In 2023, Japan went all in on semiconductors — the tiny yet critical components of electronic goods we use every single day — backing new plants and rolling out extensive support.
It’s far from alone. Around the world, governments are implementing initiatives to secure access to chips, with many pushing to develop their own capabilities and insulate supply chains from geopolitical tensions.
One of the crown jewels in Japan’s effort is the government-backed Rapidus, which is pushing to create a “Hokkaido Valley” that can compete with California’s more famous Silicon Valley, attracting big players such as ASML Holding.
Also piling into the nation’s chip sector are industry behemoth Taiwan Semiconductor Manufacturing Co., Samsung Electronics and Mitsubishi Chemical Group.
Behind these initiatives are investments worth tens of billions or even trillions of yen, which underlines a simple fact: semiconductors are big business. The market was worth around $618 billion in 2022, and is projected to reach $1 trillion by 2030, according to an EY report from April.
But that value and strategic importance also means that Japan faces significant challenges — from staffing to the need for continued investment — in attempting to reclaim something like its past dominance of the sector.
“Essentially, the semiconductor industry is a winner-takes-all industry,” said Masaru Tsuchiya, a partner at McKinsey’s Tokyo office, noting that top tier companies have been successful in securing large market shares and profits.
As the semiconductor industry needs constant investment in research and development, “it’s not easy to catch up once other companies have a strategic advantage,” Tsuchiya added.
Reviving the sector
Japan’s semiconductor conundrum is somewhat unique. Far from it being an entirely new gamble, officials are hoping they can replicate the country’s glory days in this sector. Back in the '80s and '90s, Japan was one of the biggest semiconductor players globally, buoyed by government and private sector investment. In 1988, Japanese firms accounted for 51% of sales worldwide.
Japan’s success became viewed as something of a blueprint for countries like Malaysia, Taiwan, and South Korea to develop economically without few natural resources, said Pierre Cambou, principal analyst of Yole Group, which provides semiconductor market analysis.
But trade tensions with the U.S. threw a spanner in the works, with some American officials accusing Japanese firms of flooding the market and pushing out American players, while simultaneously cutting off access to the Japan market.
This resulted in the U.S.-Japan Semiconductor Agreement in 1986, which gave American officials price-setting oversight and enabled access to Japan’s semiconductor market.
Following this, competitors — including South Korea — made gains in the sector, while Japan’s semiconductor firms lost their competitiveness as the market shifted. Japan was estimated to only account for 7% of semiconductor production in 2021, according to the Japanese Electronics and Information Technology Industries Association.
But more than just an attempt to recapture past glories, Japan’s push has been given added impetus by U.S. efforts to constrain China’s chipmaking capabilities — an endeavor that has led to a spate of restrictions on related exports by Washington and its allies, as well as a shakeup of industry supply chains.
“Considering the ongoing geopolitical risks, such as the U.S.-China issue, it is likely that the Japanese government has made the decision to secure a strategically significant semiconductor production base in the region, partly in response to industry demands,” said Jun Okamoto, KPMG Japan’s industrial manufacturing lead.
To boost Japan’s position in the sector, Prime Minister Fumio Kishida has communicated with the heads of top firms and associations in the industry to coax further investment and bolster Japan’s position, while the government has handed out major subsidies.
In December, it was revealed that Samsung Electronics would receive subsidies in order to open a chip packaging facility in Yokohama, with the government contributing around ¥20 billion ($135 million) — around half of the lab’s cost.
In 2022, Japan also launched the Leading-edge Semiconductor Technology Center to serve as a R&D hub.
Okamoto said that while the Ministry of Economy, Trade and Industry “aims to attract cutting-edge technologies such as edge AI, power semiconductors and photonics systems,” Japan will have to develop its own capabilities in these areas first.
Ultimately, officials are targeting an increase in annual semiconductor revenue to more than ¥13 trillion by 2030.
Facing reality
Japan will have to overcome a range of challenges in order to position itself as a globally-compelling semiconductor hub.
Government support through land grants, tax exemptions, subsidies and import restrictions are key supporting features when it comes to the development of chipmaking hubs, Cambou said.
One key question concerns private investment. While the government has provided ample initial funding to support the development of the sector, a key test will be whether companies follow suit, Tsuchiya said.
But even sufficient financial resources will need to be matched with a qualified workforce.
“The first crucial step is to foster semiconductor engineer (talent) through collaborative efforts between industry, government and academia,” Okamoto said.
Cambou agreed that human capital including engineers and technicians play a pivotal role in the realization of semiconductor hub ambitions, and as a result countries serious about developing themselves into chipmaking hubs should emphasize science, technology, engineering and math in schools.
In addition to developing a capable workforce and upskilling staff, constant R&D and investment will also be required.
“The challenge is, can Japan really maintain its competitiveness? The government has (laid the groundwork), but can the private sector (continue) this innovation going forward?” Tsuchiya said.
And for all the high-level pledges and announcements, Japan’s semiconductor ambitions will have to contend with the sometimes messy reality on the ground.
Indeed, as semiconductor plants have begun to descend on towns, the companies have had to deal with various issues, with TSMC’s Kumamoto plant facing water and staffing shortages.
Related to this are sustainability targets — another area where Japan is playing catch up — which the country will have to pay heed to in order to secure interest from large overseas companies, Tsuchiya said.
As companies such as Apple, Meta and Google strive to meet environmental goals, this will result in an expectation that semiconductor manufacturers will too.
“Semiconductor (production) is one of the largest portions of their carbon footprint,” Tsuchiya said.
Rival ambitions
At the same time, competition between countries is rising. While Taiwan maintains a strong grip on the market, other countries in Asia — including Vietnam, Malaysia, Singapore and Indonesia — are placing significant emphasis on semiconductors too.
Singapore, for example, has emerged as a compelling choice for semiconductor-related plants and facilities in part due to its logistical prowess, with this enticing U.S.-based GlobalFoundries and France’s Soitec to open up or expand in the city-state in 2023. The government has rolled out multibillion dollar subsidies to entice manufacturing and development, and is working to nurture essential skills in this space.
Singapore’s semiconductor industry has also benefited from increased business amid the diversification of chip supply chains — Statisia estimates that revenue in the space will reach $45.36bn this year.
Meanwhile, Vietnam, which is home to Intel’s largest semiconductor testing and packaging facility, ramped up efforts to entice investment last year, holding talks with companies over the possibility of opening the country’s first fabrication plant. And in an indication of the country’s appeal, U.S. firm Amkor opened a packaging and testing plant in October.
Cambou suggested that China may be worth considering as a potential leader in this space too, despite the semiconductor export restrictions.
“In the future, it is not impossible that China may emerge as a leader, as they tick almost all the boxes for championing the semiconductor space,” he said, noting that aggressive measures taken by the U.S. to impose technology export bans on Chinese companies such as Huawei had accelerating domestic substitution, “creating a semiconductor hub that could ultimately dominate the world,” he said.
Still, Willem Thorbecke, a senior fellow at the Research Institute of Economy, Trade and Industry in Japan, said that unless there’s a major war in Asia, “Taiwanese companies should maintain their lead in logic chips.”
“Companies like TSMC have an excellent business model as a pure-play company that does not compete with their customers. They are also technologically more advanced than their competitors. Their workers are skilled and disciplined and have decades of experience in the industry,” he said.
Japan is expected to drastically hike investment in chip gear by $7 billion this year, according to industry association Semi — an 82% increase from last year that would still put the country far behind Taiwan’s anticipated $23 billion in investments.
Still, the scientific nature of semiconductors and the multidimensional and cooperative qualities of the industry ecosystem mean that much can change, Cambou said.
“Fortunately, or not, nobody can own science, especially in an interconnected world,” he said.
“This is the chance countries in Asia have relied upon in the last half a century, upping their game to compete (with) and even surpass Western powers.”
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