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Japan, Once the World Leader in Microchips, Now Races to Catch Up

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TOKYO — Spring 2021 saw a surge in demand for new cars. But as consumers flooded with savings during the coronavirus pandemic flooded dealerships around the world, one after another, Japanese automakers halted production and waited to import critical components, semiconductors. rice field.

The coronavirus outbreak has shut down chip factories, limiting supplies due to an unexpected surge in demand for electronics from people weathering the pandemic at home. Nissan alone expected to cut production by 500,000 units.

The chip shortage is a blow to the “head” of Japan’s economy and, in the words of Yoshihiro Seki, a lawmaker who heads the study group on semiconductors, awakens Japan to vulnerabilities in the supply chains that underpin its most important industries. let me

So how can Japan, the world’s third largest economy, protect itself from both unexpected economic shocks like the pandemic and imminent risks like escalating tensions between the United States and China? There is a broader review of what can be done. These risks were highlighted by House Speaker Nancy Pelosi’s visit to Taiwan this week, which prompted an angry response from China.

The review covers a range of sectors, including energy, but semiconductors are one of the biggest concerns. To boost production, the Japanese government is investing billions in the domestic chip industry and providing huge subsidies for joint ventures with companies in Taiwan and the United States, key semiconductor suppliers.

To break with economic nationalism of the past, form coalitions with allies such as the United States and the European Union to reduce geographic concentration and create semiconductor supply chains that are better isolated from disasters and geopolitical instability. I’m trying to build a

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

Kazumi Nishikawa, director-general of Japan’s Ministry of Economy, Trade and Industry (METI), said in an interview, “The world is at peace and the era where semiconductors can be supplied by anyone is over.”

For both Japan, once the world’s largest semiconductor maker, and the United States, the birthplace of semiconductors, decades of eroding semiconductor manufacturing capacity have left them unable to keep up. Last week, Congress passed a huge industrial policy bill that includes his $52 billion in subsidies and incentives to revitalize the US chip industry.

The new effort is an economic win for both countries as China takes an increasingly aggressive stance against Taiwan, which increases its share of the chip market and increases the risk of disrupting the flow of chips made in Taiwan. and considered critical to national security.

The question is whether initiative is enough. Japan used to produce more than half of the world’s semiconductor supply and power Toshiba’s calculators and Nintendo’s game consoles, but globalization has led companies in wealthy nations to outsource chip production overseas. As a result, its market share fell to around 10%.

Companies that specialize in bespoke chip manufacturing and are well-supported by the government, such as Taiwan Semiconductor Manufacturing Company (TSMC), have acquired enough customers to achieve economies of scale. did. -House.

Japan remains the market leader in some products essential to semiconductor manufacturing, such as specialty chemicals and silicon wafers. The country also has a near monopoly on some of the highly specialized tools used in the production process.

However, it lacks the expertise to manufacture cutting-edge chips that are only made in Taiwan and South Korea. And while the geopolitical calculus around the supply chain has changed, many of the economic factors that have shrunk Japan’s share of the chip market haven’t changed.

As such, it will be difficult and potentially very costly for Japan to revive the industry, analysts say. The Semiconductor Research Group, run by Mr. Seki, a member of the Japanese Diet, Estimate Its success requires an investment of at least $78 billion.

“What they are trying to do is reverse more than two decades of underinvestment,” said Damian Tong, head of Japanese equities research at Macquarie Group.

Whether or not the business is economically viable, Japan believes it has no choice but to take on the challenge.

The first steps have already been taken in Kyushu, in southern Japan, known as the Silicon Islands, due to its position as the center of Japan’s once-thriving semiconductor industry.

June, Ministry of Economy, Trade and Industry announced will provide $3.5 billion in subsidies for the construction of $8.6 billion chip foundry Kumamoto prefecture on the west coast of the island.

The first factory to receive government support under the new initiative will be a partnership 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. joint investment.

Although it is still not as good as the world’s major factories, it will be the most advanced production facility in Japan. Production is expected to start by the end of 2024.

TSMC plans to employ more than 1,700 people in the region, 300 of them from Taiwan. Universities in the region are preparing to train hundreds of new engineers to supply the industry.

The project is “the biggest investment to date,” said Keisuke Motoda, a Kumamoto prefectural official who oversees relations between the semiconductor industry and the government.

Last month, the Japanese government also announced that it would provide about $690 million to a joint venture between Japanese company Kioxia and US company Western Digital to upgrade chip facilities in the Western Kansai region.

The new investment won’t even be able to meet the seemingly endless demand for chips from Japan’s biggest industry.The TSMC facility is expected to produce between 50,000 and 60,000 wafers per month. A single vehicle contains hundreds of semiconductors, and Toyota alone built approximately 8.6 million vehicles worldwide last year.

But Japanese officials hope TSMC’s investment will one day start developing an ecosystem that will act as insurance against supply chain disruptions.

Its insurance policy would most likely include partnerships with allies.

Semiconductor manufacturing is one of the most complex industrial processes in the world, and no country has the capability to do this process entirely domestically.

Prime Minister Fumio Kishida has made global connectivity a priority in recent meetings with US and European Union prime ministers. May, Minister of Economy of Japan visited A semiconductor research facility in New York to discuss cooperation on the development of next-generation chip technology.

Patrick Chen, head of research at CLST, a subsidiary of brokerage firm CLSA, said the efforts of Japan, the United States and their allies are creating a “new geopolitical landscape.”

When it comes to trade in general and semiconductors in particular, “the world is divided into two camps,” he said. There are things like China, Russia and possibly North Korea. “

On Japan’s domestic investment, Hideki Wakabayashi, professor at Tokyo University of Science and top government adviser on semiconductor policy, said that with sufficient government support, Japan could regain at least 20% of the semiconductor market by 2030. I believe.

But even with the subsidies, it doesn’t make economic sense for most Japanese companies to invest in domestic chip production, said Masatsune Yamaji, senior analyst and semiconductor expert at consulting firm Gartner. .

“If building a fab would make Japanese companies a lot of money, they would invest in capacity,” he said, referring to semiconductor manufacturing plants. We are not investing in process evolution.”

japanese chip maker ROHM received a multi-million dollar grant from the Ministry of Economy, Trade and Industry to build energy-efficient chips for industrial applications in its overseas factories.

The company does some operations in Japan, but it does not have enough money to move its manufacturing base there, said Tatsuhide Goto, the company’s public relations manager.

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

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