Within the Eighties, Japan was the dominant participant within the semiconductor market. However enormous shifts in the best way the chip provide chain operated eroded that modern.
Nations like Taiwan with TSMC, the world’s largest and most superior semiconductor producer, started to dominate within the manufacturing of chips. The U.S. is essential in areas like design. Whereas the Netherlands has ASML, an organization that makes instruments required to fabricate cutting-edge chips.
Japan is now on a drive to revitalize its semiconductor business.
Tokyo has unlocked billions of {dollars} of subsidies for the sector. On the coronary heart of its revival efforts is Rapidus Company, an organization based in 2022 by the Japanese authorities and eight home firms to develop and manufacture superior semiconductors.
Rapidus Company goals to fabricate 2 nanometer chips by 2027, because it seems to be to catch as much as TSMC and Samsung.
On this episode of Past the Valley, Tom Chitty and I are joined by Fei Xue from the Economist Intelligence Unit (EIU), to speak about Japan’s efforts to reignite its home semiconductor business.
You probably have any ideas on this or earlier episodes, please electronic mail us at [email protected].
You’ll be able to subscribe to “Past the Valley” by clicking the hyperlinks under to your chosen platform:
Apple Podcast
Google Podcasts
Spotify
Here’s a transcript of the “Past the Valley” episode launched on August 6, 2024. It has been edited for readability and brevity.
Tom Chitty
By now, you are most likely conscious of the significance of semiconductors. They’re in all the pieces from smartphones to trainers, and are an important part within the growth of Gen AI. However you could not know that again within the Eighties Japan occupied greater than half of the worldwide semiconductor market. Since then, nonetheless, different nations have led the best way as they scramble to safe their chip provide chains. Now Japan, with the backing of each authorities and enterprise, is planning to revitalize their semiconductor business and have begun a quest to develop the world’s most superior microchip. Our visitor this week is a senior analyst on the Economist Intelligence Unit. Created in 1946 the EIU, because it’s in any other case identified, is a analysis and evaluation division of The Economist Group, the sister firm to The Economist newspaper. He focuses on North East Asia, offering forecasts and evaluation on financial growth, public coverage and Worldwide Relations within the area. Fei Xue, thanks for becoming a member of Past the Valley.
Fei Xue
Thanks. Glad to be right here immediately.
Tom Chitty
Effectively, let’s get cracking for our listeners. Summarize how essential semiconductors [are], I did in the beginning, however simply to provide an understanding of why individuals ought to care about what we’re speaking about immediately.
Fei Xue
Primarily semiconductors [are] extra like a commodity these days, and we use this very small part in all places in not solely electronics gadgets, but in addition, such as you mentioned, even trainers. We now use that to measure issues. And finally, I feel, as a result of the transferring pattern of the world is a connection of all the pieces collectively, we’d like semiconductors for that to be achievable. And semiconductors, largely, there are two teams of it. One is logic chips, the opposite is reminiscence chips. And logic chips is what we name processors, and reminiscence chips is the place we retailer information. Yeah, the 2 greatest phase of the semiconductor markets and every phase has their dominant powers in it.
Tom Chitty
So earlier than we get again to it, Arjun, stat of the week.
Arjun Kharpal
The stat of the week is 97 billion U.S. {dollars}.
Tom Chitty
Let’s speak about particularly then, Japan. Give us a little bit little bit of background on Japan’s semiconductor business.
Fei Xue
Japan was the pioneer of worldwide semiconductor analysis and growth. On the finish of [the] Eighties, Japanese firms accounted for like 51% of the worldwide semiconductor market. Why? As a result of in 1980, a consortium of Japanese firms made a breakthrough by way of creating or growing the electron beam lithography know-how by way of making semiconductors a lot simpler and at a less expensive worth, and in addition with the assistance from state fund and financing powers, they shortly take up many of the international share of semiconductors and grow to be a powerhouse in that space. But in addition, such as you mentioned, after the Eighties ranging from Nineties their market share shortly descended, and proper now their collective market share is like under 10% on the earth. And many of the semiconductors made in Japan are both specialty semiconductors, associated to particularly automotive business, or legacy semiconductors, which is greater than 28 nanometers.
Arjun Kharpal
Fei, what [were] the adjustments [that] occurred that meant that Japan misplaced a few of its management? I do know a part of it was political, proper? I feel underneath the Reagan administration within the U.S., they imposed some very huge tariffs on Japanese reminiscence semiconductors, which successfully damage. However have been there different causes as properly?
Fei Xue
Two huge causes. One is political, as you talked about, the 100% semiconductor tariffs imposed by the U.S. But in addition from U.S., in 1986 the U.S. and Japan signed the U.S.-Japan semiconductor settlement. Primarily it set the underside restrict for Japanese-made semiconductors’ worth bought within the U.S., but in addition it forcefully elevated the share of international semiconductors bought within the Japanese market. So by doing this … one factor undercut Japanese semiconductor chip makers’ competitiveness within the international market. One other factor [is] that [it] compelled open [the] Japanese semiconductor market to international gamers, and this creates alternative for the U.S., South Korea and Taiwan. Talking of the latter two, round Nineties there’s a generational evolution in semiconductor growth – the specialization in sector. So historically, one single firm, a giant firm, takes care of each chip design and in addition the manufacturing, which is the normal Japanese mannequin. However ranging from Nineties specialization made it potential for one firm to give attention to chip designing, which is a robust level for U.S. firms. And a few firms began to only give attention to manufacturing. So primarily, TSMC, the Taiwanese chip maker, is only a contractor, they give attention to manufacturing semiconductors designed by whoever are the gamers, and that gave all these firms the chance to leapfrog Japanese firms by investing closely right into a sure particular phase or sector on this business, and plenty of of those Japanese semiconductor makers, they may not catch up, with an enormous quantity of fastened funding and authorities assist to the business additionally declining a little bit bit. In order that’s why Japanese chip makers step by step misplaced competitiveness within the international market.
Arjun Kharpal
So simply to summarize, I imply fairly just a few issues there, however it was one; that the politics … the kind of decline of funding, but in addition the rise in competitiveness of international gamers who’re allowed to enter the market. But in addition, I feel, one of many greatest shifts, and also you heard it, and if our listeners ever come throughout, is the fabless mannequin, proper? The rise of the fabless mannequin. You most likely hear today about Taiwan Semiconductor Manufacturing, Co. or TSMC, who’s the largest semiconductor producer on the earth. They are a huge beneficiary of this transfer for firms that needed to not manufacture their very own chips, however really simply design them and outsource that manufacturing to TSMC and others as properly. And in order that’s one of many huge shifts. What is going on now then Fei, by way of Japan’s bid and need to revive its personal business? What are they doing?
Fei Xue
They’re adopting a really complete strategy, I’d say. And it is once more, [a] state-led initiative pulling collectively personal sector assets and growth capabilities and [on the] one hand, they wish to step into the chip designing sector with collaboration program with IBM within the U.S. But in addition they wish to entice worldwide funding by way of semiconductor making or chip making, and to ascertain fabs in Japan’s territory. And so they have achieved a sure diploma of success in early phases. They’ve attracted TSMC to ascertain fabs on the Kyushu island, Kumamoto Prefecture. And TSMC has already mentioned that they’ll arrange one other, the second fab there. And in addition eight Japanese digital firms put assets collectively to create a consortium referred to as Rapidus with state funding assist. And this consortium aimed to have the ability to take advantage of superior semiconductors, two nanometers semiconductors by 2027.
Tom Chitty
For our listeners that do not know the distinction between two nanometers and three nanometers, and I imagine that 40 nanometers is type of the place Japan’s semiconductor business is in the meanwhile by way of its producing of one of the best microchip it has, however the main microchip is three nanometers. So when somebody says two nanometers, it is similar to, one nanometer higher, however it’s huge, sure?
Fei Xue
Sure. The issue of miniaturizing the semiconductors improve exponentially by technology. It requires plenty of funding, plenty of analysis and growth, and so it is onerous. To not point out that truly, in line with Rapidus’ newest plan to have the ability to make two nanometer semiconductors by 2027, they’ll already be behind essentially the most superior innovative semiconductors at the moment, as a result of TSMC and Samsung have already got plans to make 1.5 nanometer semiconductors by 2026. One other level is that truly some Japanese firms are attempting to bypass this and to make use of a special set of know-how, like on the again finish, by way of chip packaging, superior chip packaging, so to stack chips collectively or to include several types of chips to enhance the efficiency of processes. So they’re making an attempt to make [the] most superior or miniature semiconductors on one hand, however alternatively, they’re actively looking for [a] totally different strategy to enhance a chip’s efficiency.
Arjun Kharpal
Fei why do we have to maintain going smaller and smaller by way of nanometers?
Fei Xue
As a result of it should improve the utilization or the usefulness of semiconductors, and in addition it should robotically enhance the efficiency of the processors.
Arjun Kharpal
I feel one of many different fascinating belongings you mentioned was that even when Rapidus, if it manages to commercialize two nanometers in 2027, it should nonetheless be behind the forefront from TSMC and Samsung, and so forth. That is actually the issue, proper? For lots of nations, they nonetheless, as a lot as they wish to enhance their very own home business, they’re nonetheless going to rely closely on manufacturing from TSMC and from Samsung, simply due to, naturally, the quantity of R&D these firms put in through the years, however [also because of] a lot of a head begin they’ve as properly.
Fei Xue
Yeah, undoubtedly. However to be honest, for Japanese firms, they’re enjoying the catch-up position. They do not essentially want to have the ability to take advantage of cutting-edge semiconductors, as a result of there will probably be an enormous marketplace for legacy chips, and in addition the chips they’re making can present to home demand, and that will probably be an enormous marketplace for them to discover. And one other concern is that despite the fact that TSMC and Samsung can take advantage of innovative 1.5 nanometer semiconductors by 2026, their capability will not catch as much as the demand. So there’ll nonetheless be an enormous demand for even two nanometers semiconductors.
Arjun Kharpal
I feel plenty of the semiconductors, in the meanwhile, the innovative ones, they are going into high-end smartphones, proper? When you concentrate on a few of the smartphones from Apple, from Samsung, as properly, a few of, I feel Nvidia’s GPUs are on barely extra superior nodes as properly. However really, there’s nonetheless a giant marketplace for legacy nodes, proper? When you concentrate on vehicles and numerous different areas, they do not want, you already know, three nanometer chips essentially in them.
Fei Xue
No, not essentially. Proper now, I feel for lots of automobile specialty semiconductors, 28 is sweet sufficient.
Tom Chitty
You talked about earlier that this has been pushed, this revival by the federal government, largely with assist from enterprise. How a lot of that may be a burgeoning business that we must be, you already know, main, but in addition nationwide safety considerations?
Fei Xue
Yeah, it is an excellent query, as a result of these authorities Initiatives should not simply concentrating on financial development. In fact, by reviving the semiconductor business, [the] Japanese authorities needs to offer one other supply of financial development to the nation by facilitating the event or revival once more of supporting industries and applied sciences. Nevertheless, semiconductors, like I mentioned beforehand, has already commoditized within the international market, and it is grow to be so crucial to many superior know-how areas, together with synthetic intelligence, together with numerous digital gadgets and even EVs, and it is [an] important a part of the worldwide know-how race. And all nations wish to, many nations wish to achieve house on this area of interest space and in addition, they do not wish to rely an excessive amount of on international firms to try this, in order that they wish to set up home firms to at the very least have the ability to create and design manufacturing semiconductors for home makes use of. In the intervening time, we will see that essentially the most innovative semiconductors, 90% of those are manufactured by TSMC, or Taiwanese gamers alone. The others are made by Samsung from South Korea, and a small quantity made by the U.S. firms. So Japanese firms, in the event that they require these innovative semiconductors, they must depend on international provides. That is a nationwide safety concern.
Arjun Kharpal
Fei the geopolitics, or the semiconductors, have been so dragged into geopolitics over the previous few years, and there is been so many various issues taking place, involving specifically the U.S. and China, with many different key semiconductor gamers introduced in to this geopolitical combine. The U.S. has launched into a technique of three issues, it appears. One is making an attempt to chop off China’s entry to sure crucial instruments, promoting crucial semiconductors. The second is making an attempt to take a position, through the Chips Act, into its personal home semiconductor business, and the third appears to be hanging up partnerships with allies, the likes of Japan, South Korea and different locations as a way to safe provide chains, work collectively on semiconductors, and so forth. However on the identical time, the U.S. is extra not too long ago, there have been reviews the place they’re suggesting they might develop a few of the restrictions on China via a rule generally known as the international direct product rule, which might probably imply some Japanese companies, even Dutch companies, might not have the ability to export some semiconductor gear out to China. So it looks like between this battle between the U.S. and China in semiconductors, there’s plenty of nations, together with Japan, that, in lots of cases, may very well be caught within the center, the place, on the identical time they’re making an attempt to have kind of alliances with the U.S. How does a rustic like Japan navigate these difficulties on the geopolitical stage?
Fei Xue
Geopolitics is all the time a priority for the semiconductor business. Truly, the restrictions imposed by the U.S. has already been in impact since final 12 months, and by now, Japanese firms can not promote essentially the most cutting-edge semiconductors or chip making instruments to Chinese language firms. And apparently, earlier than the restrictions got here into impact, there was an enormous surge of Japanese exports to China particularly in chip making instruments, as a result of Chinese language firms wish to keep away from the price of these restrictions, and in addition they’re making an attempt onerous to construct its personal semiconductor business and to realize self sufficiency. Nevertheless, again to Japan. [The] Japanese authorities has already launched a set of restrictions on semiconductor exports to unfriendly international nations. That features over 25 totally different elements and supplies crucial to chip making course of and Japanese firms due to these growing geopolitical rivalry between U.S. and China and technological conflict and commerce conflicts actually will lose part of the market. Nevertheless they’ll discover or actively discover different elements of markets, particularly provided that many nations are attempting onerous to reshore or set up chipmaking capability inside their very own soil or in pleasant nations, and that can improve demand, to not point out the continued technological development in AI, in EV and information facilities. These will all amplify the demand for semiconductors and chip making instruments.
Tom Chitty
Let’s speak about AI, then. How a lot of this revival is an urgency to be a pacesetter in generative AI for Japan?
Fei Xue
For Japan by way of the semiconductor sector, AI wants two sorts of semiconductors. Again to the fundamentals; one is the logic chip, processors just like the one proper now, designed by Nvidia. Japanese firms, sadly, don’t have any capability in the meanwhile to make them. They need to have the ability to make them by the tip of this decade in order that they’ll profit from the surge of AI demand. Then again, AI growth and cloud computing wants an enormous capability of information facilities, which requires a considerable amount of reminiscence chips. And Japanese firms are attempting to each develop their very own capability but in addition entice telephone firms to ascertain fabs there. So Micron, the U.S. chip maker, and in addition Samsung, has already established plans to arrange both analysis facilities or fabs in Japan to make superior reminiscence chips there. So the plan for Japanese firms is to catch up on this space step by step.
Arjun Kharpal
I assumed one of the vital attention-grabbing tales that type of underlines Japan’s try to revive this business really entails one among its most oldest and conventional firms, Canon, clearly identified for printers, identified for cameras. I feel final 12 months, they mentioned they’re making an attempt to develop what they dubbed a nano imprint lithography system to rival ASML. Now we have spoken on the podcast earlier than, so much about ASML and their excessive ultraviolet lithography machines. They successfully have a monopoly on this market, just one on the earth that actually can do these programs required to fabricate essentially the most superior chips on the earth. This Canon story is fascinating, as I discussed, one of many oldest, well-known tech firms in Japan making an attempt to reinvent itself as properly. How probably is it going to have the ability to do this? However is that this additionally one thing we’ll see different extra conventional Japanese firms attempt to do as properly? Japan has such a wealthy historical past in innovation in know-how. You consider the model names that also survive today, Sony, Nintendo, even Canon as properly. What’s taking place in that space?
Fei Xue
Completely, I imply, Japan nonetheless holds an enormous benefit in lots of area of interest areas in semiconductor sector, and Japan is an lively participant within the precision gear making and plenty of semiconductor supplies. And again to the Canon. This nano imprint lithography know-how isn’t new, really. However they’ve someway improved this know-how in order that it may be mass commercialized. Nevertheless, I’d say that they should first obtain a sure diploma of success price in order that they are often aggressive to the present chief on this space. One other factor, many present fabs design their format to accommodate to the intense ultraviolet lithography know-how. So some modifications is perhaps wanted, and this (is an) precise price for the present chip makers and they also might want to surpass this hurdle as properly. Based on Canon, the primary competitiveness lies in cheaper manufacturing price, and in addition much less vitality hungry. In order that’s two predominant attractiveness for his or her know-how. Nevertheless, I’d say basically, surpassing the present gamers is one factor, however extra probably Japanese firms will use their area of interest know-how and manufacturing strategies to collaborate with present market dominant gamers and to discover market share and in addition to attempt to develop new applied sciences. One instance is Sony, which really is a giant purpose why TSMC determined to ascertain a fab in Kumamoto, is that they wish to collaborate with Sony to develop picture or subsequent technology picture sensors. And Sony, in fact, has its personal know-how there. However by pooling collectively these two firms’ assets and applied sciences, they wish to improve their competitiveness towards South Korea’s Samsung Electronics. So by collaborating with worldwide firms, Japanese firms can leverage their present know-how and manufacturing strategies to develop their international share as properly.
Arjun Kharpal
So we have spoken about Japan’s historic strengths, the best way that the worldwide semiconductor panorama modified and now makes an attempt on the revival. And you’ve got talked about additionally the truth that Japan has area of interest areas of semiconductor. The place is it significantly robust in the meanwhile? As a result of now we have spoken once more on this podcast about how complicated the availability chain is for semiconductors, from software program, design, manufacturing, the supplies in between, testing, packaging, all the pieces like that. The place do you see Japan’s power in the meanwhile? I used to be studying some stats saying it holds an 88% market share globally for coaters, builders like Tokyo Electron and Display Holdings, 53% for silicon wafers, 50% for photoresists. These are all very technical. So what do these all imply? The place are Japan’s strengths?
Fei Xue
Japan’s strengths lies in area of interest supplies, elements and precision chip making instruments and picture resist is an efficient instance. Not solely do Japanese firms, together with one referred to as Shin-Etsu Chemical, they dominate the worldwide market share of photoresist as a fabric which is utilized in lithography know-how and in addition the coating know-how, or coating approach to coat the photoresist round a wafer. It is dominated by Japanese firms. In order that they maintain up some area of interest areas or phase within the lengthy semiconductor provide or know-how chains, and so they can make the most of these type of supplies and chipmaking know-how and instruments to their benefit.
Tom Chitty
Improbable. All proper, properly, that is all now we have time for. But when, if you would like to play stat of the week, I will go away it to Arjun. He’d wish to be a recreation present host someday.
Arjun Kharpal
At some point, that is the dream. So, contestants, 97 billion U.S. {dollars} is the stat of the week. Fei, because you’re our particular visitor immediately, I will provide the first guess.
Fei Xue
Is that the fee required to make fabs by TSMC?
Arjun Kharpal
Your guess, Tom?
Tom Chitty
Estimated whole funding that the federal government of Japan say would require to make two nanometer chips.
Arjun Kharpal
You are each unsuitable. I imply, these are way more attention-grabbing than my stat, to be trustworthy, if we knew the stat for that. It is the market cap as of immediately, of recording 1st August 2024, of Tokyo Electron, which is among the huge Japanese semiconductor companies.
Tom Chitty
Fei, thanks a lot for becoming a member of us. That is it for this episode. Earlier than we go, please comply with and subscribe to the present and go away us a evaluation if you would like. Thanks, Fei.
Fei Xue
Thanks, Tom. Thanks, Arjun.
Tom Chitty
Thanks, Arjun
Arjun Kharpal
Thanks, Tom.
Tom Chitty
We’ll be again subsequent week for an additional episode of Past the Valley. Goodbye.
