In the Eighties, Japan was as soon as the dominant participant in the semiconductor market. However enormous shifts in the model the chip provide chain operated eroded that main-edge.
Worldwide locations appreciate Taiwan with TSMC, the arena’s largest and most superior semiconductor producer, began to dominate in the production of chips. The U.S. is important in areas appreciate create. Whereas the Netherlands has ASML, a firm that makes tools required to make cutting-edge chips.
Japan is now on a power to revitalize its semiconductor industry.
Tokyo has unlocked billions of dollars of subsidies for the sphere. On the center of its revival efforts is Rapidus Corporation, a firm based in 2022 by the Eastern executive and eight home companies to assemble and make superior semiconductors.
Rapidus Corporation targets to make 2 nanometer chips by 2027, as it appears to be like to accumulate up to TSMC and Samsung.
On this episode of Beyond the Valley, Tom Chitty and I are joined by Fei Xue from the Economist Intelligence Unit (EIU), to focus on Japan’s efforts to reignite its home semiconductor industry.
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Right here is a transcript of the “Beyond the Valley” episode launched on August 6, 2024. It has been edited for readability and brevity.
Tom Chitty
By now, you is inclined to be potentially responsive to the significance of semiconductors. They’re in everything from smartphones to trainers, and are a extraordinarily crucial component in the enchancment of Gen AI. However that you just would be in a position to perhaps perhaps also simply no longer know that support in the Eighties Japan occupied larger than half of the realm semiconductor market. Since then, nonetheless, other countries absorb led the model as they meander to stable their chip provide chains. Now Japan, with the backing of both executive and commerce, is planning to revitalize their semiconductor industry and absorb begun a quest to assemble the arena’s most superior microchip. Our visitor this week is a senior analyst at the Economist Intelligence Unit. Created in 1946 the EIU, as it be otherwise identified, is a analysis and analysis division of The Economist Group, the sister firm to The Economist newspaper. He specializes in North East Asia, offering forecasts and analysis on financial construction, public protection and World Relatives in the build. Fei Xue, thank you for becoming a member of Beyond the Valley.
Fei Xue
Thank you. Gratified to be right here this day.
Tom Chitty
Neatly, let’s salvage cracking for our listeners. Summarize how crucial semiconductors [are], I did at the begin, but factual to present an notion of why folks also can simply composed care about what we’re talking about this day.
Fei Xue
In point of fact semiconductors [are] extra appreciate a commodity in at the present time and age, and we use this very dinky component all over in no longer most efficient electronics devices, but also, appreciate you mentioned, even trainers. We now use that to measure things. And by some means, I mediate, since the provocative pattern of the arena is a connection of everything collectively, we need semiconductors for that to be achievable. And semiconductors, largely, there are two groups of it. One is common sense chips, the opposite is memory chips. And common sense chips is what we name processors, and memory chips is where we store records. Yeah, the 2 greatest segment of the semiconductor markets and each and every segment has their dominant powers in it.
Tom Chitty
So prior to we salvage support to it, Arjun, stat of the week.
Arjun Kharpal
The stat of the week is 97 billion U.S. dollars.
Tom Chitty
Let’s focus on specifically then, Japan. Give us relatively of bit of background on Japan’s semiconductor industry.
Fei Xue
Japan archaic to be the pioneer of world semiconductor analysis and construction. On the tip of [the] Eighties, Eastern companies accounted for appreciate 51% of the realm semiconductor market. Why? Due to in 1980, a consortium of Eastern companies made a step forward in the case of rising or rising the electron beam lithography expertise in the case of making semiconductors grand more uncomplicated and at a cheaper price, and also with the back from recount fund and financing powers, they hasty absorb many of the realm portion of semiconductors and change into a powerhouse in that residence. However also, appreciate you mentioned, after the Eighties starting from Nineties their market portion hasty descended, and correct now their collective market portion is appreciate below 10% in the arena. And many of the semiconductors made in Japan are either distinctiveness semiconductors, linked to especially automotive industry, or legacy semiconductors, which is bigger than 28 nanometers.
Arjun Kharpal
Fei, what [were] the adjustments [that] took build that meant that Japan lost about a of its management? I know segment of it was as soon as political, correct? I mediate under the Reagan administration in the U.S., they imposed some very enormous tariffs on Eastern memory semiconductors, which successfully disaster. However were there other causes as nicely?
Fei Xue
Two enormous causes. One is political, as you mentioned, the 100% semiconductor tariffs imposed by the U.S. However also from U.S., in 1986 the U.S. and Japan signed the U.S.-Japan semiconductor agreement. In point of fact it build the bottom restrict for Eastern-made semiconductors’ price sold in the U.S., but also it forcefully increased the portion of foreign semiconductors sold in the Eastern market. So by doing this … one thing undercut Eastern semiconductor chip makers’ competitiveness in the realm market. One other thing [is] that [it] forced originate [the] Eastern semiconductor market to foreign players, and this creates opportunity for the U.S., South Korea and Taiwan. Speaking of the latter two, spherical Nineties there is a generational evolution in semiconductor construction – the specialization in sector. So traditionally, one single firm, a large firm, takes care of both chip create and also the manufacturing, which is the archaic Eastern mannequin. However starting from Nineties specialization made it that you just are going to absorb the flexibility to think for one firm to point of curiosity on chip designing, which is an impressive point for U.S. companies. And a few companies began to factual point of curiosity on manufacturing. So in actual fact, TSMC, the Taiwanese chip maker, is factual a contractor, they point of curiosity on manufacturing semiconductors designed by whoever are the players, and that gave all these companies the opportunity to leapfrog Eastern companies by investing closely into a sure explicit segment or sector in this industry, and plenty of these Eastern semiconductor makers, they could perhaps perhaps no longer accumulate up, with a large quantity of fixed investment and executive reinforce to the industry also declining relatively of bit. So as a result of this Eastern chip makers progressively lost competitiveness in the realm market.
Arjun Kharpal
So factual to summarize, I mean so a lot of things there, but it was as soon as one; that the politics … the form of decline of investment, but also the enlarge in competitiveness of foreign players who are allowed to enter the market. However also, I mediate, considered one of the superb shifts, and you heard it, and if our listeners ever stumble upon, is the fabless mannequin, correct? The upward thrust of the fabless mannequin. You potentially hear for the time being about Taiwan Semiconductor Manufacturing, Co. or TSMC, who is the superb semiconductor producer in the arena. They are a large beneficiary of this transfer for companies that wished to no longer make their very secure chips, but in actual fact factual create them and outsource that manufacturing to TSMC and others as nicely. And so as that is considered one of the broad shifts. What is occurring now then Fei, in the case of Japan’s impart and desire to revive its secure industry? What are they doing?
Fei Xue
They are adopting a extraordinarily total come, I’d whine. And it be as soon as more, [a] recount-led initiative pulling collectively deepest sector sources and construction capabilities and [on the] one hand, they wish to step into the chip designing sector with collaboration program with IBM in the U.S. However also they wish to attract world investment in the case of semiconductor making or chip making, and to set fabs in Japan’s territory. And to boot they absorb got done a sure stage of success in early levels. They’ve attracted TSMC to set fabs on the Kyushu island, Kumamoto Prefecture. And TSMC has already mentioned that they’ll build up but every other, the second fab there. And also eight Eastern electronic companies build sources collectively to make a consortium called Rapidus with recount funding reinforce. And this consortium aimed with the map to salvage essentially the most superior semiconductors, two nanometers semiconductors by 2027.
Tom Chitty
For our listeners that salvage no longer know the distinction between two nanometers and three nanometers, and I imagine that 40 nanometers is roughly where Japan’s semiconductor industry is for the time being in the case of its producing of the correct microchip it has, however the main microchip is three nanometers. So when any individual says two nanometers, it be factual appreciate, one nanometer better, but it be remarkable, yes?
Fei Xue
Yes. The disaster of miniaturizing the semiconductors enlarge exponentially by generation. It requires so a lot of investment, so a lot of research and construction, and so it be hard. Not to indicate that in actual fact, constant with Rapidus’ most modern belief with the map to salvage two nanometer semiconductors by 2027, they’ll already be in the support of essentially the most superior cutting edge semiconductors for the time being, on legend of TSMC and Samsung absorb already got plans to salvage 1.5 nanometer semiconductors by 2026. One other point is that in actual fact some Eastern companies are attempting to bypass this and to use a assorted build of workmanship, appreciate on the support quit, in the case of chip packaging, superior chip packaging, so that you just can stack chips collectively or to incorporate assorted kinds of chips to enhance the efficiency of processes. So that they’re looking out to salvage [the] most superior or shrimp semiconductors on one hand, but nonetheless, they’re actively attempting for [a] assorted come to enhance a chip’s efficiency.
Arjun Kharpal
Fei why will now we absorb got to retain going smaller and smaller in the case of nanometers?
Fei Xue
For this reason would possibly perhaps perhaps also simply enlarge the usage or the usefulness of semiconductors, and also this would possibly perhaps perhaps also simply automatically enhance the efficiency of the processors.
Arjun Kharpal
I mediate considered one of the opposite mesmerizing things you mentioned was as soon as that even when Rapidus, if it manages to commercialize two nanometers in 2027, this would possibly perhaps perhaps also simply composed be in the support of the cutting edge from TSMC and Samsung, etc. That is basically the disaster, correct? For so a lot of countries, they composed, as grand as they wish to spice up their very secure home industry, they’re composed going to rely closely on production from TSMC and from Samsung, factual attributable to, naturally, the amount of R&D these companies build in over time, but [also because of] so grand of a head begin they absorb got as nicely.
Fei Xue
Yeah, no doubt. However to be interesting, for Eastern companies, they’re taking part in the accumulate-up role. They salvage no longer necessarily also can simply composed give you the selection to salvage essentially the most cutting-edge semiconductors, on legend of there would perhaps be a large market for legacy chips, and also the chips they’re making can provide to home build a query to, and that is known as a large market for them to explore. And but every other bid is that though TSMC and Samsung can salvage essentially the most cutting edge 1.5 nanometer semiconductors by 2026, their skill would possibly perhaps perhaps no longer accumulate up to the build a query to. So there will composed be a large build a query to for even two nanometers semiconductors.
Arjun Kharpal
I mediate many of the semiconductors, for the time being, the cutting edge ones, they’re going into high-quit smartphones, correct? Whenever you imagine about some of the smartphones from Apple, from Samsung, as nicely, about a of, I mediate Nvidia’s GPUs are on a small extra superior nodes as nicely. However in actual fact, there is composed a large market for legacy nodes, correct? Whenever you imagine about autos and quite plenty of other areas, they salvage no longer need, you understand, three nanometer chips necessarily in them.
Fei Xue
No, no longer necessarily. Gorgeous now, I mediate for quite plenty of vehicle distinctiveness semiconductors, 28 is appropriate enough.
Tom Chitty
You mentioned earlier that this has been driven, this revival by the chief, largely with reinforce from commerce. How grand of which would perhaps be a burgeoning industry that we are in a position to also simply composed be, you understand, main, but also national security concerns?
Fei Xue
Yeah, it be a extraordinarily like minded build a query to, on legend of these executive Initiatives aren’t factual focusing on financial enhance. Of path, by reviving the semiconductor industry, [the] Eastern executive desires to give but every other source of financial enhance to the country by facilitating the enchancment or revival as soon as more of supporting industries and applied sciences. Alternatively, semiconductors, appreciate I mentioned previously, has already commoditized in the realm market, and it be change into so critical to many superior expertise areas, at the side of man made intelligence, at the side of so a lot of electronic devices and even EVs, and it be [an] important segment of the realm expertise glide. And all countries deserve to, many countries deserve to make build in this niche residence and also, they salvage no longer deserve to rely too grand on foreign companies to effect that, so that they would appreciate to set home companies to finally give you the selection to make and create manufacturing semiconductors for home makes use of. In the meantime, we are in a position to gape that essentially the most cutting edge semiconductors, 90% of these are manufactured by TSMC, or Taiwanese players by myself. The others are made by Samsung from South Korea, and a dinky quantity made by the U.S. companies. So Eastern companies, if they require these cutting edge semiconductors, they deserve to depend on foreign provides. That is a national security bid.
Arjun Kharpal
Fei the geopolitics, or the semiconductors, were so dragged into geopolitics one day of the last few years, and there could be been so many assorted things occurring, appealing in explicit the U.S. and China, with many other key semiconductor players introduced in to this geopolitical mix. The U.S. has embarked on a strategy of three things, it appears. One is attempting to cleave off China’s salvage entry to to sure critical tools, promoting critical semiconductors. The second is attempting to make investments, via the Chips Act, into its secure home semiconductor industry, and the third appears to be striking up partnerships with allies, the likes of Japan, South Korea and other locations in lisp to stable provide chains, work collectively on semiconductors, etc. However at the identical time, the U.S. is extra unprejudiced no longer too long ago, there were experiences where they’re suggesting to boot they would possibly be able to simply salvage larger about a of the constraints on China by a rule identified as the foreign philosophize product rule, which would possibly perhaps perhaps potentially mean some Eastern companies, even Dutch companies, also can simply no longer give you the selection to export some semiconductor equipment out to China. So it feels appreciate between this fight between the U.S. and China in semiconductors, there is so a lot of countries, at the side of Japan, that, in so a lot of cases, can be caught in the center, where, at the identical time they’re looking out to absorb form of alliances with the U.S. How does a country appreciate Japan navigate these difficulties on the geopolitical stage?
Fei Xue
Geopolitics is continuously a bid for the semiconductor industry. In actuality, the constraints imposed by the U.S. has already been in salvage since closing year, and by now, Eastern companies can no longer promote essentially the most cutting-edge semiconductors or chip making tools to Chinese companies. And interestingly, prior to the constraints got right here into salvage, there was as soon as a large surge of Eastern exports to China especially in chip making tools, on legend of Chinese companies deserve to lead sure of the cost of these restrictions, and also they’re attempting hard to assemble its secure semiconductor industry and to effect self sufficiency. Alternatively, support to Japan. [The] Eastern executive has already presented a build of restrictions on semiconductor exports to rotten foreign countries. That choices over 25 assorted ingredients and provides critical to chip making project and Eastern companies attributable to those rising geopolitical contention between U.S. and China and technological battle and commerce conflicts undoubtedly will lose a segment of the market. Alternatively they’ll explore or actively explore other parts of markets, especially provided that many countries are attempting hard to reshore or set chipmaking skill internal their very secure soil or in pleasant countries, and that can enlarge build a query to, no longer to indicate the continued technological advancement in AI, in EV and records facilities. These will all expand the build a query to for semiconductors and chip making tools.
Tom Chitty
Let’s focus on AI, then. How grand of this revival is an urgency to be a frontrunner in generative AI for Japan?
Fei Xue
For Japan in the case of the semiconductor sector, AI desires two kinds of semiconductors. Again to the fundamentals; one is the common sense chip, processors appreciate the one correct now, designed by Nvidia. Eastern companies, unfortunately, absorb no skill for the time being to salvage them. They need with the map to salvage them by the tip of this decade so as that they’ll absorb the attend of the surge of AI build a query to. Alternatively, AI construction and cloud computing desires a large skill of facts facilities, which requires a large quantity of memory chips. And Eastern companies are attempting to both assemble their very secure skill but also attract cell phone companies to set fabs there. So Micron, the U.S. chip maker, and also Samsung, has already established plans to construct up either analysis facilities or fabs in Japan to salvage superior memory chips there. So the belief for Eastern companies is to accumulate up in this residence progressively.
Arjun Kharpal
I believed considered one of essentially the most appealing reviews that roughly underlines Japan’s strive to revive this industry in actual fact involves considered one of its most oldest and archaic companies, Canon, obviously identified for printers, identified for cameras. I mediate closing year, they mentioned they’re looking out to assemble what they dubbed a nano ticket lithography map to rival ASML. Now now we absorb spoken on the podcast prior to, loads about ASML and their horrible ultraviolet lithography machines. They successfully absorb a monopoly on this market, most efficient one in the arena that in actual fact can effect these systems required to make essentially the most superior chips in the arena. This Canon story is mesmerizing, as I mentioned, considered one of the oldest, nicely-identified tech companies in Japan looking out to reinvent itself as nicely. How seemingly is it going with the map to effect that? However is this also one thing we will gape other extra archaic Eastern companies strive to effect as nicely? Japan has such a rich history in innovation in expertise. You imagine of the emblem names that also survive for the time being, Sony, Nintendo, even Canon as nicely. What’s occurring in that residence?
Fei Xue
Fully, I mean, Japan composed holds a large attend in so a lot of niche areas in semiconductor sector, and Japan is an gripping participant in the precision equipment making and quite plenty of semiconductor provides. And support to the Canon. This nano ticket lithography expertise is no longer original, in actual fact. However they absorb got by some skill improved this expertise so as that it would even be mass commercialized. Alternatively, I’d whine that they deserve to first effect a sure stage of success fee so as that they’ll also be aggressive to the reward leader in this residence. One other thing, many reward fabs create their layout to accommodate to the intense ultraviolet lithography expertise. So some adjustments can be important, and this (is an) valid cost for the reward chip makers and to boot they’ll must surpass this hurdle as nicely. In accordance with Canon, the important competitiveness lies in cheaper production cost, and also less vitality hungry. So that is two important unprejudiced appropriate appears to be like for their expertise. Alternatively, I’d whine in regular, surpassing the reward players is one thing, but extra seemingly Eastern companies will use their niche expertise and manufacturing recommendations to collaborate with reward market dominant players and to explore market portion and also to strive to assemble original applied sciences. One instance is Sony, which in actual fact is a huge reason why TSMC made up our minds to set a fab in Kumamoto, is that they wish to collaborate with Sony to assemble image or subsequent generation image sensors. And Sony, unnecessary to whine, has its secure expertise there. However by pooling collectively these two companies’ sources and applied sciences, they wish to enlarge their competitiveness in opposition to South Korea’s Samsung Electronics. So by taking part with world companies, Eastern companies can leverage their reward expertise and manufacturing recommendations to salvage larger their world portion as nicely.
Arjun Kharpal
So now we absorb spoken about Japan’s historical strengths, the model that the realm semiconductor landscape changed and now makes an strive at the revival. And you’ve got got mentioned also the incontrovertible reality that Japan has niche areas of semiconductor. Where is it in particular sturdy for the time being? Due to now we absorb got spoken as soon as more on this podcast about how advanced the provision chain is for semiconductors, from software, create, manufacturing, the provides in between, attempting out, packaging, everything appreciate that. Where effect you gape Japan’s strength for the time being? I was as soon as reading some stats announcing it holds an 88% market portion globally for coaters, builders appreciate Tokyo Electron and Conceal Holdings, fifty three% for silicon wafers, 50% for photoresists. These are all very technical. So what effect these all mean? Where are Japan’s strengths?
Fei Xue
Japan’s strengths lies in niche provides, ingredients and precision chip making tools and photo resist is a like minded instance. Not most efficient effect Eastern companies, at the side of one called Shin-Etsu Chemical, they dominate the realm market portion of photoresist as a topic which is archaic in lithography expertise and also the coating expertise, or coating methodology to coat the photoresist spherical a wafer. It is dominated by Eastern companies. So that they retain up some niche areas or segment in the long semiconductor provide or expertise chains, and to boot they’ll salvage the these kinds of roughly provides and chipmaking expertise and tools to their attend.
Tom Chitty
Wonderful. All correct, nicely, that is all now we absorb got time for. However if, if you happen to would appreciate to play stat of the week, I will leave it to Arjun. He’d appreciate to be a sport advise host one day.
Arjun Kharpal
In the end, that is the dream. So, contestants, 97 billion U.S. dollars is the stat of the week. Fei, since you is inclined to be our particular visitor this day, I provides you the first guess.
Fei Xue
Is that the cost required to salvage fabs by TSMC?
Arjun Kharpal
Your guess, Tom?
Tom Chitty
Estimated total investment that the chief of Japan whine would require to salvage two nanometer chips.
Arjun Kharpal
You are both imperfect. I mean, those are a long way extra appealing than my stat, to be appropriate, if we knew the stat for that. It is miles the market cap as of this day, of recording 1st August 2024, of Tokyo Electron, which is considered one of the broad Eastern semiconductor companies.
Tom Chitty
Fei, thank you so grand for becoming a member of us. That is it for this episode. Earlier than we meander, please put collectively and subscribe to the advise and leave us a review if you happen to would appreciate. Thank you, Fei.
Fei Xue
Thank you, Tom. Thank you, Arjun.
Tom Chitty
Thank you, Arjun
Arjun Kharpal
Thank you, Tom.
Tom Chitty
We will be support subsequent week for but every other episode of Beyond the Valley. Goodbye.
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