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

TOKYO — 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 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 the House speaker, Nancy Pelosi, visited Taiwan, prompting an angry response from China.

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 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 so better insulated from disasters and geopolitical instability.

The latest move came on Friday, when Japan and the United States announced that they would create a joint research center 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 Kazumi Nishikawa, a director at Japan’s Ministry of Economy, Trade and Industry, or METI, in an interview.

For both Japan, once the world’s largest chip maker, and the United States, the birthplace of the semiconductor, a decades-long erosion of their chip-making capacities has left them playing catch-up. Last week, Congress passed a huge 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 takes an increasingly aggressive stance toward 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 over half the world’s supply of semiconductors, powering Toshiba calculators and Nintendo consoles, but its market share fell to around 10 percent as globalization pushed companies in wealthy countries to contract out their chip production abroad.

Firms like Taiwan Semiconductor Manufacturing Company, or TSMC, that specialized 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 specialized 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 said. The semiconductor study group run by Mr. Seki, the Japanese lawmaker, has estimated that success will require an investment of at least $78 billion.

Updated 

Aug. 5, 2022, 9:27 a.m. ET

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

Whether or not 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 $3.5 billion in subsidies 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 percent of the world’s most advanced chips, and two major Japanese companies, Sony and Denso, which supplies parts to Toyota.

It will be the most advanced production facility in Japan, albeit still behind the world’s leading plants. Production is set to begin by the end of 2024.

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

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

Last month, Japan’s government also announced that it would provide nearly $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.

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 entirely domestic.

Prime Minister Fumio Kishida has made the global connections a priority in recent talks with his counterparts in the United States and the European Union. In May, the Japanese economy minister visited a semiconductor research facility 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, the head of research at CLST, a subsidiary of the brokerage house CLSA.

For trade in general, but especially for semiconductors, “the world is being divided into two camps,” he said, “the pan-U.S. allies — that includes, obviously, Japan, Korea and Taiwan — and, on the other side, we have the likes of 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 enough government support, the country could recapture at least 20 percent of the semiconductor market by 2030.

Even with subsidies, however, it does not make economic sense for most Japanese companies to invest in domestic chip production, said Masatsune Yamaji, a senior analyst and an expert on semiconductors at the consulting firm Gartner.

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

The Japanese chip maker Rohm received millions of dollars in subsidies from METI to build more energy-efficient chips for industrial applications at its plants overseas.

While the company performs some of its operations in Japan, the funding is not enough to persuade it to move its manufacturing back home, said Tatsuhide Goto, the company’s public relations manager.

Much as the government does, the company worries about geopolitical risks to its operations abroad. But, at least for now, he said, “we’re not considering changing our business model.”