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What to save the lost 20 years of the Japanese chip industry?
A materials scientist-turned-entrepreneur, Xie Yongfen opened her company's second lab in Kumamoto Prefecture in southwestern Japan late last year. She is currently considering whether to build a third.
As the founder and CEO of Hongkang Technology, better known in the industry as MA-TEK, Tse has followed the pace of the company's major customers, such as TSMC and Sony, to expand its business in Japan. MA-TEK's main business is to test cutting-edge semiconductor materials and certify new products.
We believe the revival of Japan's chip industry may be faster than expected," she said. "Japan has a solid foundation in chip manufacturing, with first-class materials, equipment, and a network of ** chains that have been carefully built over the years and are basically complete. "MA-TEK generated 8% of its revenue from Japan last year. The company aims to increase that to 20 percent by the end of the year, Ms. Tse said.
The arrival of companies such as MA-TEK changed the fortunes of Japan's domestic chip industry. Once the world's largest semiconductor industry, Japanese chipmakers lost to competitors from South Korea, Taiwan and the United States in the '90s and early 21st centuries. After several failed attempts to restructure the industry, Tokyo has all but lost faith in the industry.
The word 'semiconductor' is closely associated with 'failure' in the eyes of politicians. Hamashima, president of the Japan Semiconductor Industry Association (SEMI Japan) and a former executive of Tokyo Electron, a global chip equipment manufacturer, said. In 1989, Japan accounted for six of the world's top 10 chip manufacturers. By 2023, there will be no Japanese companies among the top 10 chipmakers by revenue.
However, Japan's political leadership is now determined to turn the tide and attract foreign companies that have overtaken domestic manufacturers. Over the past few years, generous** subsidies have attracted industry leaders like TSMC, Micron and Samsung to invest in Japan. For some projects, such as Samsung's, subsidies account for about 50% of the total investment.
The development of advanced semiconductors, which are vital to the modern economy, has caused concern in Japan, analysts said. This has prompted the redevelopment of the semiconductor field. Under the guidance of Prime Minister Fumio Kishida, ** allocated nearly 2 trillion yen ($13 billion) for the semiconductor industry for the current fiscal year as a supplementary budget, up from 1.0 last yearThe 3 trillion yen has risen, setting a record for Japan's ** semiconductor budget.
Charles Shi, a chip analyst at U.S. investment bank Needham & Co, said: "Japan's semiconductor industry is undergoing a major shift and re-emerging on the global stage. If China is an emerging region for the growth of the global semiconductor industry over the past decade, Japan is poised to be the next region to rise. ”
Tokyo's pledge to support not only Japanese companies but also foreign companies shows its determination to revive Japan's status as a semiconductor powerhouse. "Companies like TSMC can make things that Japanese companies can't," such as advanced chips for artificial intelligence and autonomous driving technology, said Jun Okamoto, a partner at KPMG, a management consulting firm in Japan. The introduction of these companies has an "advantage" for Japan's economic security.
New foreign investors include U.S. memory chip maker Micron, which announced in 2023 that it would invest up to $3.7 billion in a DRAM chip factory in Hiroshima, the western prefecture of Japan's main island, over the next few years. South Korea's Samsung announced late last year that it would set up an R&D facility in Yokohama, a coastal city near Tokyo, where it is expected to invest 350 billion won (2$800 million).
However, the real takeaway for Japan is that TSMC plans to invest billions of dollars. TSMC, the world's top chipmaker, opened its first Japanese factory in Kumamoto, south of the island of Kyushu, on February 24. With an investment of $8.6 billion expected in the initial plant, TSMC recently announced plans to build a second plant in the same region, bringing the company's total investment in Kumamoto to at least $20 billion by 2027.
KPMG's Okamoto believes that TSMC's investment – foreseen by few industry insiders a few years ago – symbolizes a new era for Japan's semiconductor industry. He told **: Before the recent investment, it was unprecedented for foreign semiconductor companies to invest in Japan to build factories. ”
Earlier, industry leaders and politicians celebrated the opening of TSMC's factory in Kumamoto. The factory is located on a 21-hectare site on Japan's "Silicon Island" and is surrounded by cabbage fields. "Silicon Island", also known as Kyushu Island, got its name from the fact that manufacturing giants such as Mitsubishi, Sony, and Toshiba chose to set up their main factories here in the 60s of the 20th century.
The new factory will produce Japan's most advanced chips by the end of 2024.
Mr. Chang Zhongmou, the founder of TSMC, attended the ceremony together with other business leaders, including Akio Toyoda, Chairman of Toyota Corporation, Kenichiro Yoshida, CEO and Chairman of Sony Group, and senior politicians such as Takeru Saito, Minister of Economy, Trade and Industry.
This (new factory) will improve the resilience of chips in Japan and the world," Zhang Zhongmou said at the opening event. "I believe that this will also start the revival of semiconductors. “
Japanese Prime Minister Fumio Kishida "endorsed" the event with a congratulatory message, expecting large-scale chip production to begin later this year, and said that Japan would continue to "act quickly" to support the industry with financial support and the easing of restrictions.
The Kumamoto plant is driven not only by Japan's changing industrial policies and generous incentives for foreign chipmakers. In addition to the internal pull, there is also a push: new efforts by chipmakers to build and invest abroad to reduce the risk of the ** chain. TSMC seeks to decentralize production. The company is in the midst of its most daring overseas expansion ever, following a massive $40 billion plant in Arizona, USA, with a factory in Kumamoto, Japan. The Arizona-based plant is expected to begin its first phase of mass production in 2025.
These factories also form a key part of the chip** security architecture advocated by the United States, which has been triggered by factors such as global chip shortages and pandemic disruptions. The United States has formed a "value-sharing" chip alliance. Analysts said the move highlights the importance of building resilient chains and underlines the critical role of advanced chips.
TSMC's investment in Japan is gaining momentum, even outpacing the company's ongoing projects in the United States. The Kumamoto Plant was announced at the end of 2021 and construction will begin in 2022. The plant will produce specialty chips for automotive and industrial applications, with mass production expected to begin later this year.
Earlier in February, TSMC announced plans to build a second factory on the island of Kyushu, which will use 7nm and 6nm production processes, making it the most advanced chip manufacturing facility in Japan. This level of technology is suitable for the manufacture of processors for automobiles and electronic devices.
TSMC is even considering building a third factory, possibly for the production of more advanced 3-nanometer chips — similar to the company's U.S. plant, according to four people familiar with the matter.
TSMC found that its expansion in Japan is more likely to break even faster than its investments in the U.S. and Europe. A chip industry executive who understands the matter told **, "When choosing a place for overseas investment, there are several factors to consider: which region performs better in terms of finance, chain and operational efficiency? **Can make customers the most satisfied? Can you provide enough local talent resources for TSMC? After comparison, Japan may be the answer. ”
TSMC's early success in Japan, along with its relatively smooth development process, has helped convince other chipmakers and companies to follow suit.
Semiconductors are a major driver of the inflow of foreign greenfield investment (a type of foreign direct investment that includes the construction of new factories or the establishment of local subsidiaries) into Japan. From January 2021 to August 2023, Japan announced an average of more than $15 billion in greenfield investment each year, according to a report by JETRO. Among them, the chip field of nearly 10 billion US dollars accounts for about two-thirds of the total. This is very different from the past, when "chip-related FDI was mainly driven by foreign companies that acquired Japan's chip business," said Okamoto from KPMG.
Japan's high subsidies and tax credits have played a major role in the country's chip revival. But even with these subsidies, there are questions about how competitive Japan (which has relatively high labor costs) in chip manufacturing. Tsai Shikai, chairman of PowerTech Technology, a chip packaging service provider, said in an interview that operating costs are about twice as high in Japan as they are in Taiwan. However, he believes that expansion is still worth considering if there is a co-investment by the right partners, such as Sony's investment in TSMC's Kumamoto factory.
Tokyo's aggressive investment has also alarmed its neighbors, potentially triggering fierce competition to attract investment and talent.
An important advantage Japan has over its competitors is its attempt to "rebuild" rather than "build" the chip industry.
In the 80s and early 90s of the 20th century, Japan dominated the world of chips. In 1988, Japanese companies accounted for 50% of global chip sales and occupied six of the world's top 10 chip manufacturers. These include NEC, Toshiba and Hitachi. However, by 2019, Japan's Ministry of Economy, Trade and Industry reported that Japan produced only 10% of the world's semiconductors.
One reason for the decline of Japan's semiconductor industry is the ** friction with the United States, which has dealt a particularly big blow to Japanese chipmakers. At the end of the 80s of the last century, under strong pressure from Washington, Japan agreed to restrict the export of semiconductors, mainly DRAM chips, to the United States. Subsequently, American chip companies turned to TSMC to produce the chips they designed.
Shuhei Yamada, a distinguished professor of business at Tokyo's Sakura Umerill University, said that another reason for the decline of Japan's chip industry is the decline in the market share of Japanese consumer electronics companies such as Toshiba and Hitachi, which were once leaders in chip competition. As the war with China has led to a contraction in sales of consumer technology products in Japan, the demand for chips in Japan has also decreased.
"Japan's consumer electronics and semiconductor industries are dragging each other down, and both industries are in decline," Yamada said. ”
Another important reason why Japan has lost its leading position is the instability of the memory chip market. Every three to four years, the chip industry goes through a so-called chip cycle, in which the market is constantly on and off. With the rapid development of chip technology, manufacturers have had to struggle to raise capital to keep up with the demand for new equipment investments.
Large chipmakers will continue to invest even in difficult times for the industry, as waiting for the economy to improve will cost them valuable time to upgrade their products.
Japanese electronics makers can't afford to stay in the game of semiconductor investment in the face of a recession because it looks more like a "gamble" than a consumer electronics business, said Hamashima of the Japan Semiconductor Industry Association.
In the 90s of the 20th century, in order to survive, Japanese chip companies tried to integrate, but did not achieve much success. The merger didn't go well because they "lacked strong leadership," and the combined company still behaved like two separate entities, resulting in slow decision-making, Hamashima said.
A prime example of this restructuring failure is Elpida Memory, which was a joint venture between NEC and Hitachi's DRAM business. Although Elpida Memory received financial backing from Japan**, it went bankrupt in 2012 and was acquired by Micron in 2013.
The failures have alienated the first and lawmakers, who feel that intervening in the chip industry "has neither worked nor helped get more votes," Mr. Hamashima said. Industry insiders have called this period — from the 1990s to the 2010s — the "lost 20 years" of Japan's chip industry.
Despite losing some market share, Japan still controls some key parts of the chip chain, which could pave the way for its resurgence.
Japanese companies such as Tokyo Electron and Shin-Etsu Chemical have a large share in several key chip-related markets, including silicon wafers, photoresists (basic chemicals used in advanced chip production), and chip-making tools.
While Japan's chip manufacturing industry has lost its lead in global competition, its local chemical, materials and equipment** manufacturers have shown remarkable resilience"Liu Wenlong, a chemical industry veteran and CEO of LCY Chemical, a key supplier of TSMC, Intel and Micron, said in an interview. "Japanese companies have not lost their ingenuity and sense of manufacturing. "
This foundation, coupled with a change in attitude in Japan, seems to have borne fruit in attracting foreign investment. Semiconductor companies in Japan are already following TSMC's investment in Japan, which is exactly what Tokyo expects in its quest for Taiwanese manufacturers.
There are many major projects that are supported by ** funds in the works," said Masato Goto, president of Screen Semiconductor, another chip tool company. "After the 'lost 20 years,' expectations for domestic investment are very high. ”
The Kyoto-based company opened a facility in Kumamoto last year to train engineers to maintain and inspect manufacturing equipment. Masato Goto said, "We need to be ready for further market expansion. He also added that the plan is to increase the company's equipment maintenance and inspection staff by about 50% by 2030.
Among the top Japanese companies, Ebara is also investing heavily, making equipment for wafer polishing. The Tokyo-based company is currently building a third plant near the TSMC plant to produce the equipment.
Companies such as chemical dealer Tokyo Applied Chemical Industry and Wafer Shokataka Sumco have also announced investments in Kyushu, a southern island in Kumamoto Prefecture.
Okamoto said this broad investment is essential to create a complete chip ecosystem from raw materials to the final process. "TSMC will strengthen the training of new Japanese chip engineers and consolidate related industries," he said. He added that this will benefit Japan's economy in the future.
The question is whether these foreign factories will actually bring about a revival of Japan's domestic industry, or whether trillions of yen in subsidies will simply make Japan an ideal location for foreign companies to set up factories.
The biggest problem in reviving Japan's chip industry is the lack of experienced engineers in the country. According to Morgan Stanley Mitsubishi analyst Tetsuya Wadaki, a chip factory needs hundreds of engineers, but due to a long lack of training, "the winter in Japan's semiconductor industry has been so long that available talent is becoming increasingly scarce", many Japanese engineers have moved on to other industries, and those who have returned to the industry are "already over 50 years old".
Attracting new talent is a priority for the industry, but producing enough new graduates is a slow process. However, Maneo Katasu, head of Ebara's chip equipment department, said he has seen more and more students interested in joining his company or the semiconductor industry as a result of recent large-scale projects. "For the first time in 30 years, the semiconductor industry has returned to where it once was," he said. ”
A member of Japan's Ministry of Economy, Trade and Industry explained why TSMC factories are being funded: he said that strengthening domestic chip capacity has become "imminent" and that it is quite unlikely that Japanese companies will be able to launch and quickly achieve mass production of advanced chips that compete with TSMC in a short period of time.
However, the ** added: "In the second phase, it is extremely important to ensure that companies and their [business and talent] bases remain in Japan." He said that foreign companies would not be excluded, but also recognized the need for "Japanese players".
The final link in Tokyo's plan to restore its status as a chip powerhouse is Rapidus, a Tokyo-based startup founded in 2022. The company was established with an investment of 7.3 billion yen from eight Japanese companies, including Toyota. Rapidus plans to mass-produce next-generation 2nm chips in the northern islands of Hokkaido in 2027. The cost of the project is estimated to be as high as 5 trillion yen, and Tokyo has pledged 330 billion yen.
Producing 2-nanometer chips is no easy task – no Japanese chipmaker has yet achieved such advanced chip technology, and Rapidus will compete with global giants like TSMC and Samsung in the race to squeeze more transistors on a single chip. TSMC, Samsung, and Intel in the United States plan to produce 2nm chips in 2025.
The Rapidus project is considered by some analysts to be "highly unlikely to succeed," but it is Japan's eagerness to nurture domestic companies to challenge global chip giants.
Tetsuro Higashi, the chairman of Rapidus, said at a recent press conference that his project was backed by international companies because some companies were concerned about the "fairly monopolistic market landscape" in the field of advanced logic chips. Tetsuro Higashi did not mention TSMC, but hinted that his company could become an alternative in some areas.
Regarding the confidence in this project, Tetsuro Higashi said, "We have received extensive support from Japan, foreign organizations, and tool manufacturers. I didn't believe for a second that this project would be a success. ”
Rapidus says it can stay ahead of its competitors in developing cutting-edge chips by partnering with IBM in the U.S. and global institutions such as IMEC, a Belgian R&D team.
Tetsuro Higashi is not the only one who has confidence in Japan's chip industry. Peter Wennink, CEO of ASML, Europe's largest chip equipment manufacturer, said that Japan has a long history in the semiconductor industry and that Japan is clearly focused on restoring this status.
"The challenge is that you have to rebuild some of the parts of the chain that have slowed down over the last few decades, which means that you need to invest in human resources, you need to invest in the ecosystem," Wennink said. ”
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