[Chiptalk] "If even semiconductor equipment falls behind, survival is impossible"... 'Shared plight' of Japanese equipment industry

Dependence on US for Core Equipment Production Technology Remains
But Difficult to Give Up 20% of Total Exports to Chinese Market

As U.S. pressure on semiconductor regulations intensifies, the market share of Japanese semiconductor companies, which primarily exported semiconductor equipment to China, has also begun to sharply decline. The forced separation from the Chinese market, which had accounted for more than 20% of their major export markets, is painful. However, since Japanese semiconductor companies cannot produce equipment without core U.S. technology, it is pointed out that they will have no choice but to reluctantly follow the U.S. policy line going forward.

Within the Japanese semiconductor industry, there are also voices of self-reflection that they should not continue to only watch the U.S. closely. They argue that the humiliating “U.S.-Japan Semiconductor Agreement” of the 1980s, when Japan had to give up its semiconductor industry golden age under U.S. pressure, must not be repeated. Even if Japan participates in the regulations, there are calls to find a balance so that the Japanese economy can still gain practical benefits.

[Image source=Reuters Yonhap News]

Although There Is a Troubled History with the U.S. in the Semiconductor Field... High Dependence on Technology

According to the Nihon Keizai (Nikkei) newspaper on the 3rd, from October to December last year, Japan’s semiconductor equipment exports to China decreased by 16% compared to the same period the previous year. This decline was sharp even considering China’s COVID-19 lockdown measures at the time. Conversely, semiconductor equipment exports to the U.S. increased by more than 10% during the same period.

Inside and outside Japan, it is analyzed that the impact of U.S. pressure on semiconductor export restrictions to China is significant. Nikkei pointed out, “As the U.S.-China confrontation intensifies, semiconductors have become strongly associated with geopolitical risks such as supply chain disruptions. Each country and region is using massive subsidies to increase semiconductor production domestically, making exports to China structurally difficult.”

Some express concerns that a situation similar to the 1980s U.S.-Japan Semiconductor Agreement might recur, where the Japanese semiconductor industry is once again dragged along by the U.S. In 1986, when Japan’s global DRAM market share exceeded 80%, the U.S. government applied strong trade pressure on Japan, forcing it to follow U.S. policy lines.

At that time, the U.S. government required Japanese semiconductor companies to disclose production costs and imposed production volume restrictions to raise the market share of U.S. semiconductor companies within Japan to 20%. This was the first U.S.-Japan Semiconductor Agreement. Later, when the agreement was not properly observed, trade retaliation was implemented, and the two countries signed the second U.S.-Japan Semiconductor Agreement in 1996. As a result, Japan’s semiconductor industry faced a prolonged period of stagnation.

Subsequently, in 1997, Intel regained its position as the world’s number one semiconductor company and has maintained the throne since then. Following Intel, American companies such as Motorola and TI ranked high, and Samsung Electronics also ranked within the top 7 in semiconductor sales that year. Unlike in the security sector, the semiconductor field did not have a good relationship with the U.S. Nevertheless, from the current perspective of the Japanese semiconductor industry, it is difficult to easily abandon the U.S. Above all, most of the core technologies for producing Japanese semiconductor equipment depend on American companies, so if Japan rejects U.S. policies and maintains its export share to China, there is a risk of facing difficulties in semiconductor equipment production.

Moreover, it would become difficult to receive technology transfers from the U.S. Currently, Rapidus, a consortium of major Japanese semiconductor companies, has signed an agreement with IBM to begin mass production of 2-nanometer semiconductors. With moves to check China and the TSMC factory being established in the Kyushu region, breaking the cooperative system with the U.S. could potentially hinder the growth of the semiconductor industry.

The Chinese Market Is Too Big to Simply Abandon

However, there are also voices within Japan that it is difficult to solely side with the U.S. and give up the huge Chinese market. If China’s economic recovery becomes clear, the semiconductor industry could become very active again, and in that case, sales in the export market to China could surge.

Until recently, China accounted for more than 20% of total exports in the Japanese semiconductor equipment industry. For example, 26% of Tokyo Electron’s 2021 sales came from exports to China.

Mayuki Hashimoto, chairman of SUMCO, which produces silicon wafers that serve as the base for semiconductors, expressed optimism, saying, “If China’s own semiconductor production activities become more active, China may buy more (Japanese wafers).” In this situation, continuing to participate in U.S. regulations against China is tantamount to losing a major arm.

Japanese companies are currently aiming to target non-advanced fields that are not included in the U.S.-announced China-related regulations. Nikkei reported, “Demand for semiconductors used in electric vehicles is strong, and since China is an important customer for large Japanese equipment manufacturers, they are united in their intention to continue expanding business.”

Ultimately, the dominant view is that the Japanese government must step in and skillfully walk the tightrope between the U.S. and China to survive. Yuichiro Tamaki, leader of the Democratic Party for the People and a former Ministry of Finance official, emphasized in an interview with FNN, “Semiconductor manufacturing equipment is one of Japan’s major exports, and the U.S. putting the brakes on this will inevitably cause significant damage. If Japan, which has been pushed out of the global semiconductor market, also loses its share in semiconductor manufacturing equipment, it will no longer be able to survive. The Ministry of Economy, Trade and Industry and the Ministry of Foreign Affairs must actively engage in diplomatic negotiations.”