From intelligent toilets to chip card plates: How TOTO became the most underestimated "hidden champion" in the AI boom.

In the global AI arms race, names like NVIDIA, TSMC, and Samsung frequently make headlines; but in the depths of semiconductor manufacturing, there is a group of lesser-known suppliers quietly enjoying the dividends of this technological feast. One of the most unexpected ones is the Japanese company TOTO - a global sanitation brand famous for its intelligent toilets. Founded in 1917 and starting as a company named Toyo Toki, this long-established enterprise has long been associated with the "Washlet" toilet seat in the public consciousness. However, amidst the wave of capital chasing chip stocks, the British radical investment firm Palliser Capital singled out TOTO, calling it the "most underestimated and overlooked beneficiary of the AI storage industry." The basis for this assessment is a long-standing business hidden within TOTO: providing key ceramic components for semiconductor manufacturing equipment, with its core product being the Electrostatic Chuck (ESC). As of the fiscal year ending March 2025, TOTO's ceramic business unit had sales of 50.3 billion yen, accounting for less than one-tenth of the group's total revenue of 724.5 billion yen. However, this business generated an operating profit of 20.4 billion yen, equivalent to about 40% of the group's total operating profit of 48.5 billion yen. According to TOTO's latest fiscal year forecast, the operating profit of the ceramic business unit is expected to further climb to 27 billion yen, covering more than half of the group's total operating profit, with a profit margin close to 40% - while the company's overall profit margin is only about 7%. Despite its small size, it is a true profit engine. Cross-border logic of ceramic technology When we look back at TOTO's entry into the semiconductor field, we will see that this was not a one-time leap across borders, but a natural extension of manufacturing capabilities. The core competitiveness of this long-standing Japanese company lies in its over a century of accumulated ceramic precision processing technology. Producing a complex-shaped toilet requires uniform shaping of the body, precise sintering in a high-temperature kiln, and millimeter-level grinding of arcs and joints - this entire process aligns closely with the manufacturing needs of high-end fine ceramics. In the late 1970s, after the second oil crisis, energy-efficient, highly heat-resistant fine ceramics quickly gained popularity in the industry. TOTO had started researching this area in 1976, realizing that its sintering technology and precision processing capabilities could play to its advantage in the fine ceramics market. It officially established the ceramic business unit in 1984. In 1982, it initiated the development of the Electrostatic Chuck, and by 1988, it achieved mass production. The company had already predicted that as semiconductor processes continued to evolve, the environment for wafer processing would become increasingly harsh, leading to a growing demand for special plasma-resistant materials. The role of the electrostatic chuck in chip manufacturing goes beyond just holding onto wafers. In core processes like etching and deposition, wafers must be firmly fixed and even within the chamber, maintaining a highly uniform temperature distribution. Any slight temperature difference or particle contamination can lead to a decrease in yield. The interior of the process chamber is an extreme environment with high-density plasma bombardment, which TOTO describes as comparable to lightning discharge. In advanced storage chip manufacturing like 3D NAND, each chip needs to stack over 100 layers of storage units, with highly challenging etch depths and widths - holes can be as deep as 10 micrometers with a diameter of only about 100 nanometers, requiring stringent temperature control within the chamber: if the temperature difference on the wafer surface exceeds 2 degrees Celsius, the yield will sharply deteriorate. Industry institutions point out that TOTO is a major supplier of the low-temperature dielectric etching tool (used for etching channel holes in 3D NAND) electrostatic chuck, using special ceramic materials that remain stable at extremely low temperatures. Another core product of TOTO's ceramic business is the AD (Aerosol Deposition) components, mainly used to protect the internal walls of semiconductor manufacturing equipment from plasma erosion, further reducing particle contamination. Both products are consumables, regularly replaced on an annual basis, creating a natural source of continuous orders. Forty years of downturns and turning points Contrary to its current image of high profitability, TOTO's ceramic business was almost a money-losing venture for a considerable period. In the late 1990s and early 2000s, the ceramic business unit briefly shone in fiber optic connector components. During the dot-com bubble period, the explosive expansion of data center communication infrastructure drove strong demand for fiber optic connectors and receivers, leading TOTO to enter this field using its ceramic micropore precision processing technology and temporarily boosting overall sales. However, the burst of the IT bubble and the subsequent Lehman crisis dealt heavy blows to the industry. Just as the industry was showing signs of recovery, the Great East Japan Earthquake hit in 2011. TOTO's main factory for optical communication business was located within 20 kilometers of the Fukushima Daiichi Nuclear Power Plant's evacuation zone, which was sealed off and controlled. Coupled with the competitive pressure of low-priced international products, the company had to significantly scale back this business. The collapse of the optical communication business had a heavy blow on the ceramic business unit. While the electrostatic chuck business had taken on more orders, its production was highly dependent on manual labor, requiring a large amount of manual operations from manufacturing to quality inspection. Despite the increase in sales, the profits were slow to catch up. From 2013 to 2020, the profit margin of the ceramic business was consistently below 10%; in 2019, a downturn year for the semiconductor industry, sales reached 16.7 billion yen, and the operating profit directly returned to zero. During this period, except for a few rare years, this business almost lost money or barely made any profit every year. Ultimately, it was a technological insight from its core sanitation business that helped TOTO break through. It is understood that when inspecting the porcelain surface of toilets, TOTO had long used high-precision microscopes to identify minor flaws to prevent dirt from adhering. When this testing method was transferred to the quality inspection process of the electrostatic chuck, technicians discovered foreign particles such as makeup dust adhering to the product surface, caused by insufficient cleanliness in the production environment and manual operations. Once the root cause of the problem was identified, the direction for improvement became clear. In 2018, TOTO separated its research and development base from its production factory in Nakatsu City, Oita Prefecture, relocating it to an independent operation in Chigasaki City, Kanagawa Prefecture, to avoid interference with production rhythms. In 2020, a new factory building was constructed in Nakatsu City, massively introducing automation equipment and AI visual inspection systems, embedding machine vision quality inspection throughout the entire process, significantly improving the yield rate. At the same time, production flexibility increased, with the ability to expand production by extending equipment operation times during economic upturns, and the ability to shrink capacity without layoffs during downturns. From 2020 to 2024, the production staff of the ceramic business increased by about 20%, and production capacity expansion continued. The year after the new factory building went into operation, demand and reform dividends were realized simultaneously: sales reached 30.1 billion yen in 2021, skyrocketing to 49.5 billion yen in 2022, with operating profit jumping to 19.4 billion yen, and a profit margin as high as 39% in the same year. Even in 2023, during a downturn in the semiconductor cycle, when sales fell to 36.5 billion yen, the profit margin remained above 30%. The nearly thirty years of loss-making business had undergone a thorough transformation. Market position and competitive landscape Currently, the global electrostatic chuck market is dominated by American, Japanese, and Korean companies. In terms of market share distribution, the American companies Applied Materials and Lam Research, with their deep integration with semiconductor equipment, each hold a considerable share; as well, the Japanese company Screen Semiconductor Solutions is an important competitor with close relationships with equipment manufacturers; TOTO, along with Japanese parts manufacturers like Kyocera, share the remaining market. In certain high-end storage chip manufacturing niches, TOTO has established relatively strong barriers. Some institutions believe that TOTO has a competitive moat in this area for up to five years, and predict that the ceramic business will achieve over 30% revenue growth in the next two years, driven by the NAND upgrade cycle and stable demand for consumables. Electrostatic chucks are consumables, typically requiring replacement in under two years, and continuous replacement orders form a stable revenue base. When equipment manufacturers deliver electrostatic chucks to TOTO, the subsequent replacement demand generates several times the continuous business volume of the initial order. The global electrostatic chuck market size is expected to grow from about $1.8 billion in 2022 to about $2.4 billion in 2028, driven by the expansion of storage chip demand powered by AI and data centers. Extending to downstream processes Beyond electrostatic chucks, TOTO is casting its gaze towards a broader semiconductor value chain. One of the important directions in the evolution of semiconductor processes is 3D stacking and advanced packaging, which involves vertically stacking multiple chips to overcome the limitations of planar dimensions. This poses new process requirements for packaging substrate materials, and the advantages of ceramic materials in heat resistance and precise dimensional control are well suited to this demand. Additionally, there are potential applications of ceramic components in post-processing steps like cutting. Junji Kamejima, manager of TOTO's ceramic business planning department, mentioned that ceramic materials will have broader applications in downstream processing equipment. The company plans to continue investing the operating profit from residential equipment business and the Chinese market into expanding the ceramic business. While the domestic residential market in Japan is shrinking, economic growth is slowing down, the data center and electronic device demand driven by the AI wave are filling the gap in a different way. TOTO's President, Tetsuaki Kiyota, also stated at an earnings briefing, "Even though the industry has its ups and downs, the semiconductor industry undoubtedly will continue to show exponential growth." Rethinking the Japanese manufacturing industry? TOTO's rise in the semiconductor industry also reflects the longstanding undervaluation of the Japanese manufacturing industry in the market. Japanese companies are generally not adept at communicating their diversified layout and transformation achievements to the outside world, with TOTO being a prime example - in its latest investor presentation materials, the semiconductor ceramic business only occupies one page, even though it contributes 40% of the group's profits. Palliser Capital mentioned earlier even urged the management to increase the information disclosure on this high-profit business, and to optimize capital allocation towards the ceramic division, believing that once reshaping market perception, TOTO's stock price could increase by 55%. After this news became public, TOTO's stock price rose by over 5% in a single day, accumulating over 60% in the past year, prompting Goldman Sachs to upgrade the rating from "neutral" to "buy." Stories like TOTO's transition from traditional industries to the semiconductor industry are not unique in Japan. Fujikura, starting as a manufacturer of cables in the steam engine era, has seen its stock price soar nearly 25 times in about two years with its specialized optical fiber for data centers; Nippon Electric Glass, founded in 1898 in silk spinning, is now a core supplier of glass fiber fabrics deeply tied to NVIDIA and Apple, with its stock price also experiencing a significant increase in recent years. Dainippon Printing and Toppan Printing are often associated with paper and ink, but they are actually global producers of chip packaging materials and photomasks. Japan's innovation path has always been different from the Silicon Valley-style disruption logic. They are better at levergaing the technical expertise accumulated from decades of deep cultivation of a craft and quietly transplanting it into new tracks when industrial demands change. From toilet porcelain surfaces to wafer surfaces, the span may seem disparate, but behind it lies the same knowledge system about materials, sintering, and precision processing extending across different scenarios. For TOTO, this meticulous and diligent business is now experiencing its moment of glory. This article is adapted from "Observations of the Semiconductor Industry" by YiQi Shao; GMTEight Editor: Yucheng He.