TOKYO — It was the spring of 2021 and the demand for new cars increased sharply. But as consumers, who had their savings during the pandemic, rushed to dealers around the world, one Japanese automaker after another shut down production while waiting for imports of a crucial component: semiconductors.
Coronavirus outbreaks had shut down chip factories, and an unexpected surge in demand for electronics from people living through the pandemic at home had limited supplies. Nissan alone predicted 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 – woke the country to the fragility of the supply chains underlying key industries.
That has prompted a broad rethinking of how Japan can protect its economy, the world’s third largest, from both unforeseen economic shocks like the pandemic and looming risks like rising tensions between the United States and China. Those risks were highlighted this week when House Speaker Nancy Pelosi visited Taiwan, sparking an angry response from China.
The review affects a range of sectors, including energy, but semiconductors are among the top concerns. 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 key semiconductor supplier, and from the United States.
In a break with 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 thus 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 open to other “like-minded” countries.
“The era where 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 an interview.
For both Japan, once the world’s largest chipmaker, and the United States, the birthplace of the semiconductor, decades of erosion of their chip manufacturing capacity have allowed them to catch up. Last week, Congress passed a massive industrial policy bill that included $52 billion in subsidies and incentives to revitalize the U.S. 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 adopts an increasingly aggressive stance towards Taiwan, raising the risk of disruptions to the flow of chips being made there. increases.
The question is whether the initiatives will be sufficient. Japan once produced more than half of the world’s supply of semiconductors, which power Toshiba calculators and Nintendo consoles, but its market share fell to about 10 percent as globalization pushed companies in rich countries to outsource chip production abroad.
Companies such as Taiwan Semiconductor Manufacturing Company, or TSMC, which specialized in the manufacture of chips to order and received broad support from the government, gathered enough customers to achieve economies of scale that made it pointless for companies in Japan and elsewhere to buy most chips. at home.
Japan continues to be the market leader in some products essential to semiconductor manufacturing, including specialty chemicals and silicon wafers. The country also has a near monopoly on some of the highly specialized tools used in the manufacturing process.
But it lacks the expertise to create state-of-the-art chips manufactured only in Taiwan and South Korea. And while the geopolitical analysis of supply chains has changed, many of the economic factors that have caused Japan’s share of the chip market to shrink haven’t changed.
That will make it difficult and potentially very expensive for Japan to revive the industry, analysts say. The semiconductor study group led by Japanese lawmaker Mr. Seki estimates that success requires 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 the Macquarie Group.
Whether the venture is economically viable or not, Japan believes it has no choice but to try.
The first steps are already being taken in Kyushu, in southern Japan, known as Silicon Island for its position as the center of the country’s once thriving semiconductor industry.
In June, METI announced it would provide $3.5 billion in grants 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 makes more than 90 percent of the world’s most advanced chips, and two major Japanese companies, Sony and Denso, who supply parts. to Toyota.
It will be the most advanced manufacturing facility in Japan, albeit still behind the world’s leading factories. Production is due to start at the end of 2024.
TSMC is expected to employ more than 1,700 employees 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 “biggest investment we’ve 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 company Western Digital to upgrade a chip facility in the western region of Kansai.
The new investments won’t even begin to meet the seemingly abysmal demand for chips from Japan’s largest industries. TSMC’s plant is expected to produce 50,000 to 60,000 wafers per month. A single vehicle can contain hundreds of semiconductors, and Toyota alone produced nearly 8.6 million vehicles worldwide last year.
However, Japanese officials hope that TSMC’s investment will mark the beginning of the development of an ecosystem that could one day serve as an insurance policy against supply chain disruptions.
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 capacity to make the process completely domestic.
Prime Minister Fumio Kishida has made global connections a priority in recent talks with his colleagues 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 in developing next-generation chip technology.
The efforts of Japan, the United States and their allies are creating a “new geopolitical landscape,” said Patrick Chen, head of research at CLST, a subsidiary of brokerage firm CLSA.
For trade in general, but especially for semiconductors, “the world is being divided into two camps,” he said, “the Pan-American allies – which of course include Japan, Korea and Taiwan – and on the other side we have China, Russia and maybe North Korea.”
As for Japan’s domestic investment, Hideki Wakabayashi, a professor at Tokyo University of Science and a top government adviser on semiconductor policy, believes that with sufficient government support, the country can recapture at least 20 percent of the semiconductor market by 2030.
But even with subsidies, it doesn’t make economic sense for most Japanese companies to invest in domestic chip production, said Masatsune Yamaji, senior analyst and expert on semiconductors at the consulting firm Gartner.
“If making a fab made a lot of money for Japanese companies, 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 received millions of dollars in grants from METI to build more energy-efficient chips for industrial applications in its overseas factories.
While the company operates 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.
Like the government, the company is concerned about geopolitical risks to its operations abroad. But for now, he said, “we’re not considering changing our business model.”
