elephantech has raised around well over about $80 million so far, right?

Shinya: $80 million. Yes.

Tim: And you’ve raised a lot of it in debt financing.

Shinya: Yes. Debt financing.

Tim: So, this is something that I think a lot of — we’re seeing more and more of it in Japan, but I think a lot of western founders would love to raise debt rather than equity. So, how did that come about? How did you get banks to loan money to a startup?

Shinya: So, honestly, the biggest follow wind is the government policy. Most of the debt we use is kind of government supported debt. So, government is not directly debting the startups, but giving debt to startups. But I mean, they have some, I don’t know the word…

Tim: Loan guarantees.

Shinya: Yeah. Loan guarantee, for example, 50% loan guarantee to the bank or those startup acceleration policy is one follow wind, but it’s not a decisive factor. Another important factor is we use the money to specific use, especially capital expenditures. So, the biggest difference between the debt and equity is that is more strict for the use of the money. So, but for most startups, especially in software based startups, the use of money, it can vary and it’s hard to have a forecast. How do you use your money over like next three years? But in our case, we build a factory, so we need capital expenditures. So, that’s a clear use of the money. So, that’s one factor.

Tim: So, it’s moving more towards project finance, hard assets, land, things that banks are more comfortable dealing with. That makes total sense.

Shinya: Being comfortable is really important. And no one…

Tim: For banks especially.

Shinya: Yeah. Yeah. No one put money into the uncomfortable areas.

Tim: Let’s get back into the overall marketing and the overall market for this because I mean, I’m also deeply invested and deeply committed to like green transformation and decarbonization. It’s a big part of what I do at JERA Ventures. But it’s challenging. Most founders really struggle with bringing their products to market in this.

Shinya: We do.

Tim: Yeah. We’ve been doing it successfully, but in a market that I would not have predicted would be a ripe one for decarbonization because it’s big, printed circuit boards it’s a $90 billion global market. But it’s one that tends to be driven by very low margins and very tight operating constraints. As you mentioned before, there’s this pressure from the consumer facing companies like Apple to become carbon neutral, to be more eco-friendly. Is that the main driver or are there other factors that are driving your sales into this traditionally very low margin business?

Shinya: That’s great question. And there are few, let’s say discrepancies in this market, as you mentioned, circuit board manufacturing is normally very low margin, which means, so they don’t have a motivation or capability to transform their manufacturing technologies or they don’t do green transformation honestly. But circuit board manufacturer are the full manufacturer circuit boards so they need to do something. On the other hand, Apple, HP, Logitech or those global brand owners have a quite high motivation to decarbonization of circuit because circuit board is a high carbon, low price product.

Tim: Oh, I see. So, from their point of view, even if the price of the circuit board increases by 10%, it could significantly impact their carbon footprint without impacting their price much.

Shinya: Sure. As I mentioned, so 10% of Apple’s carbon footprint is circuit boards, but the cost wise, it’s like probably less than 1%. So, circuit board manufacturer is a low margin, but in cost efficiency, carbon per cost of circuit boards is very high. So set makers, brand owners have high motivation.

Tim: That makes a lot of sense. But the other thing is the subtractive process is an incredibly complex process. There are multiple steps. The additive process is really quite simple.

Shinya: Very simple.

Tim: Theoretically it should be cost competitive as it gets refined. Is that something you see on the horizon or is there something that intrinsically makes it more expensive than the subtractive process?

Shinya: Well, there’s nothing which is intrinsically more expensive than subtractive method. There’s simply two things. There’s one’s volume. So, one is accumulation of small improvement. Subtractive process has probably almost like a hundred years of history. So, all the small improvements are done, which is incredibly optimized. And the volume of the material used for subtractive method is incredibly cheap. One quick example here is like currently the subtract method uses copper laminated plastic film, but copper laminated plastic film and plastic film itself, the price of them are almost equivalent. Almost same. That’s insane, right?

Tim: Why?

Shinya: Because plastic film manufacturers do a kind of integrative line from plastic material, copper material to copper laminated plastic film. So, it’s a kind of integrated line. So, they make it for million, tons of tons of amount. So, the price is incredibly cheap as cheap as plastic film itself. That’s insane.

Tim: I’m surprised because copper is not cheap.

Shinya: Not cheap, not cheap. Especially recently.

(Continued on Disrupting Japan)