The other three Asian semiconductor players matter for other reasons. Taiwan matters as a key partner. Korea is mainly pictured as a competitor in the memory segment, while China’s state capitalism and hostile intentions pose a quasi-existential threat.
There is a certain irony in how, through a twist of history, the risk of Chinese dumping intentionally bankrupting segments of Japan’s semiconductor industry is now seriously considered by a country that 35 years ago was the object of US trade sanctions for its dumping practices. Times have completely changed. The Chinese Communist Party has formulated a vision of global leadership, even though the Chinese semiconductor industry is extremely dependent on foreign imports. As China inevitably catches up, it will acquire huge strategic leverage if it owns chokepoints in the semiconductor industry. Japan successfully managed China’s 2010 cutoff of rare earth exports, but semiconductors could cause more damage.
This risk assessment leads to a logical conclusion heard also in Europe: what matters most is owning chokepoints and cultivating strengths. By definition, Japan’s Integrated Device Manufacturers (IDMs, or companies that design and produce semiconductors), just like European firms, do not aim at mastering the cutting edge nodes of semiconductor manufacturing. The stories of the semiconductor branches of Toshiba, Fujitsu, Hitachi and Mitsubishi have similarities to those of Europe’s three largest IDMs: STMicroelectronics, Infineon and NXP. Not being TSMC does not mean that they have not built thriving businesses. They still have world leading strengths in microcontrollers, sensors and power semiconductors. METI recommends investment in R&D and capital expenditure to maintain Japan’s highly competitive position in power semiconductor and sensors. For microcontrollers for the automotive industry and smart factories, METI calls for supply chain diversification in order to maintain Japan’s high market share. And Japan holds a strong card with its 50% market share in many categories of materials for semiconductors. In 2019, it showed that it was ready to play this card when it imposed restrictions on exports of photoresists to Korea.
The advanced foundry debate in Japan and Europe
METI’s strategy paper underlines the importance of enabling domestic production for advanced logic semiconductors. This foundry issue will be very familiar to European observers who, since last year, have experienced a fierce debate in Europe between those who want an advanced foundry on European soil, crossing the threshold of the 7 nanometer manufacturing process, and those who do not.
Europe’s most advanced fab, in Dresden, uses 22 nanometer process technology. Japan’s most advanced foundry process is 40 nm. Soon, the cutting edge will be 2 nanometers - the Taiwanese government has just greenlighted the construction of TSMC’s new fab in Hsinchu. Because the market for the most advanced logic processors is essentially state-of-the art consumer digital devices, such as the iPhone, many industrial players in Europe argue that subsidizing an advanced fab would be a waste of public money. Their argument is well captured by the head of Global Foundries’s most advanced fab in Dresden, when he states: "We believe that a Dresden technology corridor from 55 to 22/12 nanometers will provide solutions for 90 percent of the chips that European industry will need well after 2035. We have the solutions ready or in the pipeline that will be needed in the next 15 years".
The question has two separate dimensions. One is to maintain stable access for the European and the Japanese automotive and other innovative industrial consumers of semiconductors, when demand spikes or when the supply side is disrupted overseas. For that, crossing the 7 nm threshold is not needed, but having more advanced local fabs would ease the pressure on the designers as they seek greater performance for their products.
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