Japan, once a world leader in microchips, is now racing to catch up

TOKYO – It was the spring of 2021 and the demand for new cars was increasing. But as consumers, full of savings accumulated during the pandemic, rushed to dealerships around the world, one Japanese carmaker after another suspended production pending imports of a key component: semiconductors.

Coronavirus outbreaks had closed chip plants, and an unexpected surge in demand for electronics from people facing the pandemic at home had limited supplies. Nissan alone envisaged a production cut of half a million vehicles.

The chip shortage – a blow to the “head” of the Japanese economy, in the words of Yoshihiro Seki, a lawmaker who leads a semiconductor study group – has awakened the country to the fragility of the supply chains that underpin its industries. most important.

This has led to a broad reconsideration of how Japan can protect its economy, the third largest in the world, from both unforeseen economic shocks such as the pandemic and looming risks such as escalating tensions between the United States and China. These risks were highlighted this week when the House speaker, Nancy Pelosi, visited Taiwan, prompting an angry response from China.

The reconsideration covers a number of sectors, including energy, but semiconductors are a major concern. To increase production, the Japanese government is investing billions of dollars in its domestic chip industry and is providing huge subsidies for joint ventures with companies from Taiwan, a major semiconductor supplier, and the United States.

Breaking with its past economic nationalism, it is also seeking to form a coalition with allies such as the United States and the European Union to build a semiconductor supply chain that is less geographically concentrated and therefore better insulated from disasters and instability. geopolitics.

The latest move came on Friday, when Japan and the United States announced they would create a joint research center for advanced semiconductors that would be open to other “like-minded” nations.

“The era when the world is at peace and it doesn’t matter who supplies our semiconductors is over,” said Kazumi Nishikawa, director of Japan’s Ministry of Economy, Trade and Industry, or METI, in a press release. interview.

For both Japan, once the world’s largest chip maker, and the United States, the birthplace of semiconductors, a decade-long erosion of their chip-making capabilities has led them to catch up. Last week, Congress passed a huge industrial policy bill that included $ 52 billion in subsidies and incentives to revitalize the US chip industry.

The new efforts are seen in both countries as critical to economic and national security as China expands its chip market share and takes an increasingly aggressive stance towards Taiwan which increases the risk of disruption in the flow of chips produced. there.

The question is whether the initiatives will be sufficient. Japan once produced more than half of the world’s semiconductor supply, powering Toshiba calculators and Nintendo consoles, but its market share has dropped to around 10 percent as globalization has prompted companies in rich countries to outsource chip production. abroad.

Companies such as Taiwan Semiconductor Manufacturing Company, or TSMC, which specialize in manufacturing chip-to-order and have received extensive government support have amassed enough customers to realize economies of scale that made it foolish for companies in Japan and elsewhere to continue manufacturing most. of the chips in -Home.

Japan is still the market leader in some essential semiconductor manufacturing products, including specialty chemicals and silicon wafers. The country also has almost a monopoly on some of the highly specialized tools used in the manufacturing process.

But there is a lack of experience to make the cutting-edge chips that are only produced in Taiwan and South Korea. And, while the geopolitical calculation on supply chains has changed, many of the economic factors that have caused market share to shrink Japanese chips have not changed.

This will make it difficult, and potentially very costly, for Japan to revive the sector, analysts said. The semiconductor study group led by Seki, the Japanese lawmaker, has estimated that success will require an investment of at least $ 78 billion.

“What they are trying to do is reverse more than 20 years of under-investment,” said Damian Thong, head of Japanese equity research at the Macquarie Group.

Regardless of whether the firm is economically viable or not, Japan believes it has no choice but to try.

The first steps are already taking place in Kyushu, southern Japan, known as Silicon Island due to its location as the hub of the country’s once thriving semiconductor industry.

In June, METI announced it would provide $ 3.5 billion in subsidies to build an $ 8.6 billion chip foundry in Kumamoto, a prefecture on the island’s west coast.

The factory, the first to receive government support under the new initiative, is a joint investment between TSMC, which produces more than 90 percent of the world’s most advanced chips, and two major Japanese companies, Sony and Denso, which supplies components to Toyota.

It will be Japan’s most advanced manufacturing facility, albeit still behind the world’s leading factories. Production is expected to start by the end of 2024.

TSMC is expected to employ more than 1,700 workers in the region, with 300 employees from Taiwan. Universities in the area are gearing up to train hundreds of new engineers to supply the industry.

The project is “the largest investment we have ever had,” said Keisuke Motoda, a Kumamoto Prefecture official who oversees the government’s relations with the semiconductor industry.

Last month, the Japanese government also announced it would provide nearly $ 690 million to a joint venture between Kioxia, a Japanese company, and US firm Western Digital to upgrade a chip facility in Western Kansai.

The new investments won’t even begin to meet the seemingly bottomless demand for chips from Japan’s largest industries. TSMC’s facility is expected to produce 50,000 to 60,000 wafers per month. A single vehicle can have hundreds of semiconductors, and Toyota alone produced nearly 8.6 million vehicles worldwide last year.

Japanese officials, however, hope that TSMC’s investment will kickstart the development of an ecosystem that could one day serve as a supply chain disruption insurance policy.

That insurance policy would most likely include partnerships with allied nations.

Semiconductor manufacturing is one of the most complex industrial processes in the world and no country has the ability to make the process entirely domestic.

Prime Minister Fumio Kishida has made global connections a priority in recent talks with his counterparts in the United States and the European Union. In May, Japan’s economy minister visited a semiconductor research facility in New York to discuss cooperation on developing next-generation chip technology.

The effort by Japan, the United States and their allies is creating a “new geopolitical landscape,” said Patrick Chen, head of research at CLST, a subsidiary of the brokerage firm CLSA.

For trade in general, but especially for semiconductors, “the world is divided into two camps,” he said, “the Pan American allies – which obviously include Japan, Korea and Taiwan – and, on the other hand, we have artists of the caliber of China, Russia and perhaps North Korea ”.

As for Japan’s domestic investment, Hideki Wakabayashi, a professor at Tokyo University of Science and a leading government consultant on semiconductor policy, believes that, with sufficient government support, the country could win back at least 20% of the market. of semiconductors by 2030.

Even with subsidies, however, it doesn’t make economic sense for most Japanese companies to invest in in-house chip manufacturing, said Masatsune Yamaji, senior analyst and semiconductor expert at consulting firm Gartner.

“If making a factory produced a lot of money for Japanese companies, then they would invest in manufacturing capacity,” he said, referring to a semiconductor manufacturing plant. “But, in the past 15 years, Japanese companies have not invested in the evolution of the semiconductor manufacturing process.”

Japanese chipmaker Rohm has received millions of dollars in grants from METI to build more energy-efficient chips for industrial applications at its overseas facilities.

Although the company does some of its operations in Japan, the funding isn’t enough to convince it to move its production home, said Tatsuhide Goto, the company’s public relations manager.

Just like the government does, the company is concerned about geopolitical risks for its overseas operations. But, at least for now, he said, “we are not considering changing our business model.”

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