Japan’s Semiconductor Resurgence: Strategic Partnerships and Domestic Production

The Rise, Fall, and Rise of Japan’s Semiconductor Industry

The current semiconductor landscape is shaped and dominated by names such as TSMC of Taiwan, Samsung of South Korea, and Intel of the United States. Between the 1960s and 1980s, however, Japan with its Toshiba and Hitachi dominated the market in both chip design and manufacturing. By 1989, six of the top 10 global chip makers were Japanese. This dominance did not last, and by the 2000s, Japan lost its leading position to the United States, South Korea, Europe, and Taiwan. By 2006, only two Japanese companies remained in the top 10. From more than 50% of global production in 1989, Japan’s share shrunk to 9% by 2022.

The fall of Japan’s semiconductor industry is multifaceted but can be primarily attributed to Japanese companies’ fixation on vertical integration (responsible for designing, manufacturing, and sales) for too long. Competitors such as Qualcomm and TSMC moved on to horizontal integration, specializing in either design or wafer manufacturing, creating substantial competitive advantages that Japanese firms could no longer match.

Despite the dramatic fall, the country still retains some competitive advantage in semiconductor equipment and memory chips such as coaters, silicon wafers, photoresists, and dynamic random-access memory (DRAM). Such an advantage has provided the necessary technological and logistical foundations for the re-emergence of Japan’s semiconductor out of the 30-year doldrum.

The construction of a Japan-based factory of TSMC in 2024 is the most significant sign of Japan’s comeback. The factory is meant to produce thousands of wafers per month as well as advanced logic chips that Japan has not been able to manufacture. This will only be the opening shot of the subsequent rush of investments from other countries such as the United States and South Korea that could mark the beginning of Japan’s long road back to regain its former position in the sector. With the US-China relations in a downward spiral, there will be more pressure on US-friendly countries to divert their semiconductor investment to countries that are more aligned with the United States, a situation in which Japan can benefit.

External Strategic Partnerships

To accelerate the revival of the country’s semiconductor industry, the Japanese government has formed a network of strategic alliances with external actors to supplement what the country now lacks in terms of technology and talent. This contrasts sharply with the more insular approach taken in the 1980s when the country was fixated on achieving self-sufficiency in semiconductors with little success in the end.

United States

As Japan’s most important ally, the United States figures as a natural partner for the country in revitalizing its semiconductor industry. This partnership has become more critical for both parties as the strategic competition with China heats up across the Asia-Pacific and the world, one in which chips will play a vital role.

The partnership starts with the formation of Rapidus in 2022, a collection of Japanese firms working closely with IBM Research, one of the world’s premiere chip inventors. The initiative will see Rapidus help IBM Research develop the cutting-edge 2 nanometers (nm) logic chip to be produced in Japan’s Hokkaido Prefecture in the second half of the 2020s. This initiative will help Japan bridge its existing technical and technological gaps in making advanced logic chips below 5nm, something that could only be achieved through cooperation with IBM with its top-of-the-line technologies.

Taiwan

While the partnership with the United States is to catapult Japan’s semiconductor industry into the bleeding edge of the 21^st century, the partnership with Taiwan, particularly with TSMC, is more focused on helping to provide Japan with a strong foundation to produce more legacy models of 28nm to 12nm logic chips, rather than the advanced 2nm logic chips. These legacy chips can satisfy the country and the world’s immediate demands and not catapult Japan to the technological forefront.

South Korea

At a time of increasing market pressure from dominant players in the global chip market such as China and the United States, a Japan-South Korea semiconductor partnership is becoming increasingly important in helping both countries become more competitive on the global market. In addition, South Korea-China relations deteriorated due to increasing differences in the North Korean issue as well as the retrenchment of global order into competing camps with South Korea, Japan, and the United States on one side and China with Russia and North Korea on the other. These factors have made it more attractive for South Korea to pivot from China to Japan as the preferred business partner in the sector.

As a part of this new development, South Korea’s premier chip maker Samsung has decided to invest more than USD 200 million to build a semiconductor research and development facility in the city of Yokohama, Kanagawa Prefecture. The investment will both strengthen Japan’s technological capacity and mitigate South Korea’s current risks. Construction started in 2023 and the facility itself will then enter operation in 2025.

Internal Strategic Partnerships

Japan’s semiconductor industry also benefits from domestic actors, whose presence is critical to the current turnaround. Both the public and commercial sectors are providing crucial support for the present resurgence, including financial, technical, and market assistance.

The Japanese Government

The Japanese Government plays a vital role in initiating Japan’s collaboration with many of its external supporters. The government’s diplomatic efforts with the United States helped create, in 2022, the US-Japanese Task Force for Next-Generation Semiconductor, a body to coordinate bilateral cooperation in semiconductors that, in turn, has facilitated many US-Japanese cooperative efforts such as the Rapidus-IBM cooperation scheme.

More important are the Japanese Government’s generous subsidies for the industry. At about USD 25.7 billion, or 0.71% of the country’s GDP (stretching from 2021 to 2024), Japan’s Government demonstrates its utmost determination to revive the country’s once-exalted semiconductor industry. Though the absolute amount of investment cannot match that of the United States, Japan outpaces the United States in terms of percentage of GDP (0.21%).

The Japanese private sector

The government’s subsidy will be insufficient to attract new investments in a sector already saturated with similar state funding from other national governments. Hence, the private sector’s support is equally important. TSMC would not have invested in Japan, even with subsidies, if Sony had not cooperated and supported it in easing the challenges of investing in a new country, something that Intel did not provide.

The Rapidus initiative is an example of the significant role the private sector can play in jump-starting Japan’s semiconductor sector. It was made possible due to private-sector actors providing financial support (such as Softbank and Mitsubishi UFJ Bank) or initial market providers (such as Toyota, Sony, and Toshiba) for the novel 2nm logic chips that the consortium will produce.

Domestic Production Landscape

Overall, the domestic production landscape of Japan as of Q2 of 2024 is characterized by strong sales in semiconductor equipment, Japan’s advantage in the industry for the past 30 years. The country boasts an extremely healthy year-on-year growth rate of 9.4% in sales of semiconductor equipment in Q1 2024, with projected growth for the entire 2024 at 8%. At the same time, Japan maintains about 30% of the market share in sales of semiconductor equipment, only behind the United States.

Implications of Japan’s Semiconductor “Renaissance”

The resurgence of Japan’s semiconductor industry could have an impact on existing global trade patterns. If Japan’s manufacturing capacity expands significantly, it may reduce the global reliance on chip manufacturers in other countries, such as Taiwan and South Korea. This could result in a diversification of the global chip supply chain, making it less susceptible to disruptions caused by geopolitical conflicts in these vulnerable regions, such as the North-South Korean conflict and the Taiwan Strait conflict.

The resurgence of Japan’s semiconductor industry may provide other players with a new major rival, making protectionist trade policies more appealing to them as a means of protecting their current advantage against a resurgent Japan. This development, in turn, will fragment the global chip market further on top of the increasing division between the US and Chinese camps.

Existing Challenges

Despite the impressive resurgence of Japan’s semiconductor industry, the country is still facing many headwinds in the future that are both external and internal in nature.

US policy changes

Despite being the United States’ top ally in the Asia-Pacific, Japan is not invulnerable to US policy changes in its chip policies to something more isolationist and nationalist, a distinct possibility at a time when the political class in the United States of both major parties is increasingly likely to resort to more protectionist solutions to both protect existing US industrial advantages as well to secure domestic political wins. The risk is not without foundations given the fact that the US utilized legal actions to keep Japanese chip makers in check in the 1980s through charges of product dumping.

Skilled labor shortage

Another key impediment to the recovery of Japan’s semiconductor industry is a lack of skilled personnel. This is seen in Japan’s lower-than-average number of STEM (science, technology, engineering, and mathematics) university graduates, a crucial field of study that offers the skill foundations for a productive semiconductor workforce. In terms of STEM graduate proportion, Japan trails many of its counterparts with comparable or even smaller populations, including South Korea, France, Germany, and Mexico.

To further compound this labor skill problem, Japan in 2023 recorded a birth rate of just 1.2, the lowest figure in a country already troubled by low fertility since the 1980s. This low birth rate will translate into a precipitous drop in the workforce as the working-age population is set to drop by 20% by 2040 to only around 60 million people. Already, there have been predictions that the country will suffer a labor shortfall of around 11 million workers by 2040.

Technological lag

Japan’s technological stagnation exacerbates all of these difficulties. According to research by Japan’s Ministry of Economy, Trade, and Industry, the country’s semiconductor industry is nearly ten years behind major chip producers such as Taiwan and South Korea. Though Japan remains powerful in memory chips, the country is much weaker in logic chips, struggling to develop 28 to 12nm logic chips, which are older and less advanced than the 3nm chips that other countries are churning out. It would be difficult to imagine that Japan can overcome such a huge technological gap, without external assistance, to produce the most cutting-edge 2nm logic chip, which will soon be rolled out in 2025.

The Road Ahead

Japan is currently pursuing a two-track strategy to maintain the resurgence of its semiconductor industry. The first track, exemplified by the TSMC project in Kumamoto, is a conservative and low-risk/low-reward approach that seeks to produce wafers for legacy chips that do not require much capital and technological investment and can meet the immediate needs of consumer electronics, electric vehicle, and other industries requiring mostly 22/28nm logic chips.

Japan is also undertaking a high-risk and high-reward track through the Rapidus initiative, which seeks to roll out forefront 2nm logic chips. This type of product requires substantial investment without much immediate demand. The massive investment in 2nm came under scrutiny regarding the product’s overall profitability. However, the production of such chips remains vital for Japan if it wants to avoid the technological quagmire it found itself in for the past 30 years. By investing in 2nm logic chips, Japan will be able to catch up with its competitors and hopefully stay ahead of the technological curve in this constantly changing industry.

Japan’s two-track approach is a sensible response to the country’s current conditions. While the first track maintains profits for the semiconductor industry by meeting immediate chip demands, the second and less immediately profitable track helps narrow the current technological gap. This strategy demonstrates that Japan’s chip ambitions are not divorced from pragmatic economic concerns, an approach that could prove sustainable in the long run.

It is too soon to declare victory for Japan’s semiconductor sector amid ongoing uncertainty. Japan still faces challenges with US policy changes, demographic decline, and technological stagnation. However, with the determination and pragmatism demonstrated so far, it is conceivable that Japan will regain its former position in the industry.

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