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Japan’s chip industry faces old challenge: scaling up production 

 April 8, 2022

Japanese auto parts maker Denso said late last month that it would set up a large power plant manufacturing plant with UMC Taiwanese foundry, a move that underscores the growing demand for these special semiconductors used in everything from electric vehicles to trains to wind turbines.

But the announcement is also another sign of what government experts and Japanese industry say is the biggest weakness of the local chip industry: a split.

Dansu has chosen to partner with the local unit of Taiwanese chipmaker, while its four local counterparts are also investing in their own manufacturing plants.

Power chips are a type of semiconductor used to regulate power flows, and are essential for everything from electric vehicles and air conditioners to factory data center servers and robots.

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This segment accounted for close to 10% of the global chip industry of $ 555 billion by 2021, and demand is expected to grow in line with the broader semiconductor market, according to global semiconductor trade statistics. “They are essential instruments for the global transition from fossil fuels,” said Hideki Wakabayashi, a professor at Tokyo University of Science and a member of an advisory panel at the Ministry of Economy, Trade and Industry of Japan (Meti).

This article is from Nike Asia, A global publication with a unique Asian perspective on politics, economics, business and international affairs. Our reporters and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the largest and growing companies listed in more than 11 economies outside of Japan.

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The question of Japan’s chipmakers is whether they will be able to hold on to their niche. The world’s largest power chip maker – German Infineon Technologies – boasts a 21% global market share, equal to the top five manufacturers in Japan combined.

Experts say that the relatively small scale of Japanese chipmakers makes it difficult for them to increase production and marketing. Japanese manufacturers are also wary of making large investments, lest their counterparts do the same and result in excess supply.

Unification is needed, experts say, before the country’s share of the global market falls further – Japan lost 1.2 percentage points from 2020 to 2021.

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Some try to turn words into deeds.

Fumiaki Sato, co-founder of Sangyo Sosei Advisory, a boutique investment banking company, aims to set up a chip foundry that will provide manufacturing services to all electrical chip manufacturers in Japan. The idea is to create a semiconductor equivalent of Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker, said Sato, former vice chairman of Merrill Lynch Japan.

“Every company invests in its own production capacity. If they need more, they can come to us,” Sato told Nikkei Asia. Building a chip plant costs up to ¥ 100 billion ($ 765 million), he said. “Companies see this as a risky task, even at a time when demand is expected to grow. There is always a risk of oversupply.”

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Sato is considering acquiring an old chip plant in Niagata, central Japan, from the American Maunsami, and his initiative won a Mathi subsidy last year. But so far, the plan has not progressed yet.

Sato noted challenges such as securing additional funding and prospects.

One factor that has stopped capacity expansion is the nature of semiconductors on their own. They are designed to handle high voltage equipment, and are usually built to individual product specifications rather than mass production.

But the industry could undergo a radical change with the start of mass production of electric vehicles, leading to calls for cheaper standard chips, said Masao Tagucci, former head of Fujitsu’s semiconductor division. “Power semiconductors may be more standard, resulting in companies being able to increase production that dominates the market,” he said. “This is what happened in the DRam market,” he added, referring to the way Japanese chipmakers lost to South Korea’s rivals in the memory chip market.

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Infinion from Germany advanced in the race to scale. It operates two large 300mm slice production plants, one in Dresden and the other in Willach, Austria. Denso’s facility will only go online in the first half of next year.

Toshiba is building two 300mm production facilities, one scheduled to operate in the current fiscal year and another for fiscal year 2024. Mitsubishi Electric will begin mass production of 300mm slices only in fiscal year 2024.

Fuji Electric, a key supplier to Toyota and Honda, said it does not pursue market share and keeps its capital investments under close control. She said she was preparing to develop a 300mm facility but declined to elaborate on the time frame.

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An industry source said that “unification is unlikely to take place unless there is a real need”.

Policymakers, meanwhile, are closely monitoring the situation.

Meti reconvened the Semiconductor Industry Strategy Panel on April 14 to discuss, among other things, the strategy for strengthening the semiconductor industry.

Demand for such semiconductors is expected to “grow rapidly” and “may exceed supply,” said Kazumi Nishikawa, director of METI’s IT industry division.

The firm recently provided subsidies to Japanese chipmakers to help them upgrade their aging plants, but Nishkawa said it was a short-term repair, not a long-term solution. “As a leading semiconductor manufacturer, Japan has a responsibility to the rest of the world for supply,” he said.

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The government is expected to detail concrete support measures for the industry as soon as it passes a bill to strengthen the country’s economic security, he said. These steps are expected to be part of next year’s budget.

Mattie achieved a victory last year when she helped persuade TSMC to build a chip plant in Kumamoto, southern Japan, but the ministry said there was more to do. “We were able to get to the starting line,” Nishikawa said of the TSMC deal. “Progress in the chip industry is rapid. Pause your efforts, and you will lag behind.”

One of the biggest tasks of the industry will be dealing with that of Japan keiretsu A system, in which companies create close affiliations and focus more on one service to another than on the wider market. The dismantling of this system will be essential for the reorganization of Japan’s fragmented chip industry.

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Taguchi, the former director of Fujitsu, sees a leader in Toshiba, which created the world’s second-largest flash memory maker, Kioxia. “Toshiba has a high global recognition. It could become a meeting point for the Japanese semiconductor industry,” he said.

Wakabayashi, a professor of Tokyo University of Science and a member of Meti’s strategy panel, also stressed the importance of global scale competitiveness.

“Major semiconductor customers will most likely be global car suppliers – Danso, Bush and Continental,” Wakbaishi said. “Danso continues the good fight, but the others are Europeans.”

A version of this article First published by Nikkei Asia on May 12, 2022. © 2022 Nikkei Inc. All rights reserved.

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