In the 1980s, “Made in Japan” became a byword for electronics excellence. Concern about the country’s dominance of all things tech ran so high that a trio of US Congresspersons, no less, took to some literal Japan-bashing by using sledgehammers to smash several boomboxes into smithereens.
While these insane (and let’s be honest, slightly racist) sounding acts of protest perhaps say more about what US politicians thought the ordinary American wanted to see and hear than anything else, they were at least founded in economic reality. Back then, Japan’s annual GDP growth outstripped that of any other advanced economy, including the US, and it looked set to dominate the global tech scene for years to come.
Japan’s ‘economic miracle’ – driven by shrewd industrial policy and heavy private investment – saw its rapidly developing tech sector give birth to iconic consumer products such as the Sony Walkman and the Gameboy, while its automakers churned out some of the world’s most popular vehicles. These advances were underpinned by the country’s dominance of the semiconductor market, with its vendors producing more than half the chips consumed around the world.
Fast forward 30 years, and the picture is somewhat different, with decades of economic and technological stagnation having left Japan a mere bit-part player in the semiconductor sector that it once ruled. But there are signs things could be about to change, with a new programme of chip investment led by the Ministry of Economy, Trade and Industry, better known as METI, which was instrumental in the successes of the past.
Japan has also signalled its ambition to engage with other countries on the geopolitical tensions which threaten to disrupt the chip industry, inking the Hiroshima Accord with the UK government on semiconductor R&D, skills and materials in May, and joining the US and the Netherlands in their blockade of China’s chipmakers.
But while the government is doing a good job of flexing its muscles on the world stage, whether its companies can make an impact on a market now dominated by its neighbours Taiwan and South Korea is less certain.
The rise and fall of Japan’s chip industry
Matters were even less sure in 1945. With the country occupied by the US after the Second World War, Japan’s new Liberal Democratic government fuelled economic growth by keeping interest rates, corporation taxes and export duties low, especially for those businesses that showed promising signs of growth. Within a few years, the economy was overflowing with liquidity, money that companies often spent on R&D and the acquisition of foreign technology. Out of this milieu sprang the Japanese chip industry, overseen by keiretsu conglomerates like Hitachi, Mitsubishi and NEC. The government’s market interventionism, combined with cheap labour and strong domestic competition allowed the sector to become globally competitive. By 1988, Japan controlled 51% of the global market for semiconductors.
The following decade, however, saw Japanese semiconductor exports decline precipitously thanks to trade friction with the US. The industry itself had also started to fracture, with specialist vendors like the British chip designer Arm and Taiwanese manufacturing behemoth TSMC rising to supplant their vertically integrated Japanese rivals. Despite several valiant attempts by Tokyo to bail out its semiconductor industry, by 2022 its market share had shrivelled to just 9% of the overall chip market.
In this context, says Masatsune Yamaji, many in Japan are pessimistic about the sector’s future. “We have so many strong material vendors and capital equipment vendors, but chip vendors have become weaker and weaker over the past 30 years,” says Yamaji, a senior director analyst at Gartner who covers the semiconductor market. “We have heard a lot of good news from the Japanese government recently about aggressive investment, and some people are happy to hear it. But many, especially those in the electronics industry, know METI has made a lot of failures in the past few years.”
After taking so many wrong turns why, then, is Japan so keen to revive the glory days of the 1980s? The answer – the same epiphany, in fact, that has occurred to the US, the UK, the EU and China – is that the nation which does not control the supply chain for semiconductors will suffer during a global shortage. That’s precisely what happened in 2021, when the perfect storm of US-China rivalries and the Covid-19 pandemic saw chipmakers fail to service global demand for their products, and industries around the world falter thanks to a lack of key components.
Japan was hit harder than most, as its automotive companies ended up at the back of the queue for chips, with manufacturers instead prioritising more lucrative orders. As a result, the output from Honda’s Japanese factories fell 40% in September 2021, while Toyota was forced to close production lines at seven of its 14 factories the following month.
Slowly but surely, the global chip shortage eased, but some Japanese companies are still dealing with the fallout – Subaru said in February that it was slashing its output target for the year by 10% as it is struggling to obtain components. And many of the problems that caused the shortage remain unresolved, not least that most of the world’s leading-edge semiconductors are still made in Taiwan by TSMC. Should China choose to invade the island, as it has repeatedly threatened to do so since 1949, the ensuing global chip shortage could be instantaneous and catastrophic.
“The Taiwan Strait risks are really part of Japan’s thinking,” explains Mathieu Duchâtel, director of international studies at the Institut Montaigne think tank and an expert on the region. “Huawei’s stockpiling [of components] in 2019 to counter the US sanctions had a major impact, it was really huge. Since then, having capacity in Japan has become a national project.”
Japan has not set out an overarching piece of legislation for subsidising the chip industry, as has been the case in the US and Europe, but it has set aside funding for the sector. In February, the government reserved 368.6 billion yen ($2.8bn) to fund capital investment in chip factories, or fabs, contingent on businesses guaranteeing at least 10 years of production. This was on top of 774 billion yen ($5.46bn) pledged in the 2021 budget.
The cash is being used in two ways: one is to bolster investment by chipmakers from home and abroad and, as a result, TSMC is planning a $7bn fab in partnership with Sony, South Korea’s Samsung Electronics is considering setting up a packing plant near its existing R&D facility in Tokyo, and US memory chip maker Micron Technology is investing $3.5bn to bring cutting-edge EUV lithography chipmaking equipment to Japan.
Japan’s government also surprised many in the industry last month with a state-backed bid to buy JSR, which supplies key chemicals in the chip supply chain, for $6.3bn. The deal is pending approval by the company’s shareholders, and is being funded by Japanese Investment Core, a state investment fund which aims to boost national competitiveness.
The second strand of the plan is a bet that Japan can build the chip technology of tomorrow. Last year the government helped set up Rapidus, a new Japanese chipmaker which will work with IBM to try and commercialise advanced two nanometre (2nm) chips from a new factory it is building in Chitose, Hokkaido. Most leading-edge semiconductors are currently built on 4nm or 5nm nodes, and Rapidus hopes to have a prototype manufacturing line for its next-generation chips up and running by 2025, with mass production at some vague point in the second half of the decade. Rapidus is backed by some of the biggest names in Japanese industry, with Toyota, Sony and car parts maker Denso among those to have taken a stake in the business.
Can Japan’s semiconductor strategy succeed?
Japan isn’t the only nation struggling to work through its existential anxieties about chipmaking; the European Union, too, is keen to reinvigorate latent semiconductor supply chains. But where Brussels seems content to reproduce 4nm chips and invest vast amounts of public money to get the job done, Tokyo has successfully ginned up private sector interest to help Rapidus.
“It’s a case of a Japanese company and the state working together on a strategic project,” says Duchâtel – a case, perhaps, of the government trying to pull off the kind of artful state intervention in the market not seen since the 1980s. Indeed, says Duchâtel, “the symbiosis between METI and the Japanese industry is very high, and their capacity to work together on strategic projects is unheard of in the European context.”
But getting the fab up and running and operating it effectively at scale are two different things, Duchâtel warns. “There’s a difference between building a pilot line and building volume,” he says. “In Taiwan, when you ask about TSMC’s success, it’s not about technology, it’s about management. It seems to be more difficult than the technology – and that’s going to be the challenge.”
In any case, the idea that the Japanese market is waiting with bated breath for Rapidus to churn out thousands of 2nm semiconductors is flawed, argues Yamaji. “I don’t think Denso needs 2nm chips, and automotive companies in general are very conservative,” he says. “I don’t think there are many potential customers for Rapidus in Japan.”
The company will need to concentrate on use cases not served by other businesses if it is to make an impact, Yamaji says. “Rapidus’s target should be niche areas that require very high-performance processors which are not commercialised yet,” he says. These could include the pharmaceutical industry or the AI server markets, where orders for tailor-made chips are likely to be rejected by the likes of TSMC and Samsung for being too small, he argues.
Yamaji is more positive about the other strand of Japan’s plan, but says that while it will boost national capacity and resilience, chipmakers should be wary of rushing to embrace the high subsidies on offer in what is a famously cyclical industry. Most of the public subsidies, after all, are intended to boost production capacity to meet likely – but still hypothetical – increases in global demand for chips. But, says Yamaji, “if that doesn’t exist, their pricing strategies will collapse.”