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

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TOKYO — It was the spring of 2021 and demand for new cars was skyrocketing. But, as consumers, full of savings accumulated during the pandemic, rushed to dealerships around the world, one Japanese automaker after another halted production pending imports of a critical component: semi- drivers.

Coronavirus outbreaks had shut down chip factories, and an unforeseen surge in demand for electronics from people weathering the pandemic at home had limited supplies. Nissan alone predicted a production drop of half a million vehicles.

The chip shortage – a blow to the “head” of Japan’s economy, in the words of Yoshihiro Seki, a lawmaker who heads a study group on semiconductors – has awakened the country to the fragility of the chains supply chain that underpins its most important industries.

This has led to a broad re-examination of how Japan can protect its economy, the world’s third-largest, from both unforeseen economic shocks like the pandemic and imminent risks like rising tensions between the United States and China. China. Those risks were highlighted this week as House Speaker Nancy Pelosi visited Taiwan, prompting an angry response from China.

The review covers a range of sectors, including energy, but semiconductors are among the main concerns. To increase production, the Japanese government is investing billions of dollars in its domestic chip industry and providing huge subsidies for joint ventures with companies in Taiwan, a crucial semiconductor supplier, and the United States.

Breaking away from its past economic nationalism, it is also seeking to form a coalition with allies like 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 geopolitical instability.

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

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

For both Japan, once the world’s largest chipmaker, and the United States, the birthplace of the semiconductor, a decades-long erosion of their chipmaking capabilities has forced them to catch up. Last week, Congress passed a massive industrial policy bill that included $52 billion in grants 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 share of the chip market and takes an increasingly aggressive stance toward Taiwan, raising the risk of disruptions to the flow of chips. chips manufactured there.

The question is whether the initiatives will be sufficient. Japan once made more than half of the world’s semiconductor supply, powering Toshiba calculators and Nintendo consoles, but its market share has fallen to around 10% as globalization has pushed companies in wealthy countries to outsource their chip production overseas.

Companies like Taiwan Semiconductor Manufacturing Company, or TSMC, which specialized in making chips to order and received significant government support, accumulated enough customers to achieve economies of scale that made senseless for business. in Japan and elsewhere to continue to manufacture most chips in -housing.

Japan still dominates the market for some products essential to semiconductor manufacturing, including specialty chemicals and silicon wafers. The country also has a virtual monopoly on some of the highly specialized tools used in the production process.

But it lacks the expertise to make the cutting-edge chips which are only made in Taiwan and South Korea. And, while the geopolitical calculus on supply chains has changed, many of the economic factors that have driven Japan’s share of the chip market down have not.

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

“What they’re trying to do is reverse more than 20 years of underinvestment,” said Damian Thong, head of Japanese equity research at Macquarie Group.

Whether the venture 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 position as the hub of the country’s once-thriving semiconductor industry.

In June, METI announced it would provide $3.5 billion in grants for the construction of 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 makes more than 90% of the world’s most advanced chips, and two major Japanese companies, Sony and Denso. , which supply parts to Toyota.

It will be the most advanced production facility in Japan, although it will still be behind the main factories in the world. Production is expected to begin in late 2024.

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

The project is “the biggest investment we’ve ever had,” said Keisuke Motoda, a Kumamoto prefecture official who oversees government relations with the semiconductor industry.

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

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

Japanese officials, however, hope that TSMC’s investment will kick-start the development of an ecosystem that could one day serve as an insurance policy against supply chain disruptions.

This 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 capacity 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 center 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 brokerage 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 side we have people like China, Russia and maybe North Korea.

Regarding Japan’s domestic investment, Hideki Wakabayashi, a professor at Tokyo University of Science and a top government adviser on semiconductor policy, believes that with enough government support, the country could resume at least 20% of the semiconductor market by 2030.

Even with subsidies, however, it doesn’t make economic sense for most Japanese companies to invest in domestic chip production, said Masatsune Yamaji, principal analyst and semiconductor expert at consultancy Gartner.

“If manufacturing a fab made a lot of money for Japanese companies, they would invest in production capacity,” he said, referring to a semiconductor fabrication plant. “But, over the past 15 years, Japanese companies have not invested in changing the semiconductor production process.”

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

While the company does some of its operations in Japan, the funding isn’t enough to persuade it to move manufacturing to its country, said Tatsuhide Goto, the company’s public relations manager.

Like the government, the company is concerned about geopolitical risks to its overseas operations. But, at least for now, he said, “we don’t plan to change our business model.”

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