Japan once led the world in microchips; now, it's racing to catch up

An engineer holds a chip at the Taiwan Semiconductor Research Institute in Hsinchu, Taiwan. PHOTO: REUTERS

TOKYO (NYTIMES) - It was the spring of 2021, and demand for new cars was spiking. But, as consumers, flush with savings amassed during the pandemic, rushed to dealerships around the world, one Japanese automaker after another idled production as they waited for imports of a critical component: semiconductors.

Coronavirus outbreaks had shut down chip plants, and an unanticipated surge in demand for electronics from people riding out the pandemic at home had constrained supplies. Nissan alone predicted a cut in output of half a million vehicles.

The chip shortfall - a blow to "the head" of Japan's economy, in the words of Mr Yoshihiro Seki, a lawmaker who leads a study group on semiconductors - woke up the country to the fragility of the supply chains that undergird its most important industries.

That has driven a broad reconsideration of how Japan can protect its economy, the world's third largest, against both unforeseen economic shocks like the pandemic and looming risks like the rising tensions between the United States and China.

Those risks were highlighted this week as House Speaker Nancy Pelosi visited Taiwan, prompting an angry response from China.

End of an era

The reconsideration covers an array 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 providing enormous subsidies for joint ventures with companies from Taiwan, a crucial semiconductor supplier, and from the US.

In a break with its past economic nationalism, it is also seeking to form a coalition with allies such as the US and the European Union to build a semiconductor supply chain that is less geographically concentrated and so better insulated from disasters and geopolitical instability.

The latest move came on July 29, when Japan and the US announced that they would create a joint research centre for advanced semiconductors that would be open to other "like-minded" nations.

"The era where the world is at peace and it doesn't matter who supplies our semiconductors is over," said Mr Kazumi Nishikawa, a director at Japan's Ministry of Economy, Trade and Industry, or METI.

New efforts

For both Japan, once the world's largest chipmaker, and the US, the birthplace of the semiconductor, a decades-long erosion of their chipmaking capacities has left them playing catch-up.

Last week, Congress passed a huge industrial policy Bill that included US$52 billion (S$72 billion) in subsidies and incentives to revitalise 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 towards Taiwan that raises the risk of disruptions to the flow of chips made there.

The question is whether the initiatives will be enough.

Japan once manufactured more than half the world's supply of semiconductors, powering Toshiba calculators and Nintendo consoles, but its market share fell to around 10 per cent as globalisation pushed companies in wealthy countries to contract out their chip production abroad.

Firms such as Taiwan Semiconductor Manufacturing, or TSMC, that specialised in made-to-order chip manufacturing and that received ample government support, accumulated enough customers to achieve economies of scale that made it senseless for companies in Japan and elsewhere to continue making most chips in-house.

Japan still leads the market in some products that are essential to semiconductor manufacturing, including specialty chemicals and silicon wafers. The country also has nearly a monopoly on some of the highly specialised tools used in the production process.

But it lacks the expertise to make the cutting-edge chips that are manufactured only in Taiwan and South Korea.

And, while the geopolitical calculus on supply chains has changed, many of the economic factors that caused Japan's share of the chip market to shrink have not.

That will make it difficult, and potentially very expensive, for Japan to revive the industry, analysts say.

No choice but to try

The semiconductor study group run by Seki has estimated that success will require an investment of at least US$78 billion.

"What they're trying to do is reverse more than 20 years of underinvestment," said Mr Damian Thong, head of Japan equity research at the Macquarie Group.

Whether the undertaking is economically viable, Japan believes it has no choice but to try.

The first steps are already taking place in Kyushu, in southern Japan, which is known as Silicon Island because of its position as the hub of the country's once-thriving semiconductor industry.

In June, METI announced that it would provide US$3.5 billion in subsidies for the construction of an US$8.6 billion chip foundry in Kumamoto, a prefecture on the island's west coast.

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

The new investments will not even begin to meet the seemingly bottomless demand for chips from Japan's biggest industries.

TSMC's facility is expected to produce 50,000 to 60,000 wafers a month. A single vehicle can have hundreds of semiconductors, and Toyota alone manufactured almost 8.6 million vehicles worldwide last year.

Japanese officials, though, hope that TSMC's investment will kick off the development of an ecosystem that could one day serve as an insurance policy against supply chain disruptions.

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