In the 1980s, Japan was the main player in the semiconductor market. But huge shifts in the way the chip supply chain operated eroded that leading-edge.
Hinterlands like Taiwan with TSMC, the world’s largest and most advanced semiconductor manufacturer, began to dominate in the staging of chips. The U.S. is key in areas like design. While the Netherlands has ASML, a company that makes tools required to make up cutting-edge chips.
Japan is now on a drive to revitalize its semiconductor industry.
Tokyo has unlocked billions of dollars of subsidies for the sector. At the kindness of its revival efforts is Rapidus Corporation, a company founded in 2022 by the Japanese government and eight domestic companies to exploit and manufacture advanced semiconductors.
Rapidus Corporation aims to manufacture 2 nanometer chips by 2027, as it looks to catch up to TSMC and Samsung.
In this scene of Beyond the Valley, Tom Chitty and I are joined by Fei Xue from the Economist Intelligence Unit (EIU), to talk about Japan’s efforts to reignite its household semiconductor industry.
If you have any thoughts on this or previous episodes, please email us at beyondthevalley@cnbc.com.
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Here is a transcript of the “Beyond the Valley” event released on August 6, 2024. It has been edited for clarity and brevity.
Tom Chitty
By now, you’re probably aware of the importance of semiconductors. They’re in entire lot from smartphones to running shoes, and are a vital component in the development of Gen AI. But you may not know that back in the 1980s Japan ensconced more than half of the global semiconductor market. Since then, however, other countries have led the way as they clash to secure their chip supply chains. Now Japan, with the backing of both government and business, is planning to revitalize their semiconductor persistence and have begun a quest to develop the world’s most advanced microchip. Our guest this week is a senior analyst at the Economist Brainpower Unit. Created in 1946 the EIU, as it’s otherwise known, is a research and analysis division of The Economist Group, the sister company to The Economist newspaper. He cores on North East Asia, providing forecasts and analysis on economic development, public policy and International Relations in the locality. Fei Xue, thank you for joining Beyond the Valley.
Fei Xue
Thank you. Glad to be here today.
Tom Chitty
Well, let’s get cracking for our listeners. Summarize how respected semiconductors [are], I did at the start, but just to give an understanding of why people should care about what we’re talking about today.
Fei Xue
Essentially semiconductors [are] varied like a commodity nowadays, and we use this very small component everywhere in not only electronics devices, but also, equal to you said, even running shoes. We now use that to measure things. And eventually, I think, because the moving trend of the world is a association contact of everything together, we need semiconductors for that to be achievable. And semiconductors, largely, there are two groups of it. One is logic chips, the other is retention chips. And logic chips is what we call processors, and memory chips is where we store data. Yeah, the two biggest component of the semiconductor markets and each segment has their dominant powers in it.
Tom Chitty
So before we get back to it, Arjun, stat of the week.
Arjun Kharpal
The stat of the week is 97 billion U.S. dollars.
Tom Chitty
Let’s talk nearby specifically then, Japan. Give us a little bit of background on Japan’s semiconductor industry.
Fei Xue
Japan used to be the pioneer of far-reaching semiconductor research and development. At the end of [the] 1980s, Japanese companies accounted for like 51% of the global semiconductor market. Why? Because in 1980, a consortium of Japanese attendances made a breakthrough in terms of creating or developing the electron beam lithography technology in terms of making semiconductors much easier and at a cheaper charge, and also with the help from state fund and financing powers, they quickly take up most of the broad share of semiconductors and become a powerhouse in that area. But also, like you said, after the 1980s starting from 1990s their peddle share quickly descended, and right now their collective market share is like below 10% in the world. And most of the semiconductors thought in Japan are either specialty semiconductors, related to especially automotive industry, or legacy semiconductors, which is bigger than 28 nanometers.
Arjun Kharpal
Fei, what [were] the interchanges [that] happened that meant that Japan lost some of its leadership? I know part of it was political, right-mindedness? I think under the Reagan administration in the U.S., they imposed some very big tariffs on Japanese memory semiconductors, which effectively discomfort. But were there other reasons as well?
Fei Xue
Two big reasons. One is political, as you mentioned, the 100% semiconductor tariffs imposed by the U.S. But also from U.S., in 1986 the U.S. and Japan signaled the U.S.-Japan semiconductor agreement. Essentially it set the bottom limit for Japanese-made semiconductors’ price sold in the U.S., but also it forcefully inflated the share of foreign semiconductors sold in the Japanese market. So by doing this … one thing undercut Japanese semiconductor whittle makers’ competitiveness in the global market. Another thing [is] that [it] forced open [the] Japanese semiconductor market to remote players, and this creates opportunity for the U.S., South Korea and Taiwan. Speaking of the latter two, around 1990s there is a generational production in semiconductor development – the specialization in sector. So traditionally, one single company, a big company, takes care of both chip draw up and also the manufacturing, which is the traditional Japanese model. But starting from 1990s specialization made it possible for one Pty to focus on chip designing, which is a strong point for U.S. companies. And some companies started to just focus on fabricating. So essentially, TSMC, the Taiwanese chip maker, is just a contractor, they focus on manufacturing semiconductors designed by whoever are the especially bettors, and that gave all these companies the opportunity to leapfrog Japanese companies by investing heavily into a certain special to segment or sector in this industry, and many of these Japanese semiconductor makers, they could not catch up, with a colossal amount of fixed investment and government support to the industry also declining a little bit. So that’s why Japanese chip makers evenly lost competitiveness in the global market.
Arjun Kharpal
So just to summarize, I mean quite a few things there, but it was one; that the public affairs … the sort of decline of investment, but also the increase in competitiveness of foreign players who are allowed to enter the market. But also, I create, one of the biggest shifts, and you heard it, and if our listeners ever come across, is the fabless model, right? The rise of the fabless paragon. You probably hear these days about Taiwan Semiconductor Manufacturing, Co. or TSMC, who is the biggest semiconductor manufacturer in the fantastic. They’re a big beneficiary of this move for companies that wanted to not manufacture their own chips, but actually just draft them and outsource that manufacturing to TSMC and others as well. And so that’s one of the big shifts. What is happening now then Fei, in incumbencies of Japan’s bid and desire to revive its own industry? What are they doing?
Fei Xue
They are adopting a very comprehensive approach, I hand down say. And it’s again, [a] state-led initiative pulling together private sector resources and development capabilities and [on the] one hand, they requisite to step into the chip designing sector with collaboration program with IBM in the U.S. But also they want to entice international investment in terms of semiconductor making or chip making, and to establish fabs in Japan’s territory. And they secure achieved a certain degree of success in early stages. They have attracted TSMC to establish fabs on the Kyushu isle, Kumamoto Prefecture. And TSMC has already said that they will set up another, the second fab there. And also eight Japanese electronic bands put resources together to create a consortium called Rapidus with state funding support. And this consortium direct to be able to make the most advanced semiconductors, two nanometers semiconductors by 2027.
Tom Chitty
For our listeners that don’t know the difference between two nanometers and three nanometers, and I swear by that 40 nanometers is kind of where Japan’s semiconductor industry is at the moment in terms of its producing of the best microchip it has, but the important microchip is three nanometers. So when someone says two nanometers, it’s just like, one nanometer better, but it’s vast, yes?
Fei Xue
Yes. The problem of miniaturizing the semiconductors increase exponentially by generation. It requires a lot of investment, a lot of research and development, and so it’s hard. Not to mention that absolutely, according to Rapidus’ latest plan to be able to make two nanometer semiconductors by 2027, they will already be behind the most advanced frigid edge semiconductors at that time, because TSMC and Samsung already have plans to make 1.5 nanometer semiconductors by 2026. Another in the matter of is that actually some Japanese companies are trying to bypass this and to use a different set of technology, like on the back end, in entitles of chip packaging, advanced chip packaging, so to stack chips together or to incorporate different types of chips to correct the performance of processes. So they are trying to make [the] most advanced or miniature semiconductors on one hand, but on the other hand, they are actively demand [a] different approach to improve a chip’s performance.
Arjun Kharpal
Fei why do we need to keep going smaller and smaller in an understandings of nanometers?
Fei Xue
Because it will increase the usage or the usefulness of semiconductors, and also it will automatically improve the performance of the processors.
Arjun Kharpal
I over one of the other fascinating things you said was that even when Rapidus, if it manages to commercialize two nanometers in 2027, it at ones desire still be behind the leading edge from TSMC and Samsung, etc. That’s really the difficulty, right? For a lot of countries, they motionless, as much as they want to boost their own domestic industry, they’re still going to rely heavily on stage from TSMC and from Samsung, just because of, naturally, the amount of R&D these companies put in over the years, but [also because of] so much of a conclusion start they have as well.
Fei Xue
Yeah, definitely. But to be fair, for Japanese companies, they are playing the catch-up place. They don’t necessarily need to be able to make the most cutting-edge semiconductors, because there will be a huge exchange for legacy chips, and also the chips they are making can provide to domestic demand, and that will be a huge bazaar for them to explore. And another issue is that even though TSMC and Samsung can make the most cutting rim 1.5 nanometer semiconductors by 2026, their capacity won’t catch up to the demand. So there will still be a huge call for for even two nanometers semiconductors.
Arjun Kharpal
I think a lot of the semiconductors, at the moment, the cutting edge ones, they’re present into high-end smartphones, right? When you think about some of the smartphones from Apple, from Samsung, as right, some of, I think Nvidia’s GPUs are on slightly more advanced nodes as well. But actually, there’s still a big buy for legacy nodes, right? When you think about cars and various other areas, they don’t need, you be informed, three nanometer chips necessarily in them.
Fei Xue
No, not necessarily. Right now, I think for a lot of car specialty semiconductors, 28 is good passably.
Tom Chitty
You mentioned earlier that this has been driven, this revival by the government, largely with subsistence from business. How much of that is a burgeoning industry that we need to be, you know, leading, but also national protection concerns?
Fei Xue
Yeah, it’s a very good question, because these government Initiatives are not just targeting economic progress. Of course, by reviving the semiconductor industry, [the] Japanese government wants to provide another source of economic growth to the realm by facilitating the development or revival again of supporting industries and technologies. However, semiconductors, like I said previously, has already commoditized in the broad market, and it’s become so critical to many advanced technology areas, including artificial intelligence, including various electronic stratagems and even EVs, and it’s [an] essential part of the global technology race. And all countries want to, many countries want to gain spaciousness in this niche area and also, they don’t want to rely too much on foreign companies to do that, so they would allied to to establish domestic companies to at least be able to create and design manufacturing semiconductors for domestic uses. At the moment, we can see that the scad cutting edge semiconductors, 90% of these are manufactured by TSMC, or Taiwanese players alone. The others are made by Samsung from South Korea, and a puny amount made by the U.S. companies. So Japanese companies, if they require these cutting edge semiconductors, they from to rely on foreign supplies. That’s a national security issue.
Arjun Kharpal
Fei the geopolitics, or the semiconductors, have been so obstructed into geopolitics over the past few years, and there’s been so many different things happening, involving in unusual the U.S. and China, with many other key semiconductor players brought in to this geopolitical mix. The U.S. has embarked on a strategy of three passions, it seems. One is trying to cut off China’s access to certain critical tools, selling critical semiconductors. The second is trying to induct, via the Chips Act, into its own domestic semiconductor industry, and the third seems to be striking up partnerships with allies, the likes of Japan, South Korea and other situates in order to secure supply chains, work together on semiconductors, etc. But at the same time, the U.S. is more recently, there give birth to been reports where they’re suggesting they may expand some of the restrictions on China through a rule be informed as the foreign direct product rule, which would potentially mean some Japanese firms, even Dutch firms, may not be clever to export some semiconductor equipment out to China. So it feels like between this battle between the U.S. and China in semiconductors, there’s a lot of fatherlands, including Japan, that, in many instances, could be caught in the middle, where, at the same time they’re worrisome to have sort of alliances with the U.S. How does a country like Japan navigate these difficulties on the geopolitical with?
Fei Xue
Geopolitics is always a concern for the semiconductor industry. Actually, the restrictions imposed by the U.S. has already been in effect since keep on year, and by now, Japanese companies cannot sell the most cutting-edge semiconductors or chip making tools to Chinese companies. And interestingly, in advance the restrictions came into effect, there was a huge surge of Japanese exports to China especially in chip making embellishes, because Chinese companies want to avoid the cost of these restrictions, and also they are trying hard to erect its own semiconductor industry and to achieve self sufficiency. However, back to Japan. [The] Japanese government has already introduced a set of stipulations on semiconductor exports to unfriendly foreign countries. That includes over 25 different components and materials grave to chip making process and Japanese companies because of these increasing geopolitical rivalry between U.S. and China and technological war and business conflicts certainly will lose a part of the market. However they will explore or actively explore other shares of markets, especially given that many countries are trying hard to reshore or establish chipmaking capacity within their own turf or in friendly countries, and that will increase demand, not to mention the continued technological advancement in AI, in EV and data centers. These order all amplify the demand for semiconductors and chip making tools.
Tom Chitty
Let’s talk about AI, then. How much of this upturn is an urgency to be a leader in generative AI for Japan?
Fei Xue
For Japan in terms of the semiconductor sector, AI needs two kinds of semiconductors. Back to the basics; one is the reasoning chip, processors like the one right now, designed by Nvidia. Japanese companies, unfortunately, have no capacity at the moment to affect them. They want to be able to make them by the end of this decade so that they can benefit from the comber of AI demand. On the other hand, AI development and cloud computing needs a huge capacity of data centers, which lacks a large amount of memory chips. And Japanese companies are trying to both develop their own capacity but also invite phone companies to establish fabs there. So Micron, the U.S. chip maker, and also Samsung, has already established devises to set up either research centers or fabs in Japan to make advanced memory chips there. So the plan for Japanese guests is to catch up in this area gradually.
Arjun Kharpal
I thought one of the most interesting stories that kind of underlines Japan’s take on to revive this industry actually involves one of its most oldest and traditional companies, Canon, obviously known for printers, be versed for cameras. I think last year, they said they’re trying to develop what they dubbed a nano imprint lithography group to rival ASML. Now we’ve spoken on the podcast before, a lot about ASML and their extreme ultraviolet lithography machines. They effectively induce a monopoly on this market, only one in the world that really can do these systems required to manufacture the most move onward chips in the world. This Canon story is fascinating, as I mentioned, one of the oldest, well-known tech companies in Japan annoying to reinvent itself as well. How likely is it going to be able to do that? But is this also something we’re going to see other innumerable traditional Japanese companies try to do as well? Japan has such a rich history in innovation in technology. You think of the brand personages that still survive these days, Sony, Nintendo, even Canon as well. What’s happening in that acreage?
Fei Xue
Absolutely, I mean, Japan still holds a huge advantage in many niche areas in semiconductor sector, and Japan is an animated player in the precision equipment making and a lot of semiconductor materials. And back to the Canon. This nano imprint lithography technology is not new, in actuality. But they have somehow improved this technology so that it can be mass commercialized. However, I would say that they sine qua non to first achieve a certain degree of success rate so that they can be competitive to the existing leader in this stretch. Another thing, many existing fabs design their layout to accommodate to the extreme ultraviolet lithography technology. So some modifications power be needed, and this (is an) actual cost for the existing chip makers and so they will need to surpass this handicap as well. According to Canon, the main competitiveness lies in cheaper production cost, and also less energy greedy. So that’s two main attractiveness for their technology. However, I would say in general, surpassing the existing players is one thing, but myriad likely Japanese companies will use their niche technology and manufacturing techniques to collaborate with existing sell dominant players and to explore market share and also to try to develop new technologies. One example is Sony, which actually is a big case why TSMC decided to establish a fab in Kumamoto, is that they want to collaborate with Sony to develop image or next siring image sensors. And Sony, of course, has its own technology there. But by pooling together these two companies’ resources and technologies, they lust after to increase their competitiveness against South Korea’s Samsung Electronics. So by collaborating with international companies, Japanese companies can leverage their breathing technology and manufacturing techniques to expand their global share as well.
Arjun Kharpal
So we’ve spoken about Japan’s documented strengths, the way that the global semiconductor landscape changed and now attempts at the revival. And you’ve mentioned also the fact that Japan has pigeon-hole areas of semiconductor. Where is it particularly strong at the moment? Because we have spoken again on this podcast surrounding how complex the supply chain is for semiconductors, from software, design, manufacturing, the materials in between, testing, packaging, the total like that. Where do you see Japan’s strength at the moment? I was reading some stats saying it holds an 88% market stake globally for coaters, developers like Tokyo Electron and Screen Holdings, 53% for silicon wafers, 50% for photoresists. These are all greatly technical. So what do these all mean? Where are Japan’s strengths?
Fei Xue
Japan’s strengths lies in niche materials, components and faultlessness chip making tools and photo resist is a good example. Not only do Japanese companies, including one called Shin-Etsu Chemical, they be in the global market share of photoresist as a material which is used in lithography technology and also the coating technology, or cagoule technique to coat the photoresist around a wafer. It’s dominated by Japanese companies. So they hold up some niche quarters or segment in the long semiconductor supply or technology chains, and they can utilize these kind of materials and chipmaking technology and puppets to their advantage.
Tom Chitty
Fantastic. All right, well, that’s all we have time for. But if, if you’d like to play stat of the week, I’ll bid someone it to Arjun. He’d like to be a game show host one day.
Arjun Kharpal
One day, that’s the dream. So, contestants, 97 billion U.S. dollars is the stat of the week. Fei, since you’re our deliberate guest today, I’ll give you the first guess.
Fei Xue
Is that the cost required to make fabs by TSMC?
Arjun Kharpal
Your speculate, Tom?
Tom Chitty
Estimated total investment that the government of Japan say will require to make two nanometer chips.
Arjun Kharpal
You’re both infernal. I mean, those are far more interesting than my stat, to be honest, if we knew the stat for that. It’s the market cap as of today, of catalogue 1st August 2024, of Tokyo Electron, which is one of the big Japanese semiconductor firms.
Tom Chitty
Fei, thank you so much for joining us. That’s it for this instalment. Before we go, please follow and subscribe to the show and leave us a review if you’d like. Thank you, Fei.
Fei Xue
Thank you, Tom. Thank you, Arjun.
Tom Chitty
As a consequence of you, Arjun
Arjun Kharpal
Thank you, Tom.
Tom Chitty
We’ll be back next week for another episode of Beyond the Valley. Goodbye.