To a large extent, our modern world is powered by semiconductors, which represent the building blocks of both legacy and emerging applications. As the impact of digital technologies on society and business accelerates, semiconductors are expected to balloon into a USD 1 trillion industry by the end of the decade. Their role as enablers of technological megatrends, including artificial intelligence (AI), autonomous driving and 5G networks, makes chips strategically important for achieving both industrial growth and economic security.
Against this backdrop, global powers have all passed legislation to bolster their semiconductor sectors and onshore production, pushing fab capacity to record highs. Most notable among these is the Biden administration's CHIPS Act, one of the few pieces of legislation that appear likely to survive the upcoming change in U.S. leadership. Despite campaign rhetoric, President-elect Donald Trump is unlikely to roll back a policy that boosted employment and attracted critical technologies onshore, according to industry experts.
"Today, there is a profound recognition of the value proposition and vital role semiconductors play in bolstering a nation's economic strength and innovation capacity," observes Eric Johnson, CEO and president of JSR Corporation, a global powerhouse in advanced semiconductor materials responsible for providing around 25 percent of the world's photoresists—light-sensitive resins crucial for creating intricate microchips. "Politically, there has been minimal controversy around the regionalization of foundries. While the technology and its infrastructure are inherently exciting, the ability to invest with minimal friction is the force propelling the current upcycle."
Japan as a Production Hub
For Japan, the current cycle marks a unique opportunity not only to boost exports but also to partially regain the status it held in the 1980s and 1990s, when the country was the dominant chip production hub.
To achieve this revival, the Japanese government and private sector have articulated a three-axis strategy centered on the onshoring of semiconductor production, greater collaboration with international organizations and the development of next-generation technologies. Supported by a large budget dedicated to semiconductor manufacturing, the country has already concluded a series of agreements with leading players, including the world's largest chipmaker, TSMC, which in 2021 announced it would build a production base on Kyushu Island.
TSMC's investment in Japan is an integral part of the company's expansion strategy, which also includes the construction of a new foundry in Arizona. Because these two projects began almost simultaneously, their evolution provides a glimpse into Japan's advantages as a location for semiconductor production.
Originally scheduled to begin mass production in 2024, TSMC's U.S. project has been plagued with various delays, and production is now expected to begin two years late. In stark contrast, the Kyushu foundry opened in February of this year, with plans underway for a second facility slated for completion by 2027.
While one of the reasons for this divergence is the difference in scale between the two projects—the Arizona plant will focus on higher-end chips—industry executives familiar with the matter also highlight other factors. Most significantly, they say, Japan has better chip industry infrastructure than the U.S.
The comparison between Japan and the U.S. exemplifies a key advantage of the former: its industrial and semiconductor ecosystem. While the country has lost its market share in terms of chip production, it remains a cornerstone of the semiconductor supply chain. Today, Japan controls around 50 percent of the global market for essential chip-making materials and around 40 percent of semiconductor production equipment, according to various industry sources.
As such, the country is home to strategically important enterprises essential to advanced chip production. A case in point is Tokyo Electron (TEL), one of the world's largest and most successful semiconductor equipment makers, which counts among its clients all major foundries.
"Device scaling, deposition, lithography, etching and cleaning are all critical processes in chip production," explains Toshiki Kawai, representative director, president and CEO of TEL. "TEL is the only company in the world that can offer products for these four key processes, and our product market share in each segment is number one or number two at present."
JSR is another such example. Beyond its dominant position in the traditional photoresist sector, the firm has made aggressive investments in the development of metal oxide resists, materials crucial to extreme ultraviolet (EUV) lithography, a production technology used to manufacture today's most advanced chips.
To international foundries, having access to this unique ecosystem represents an obvious comparative advantage. This argument is further strengthened when looking at Japan's entire semiconductor supply chain, which is also composed of a multitude of small and medium-sized enterprises (SMEs) that provide comprehensive support to larger companies.
A Unique Ecosystem
"Japan was once the world leader in semiconductor manufacturing, so the supply chains and material manufacturing technologies established during that time still exist today," explains Ikunobu Sonoda, president of Techno Quartz, a company specializing in the production of quartz, silicon and ceramic products. "We believe that this serves as motivation for wanting to establish production bases in Japan."
As a commissioned manufacturer of components for some of the world's leading semiconductor equipment makers, Techno Quartz exemplifies the advantages that Japanese suppliers offer to international firms.
"Competitiveness is not simply a matter of pricing but also encompasses factors such as quality, delivery time, business continuity planning and risk mitigation," says Mr. Sonoda. "Catering to a major manufacturer's needs quickly, efficiently and with competitive pricing are the three keys to our business."
To remain competitive in a market dominated by large enterprises, Japan's smaller suppliers have adopted a laser-sharp focus on the development of niche technologies that larger makers do not seek to enter. In turn, this has created a complementary relationship between clients and suppliers.
"The semiconductor industry is formed by the cooperation of specialists, and that is a reason why Japan still has a large share in specific fields of semiconductor production," argues Yojiro Kamei, president and CEO of SEIREN KST.
SEIREN KST is a vibrant example of this strategic success. To grow, the company focused on a handful of core applications, including the processing of SOI (silicon on insulator) wafers, a special type of silicon wafer built with an extra layer of insulating material, which allows for faster and more energy-efficient devices by reducing electricity leakage.
"We are able to supply oxide films that are ten times thicker than competitors'," says Mr. Kamei. "Our products are widely used in optical devices because they contribute to improved communication accuracy."
Explosive Growth Incoming
As global foundry capacity continues to expand against a backdrop of increased demand from both new and legacy applications and strategic onshoring investments, the market for production equipment and materials is set to surge, with global trade organization SEMI expecting to see a 22 percent increase in equipment spending by 2025 to reach USD 132 billion.
This trend is providing Japanese suppliers with a window of opportunity to drastically boost exports and expand their customer bases. To prepare for this period of explosive growth, Japanese firms have made strategic investments globally.
This has also been the case for Toray Research Center (TRC), a subsidiary of global multinational Toray Industries. Established in 1978, TRC specializes in advanced analytical techniques and physical property evaluations to support research and manufacturing across diverse industries, including electronics, materials and life sciences.
"In 2018, we established our first overseas subsidiary in Shanghai, and in October of the same year, we set up an analysis center at the Toray Automotive Center Europe," says Masanobu Yoshikawa, president of TRC.
With its wide range of analytical instruments capable of analyzing semiconductor materials from both nano and macro perspectives, TRC has become a cornerstone of semiconductor research.
"We have more than 2,000 clients, including companies and research institutions both inside and outside Japan. Global demand for semiconductors is surging, so it is crucial to constantly upgrade ourselves and maintain our position at the forefront of the industry," explains Dr. Yoshikawa.
With limited scale and resources, Japan's smaller suppliers that lack the backing of a large multinational group face challenges in capturing global growth. Bridging that gap in the market has created an opportunity for specialized trading companies.
One such example is Mabuchi S&T, a trader of materials and equipment used in the optical and electronic industries. "Our strength as a trading firm is to act as a mediating bridge between Japanese and overseas companies," says Takashi Mabuchi, president of Mabuchi S&T. "We have this vast network of companies and we've been introducing high-end technologies from SMEs to foreign markets."
Besides its network, the success of Mabuchi S&T has been built on its ability to provide comprehensive support services to its clients, including quality improvements and delivery optimization. Given the expected growth of the sector, demand for Mabuchi S&T's services is set to continue expanding.
An Eye to the Future
While the coming years bode well for Japanese suppliers, the true explosive growth of the semiconductor industry will likely arrive later in the century as emerging technologies become mainstream.
"Up until 2023, we saw that it took 76 years [for the semiconductor market] to reach USD 500 billion," states TEL's CEO, Mr. Kawai. "Now we estimate that the market size will double in less than six years [and] experts are predicting that the third wave, which will be driven by quantum computing and Industry 5.0, will grow the market to a staggering USD 5 trillion valuation by 2050."
Decades from now, when semiconductors will have ballooned into a multi-trillion-dollar industry, will industry experts look back at the current period as the starting point of Japan's great silicon expansion?