Japan Bets $67 Billion to Become a Global Chip Powerhouse Once Again
(Bloomberg) -- Deep in the snowy northern island of Hokkaido, Japan is pouring billions of dollars into a long-shot bet to revive its chip-making prowess and insulate its economy from growing US-China tensions.
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Excavators and trucks criss-cross the frosty ground as construction work continues on a futuristic factory looking over a grassy plain with roaming horses. It’s a development that is changing the landscape of an area known for farming, military bases and Chitose airport. It’s a project that also aims to change the face of Japan’s chip industry.
A freshly created homegrown venture, Rapidus Corp., is looking to mass produce state-of-the art 2 nanometer logic chips in 2027 from an initial starting point of zero. By industry standards it’s an implausible challenge for an 18-month-old venture in a country that has fallen far behind overseas rivals on semiconductor production.But with the US and China sparring over access to the latest chipmaking expertise and equipment, Japan’s government has sensed an opportunity to leverage Washington’s concern over supply chain security to get back into a game it once dominated.
The stakes are huge. Advanced chips will serve as the foundation for a dozen critical technologies, including artificial intelligence, weapons systems and electric vehicles. A large portion of global production centers on Taiwan and South Korea, leaving future supplies vulnerable to regional tensions.
“There are geopolitical, economic security factors involved,” said Atsuo Shimizu, a Rapidus executive in charge of launching the new foundry. “To survive as a nation, Japan needs to be a global player with technology. And we can clearly demonstrate that with semiconductors.”
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Tokyo has already shown it means business. In less than three years, Japan has earmarked about ￥4 trillion ($26.7 billion) for revitalizing its semiconductor punching power with Prime Minister Fumio Kishida targeting financial support for the industry to eventually reach ￥10 trillion with private sector support. Among the goals is a tripling of domestically produced chip sales to more than ￥15 trillion by 2030.
Japan’s new chip strategy has two main strands. First, the country is seeking to reestablish itself as a prime location for manufacturing legacy chips by luring to Japan the biggest foreign names in the industry with generous subsidies of up to half of the set-up costs.The second and more ambitious part of the strategy is the Rapidus project in Hokkaido aimed at restoring Japan’s place as a player at the forefront of silicon-chip wizardry.“Why do we do so much for chips? Honestly, that’s because there’s the US-China confrontation,” said Kazumi Nishikawa, principal director of economic security policy at Japan’s Ministry of Economy, Trade and Industry and one of the architects of the strategy. “If chip supplies from Taiwan halt, there will be negative impacts of trillions of dollars everywhere and economies will collapse.”
Already Tokyo can claim some success in the first and larger part of its strategy. The world’s biggest chipmaker, Taiwan Semiconductor Manufacturing Co., has a $7 billion factory edging closer to production in Kumamoto, southern Japan, with another one to come and talk of a third. The Taiwanese giant has quickly realized that chip projects partly bankrolled by Tokyo can get off the ground a whole lot faster than in the US or other countries.
By drawing on the expertise of the world’s leading manufacturers, Japan hopes to recreate chip-related ecosystems that provide employment and renewed growth in its regional economies.Read More: Japan’s Chip Spree Aims to Kick Economy Into High GearAt the same time these moves will help strengthen Japan’s credentials as a key ally in a US-led global supply chain committed to keeping the production line of vital semiconductors rolling for everything from smartphones and cars to the latest missile systems.The fate of the second part of Tokyo’s strategy looks far less certain. The Rapidus project has generated both excitement and doubts. Its success hinges on achieving a huge technological jump with little idea of how costly or reliable the final output will be—or if there will be any buyers. It’s a target that even industry leaders are struggling to attain.
On the plus side, Japan can lean on the US as its ally this time around, rather than its technological foe—as was the case back in 1986 when Washington put pressure on Tokyo to limit its chip exports.As part of the Rapidus project, IBM Corp. is training about 100 veteran Japanese engineers in Albany, New York, to get them up to speed on frontier level US chip expertise.“We're partners, allies, collaborators in making sure that our national security, our economic securities are aligned, because the threat is coming from somewhere else. And that somewhere else is China,” US Ambassador to Japan Rahm Emanuel said. “We're in the boat together and we're paddling in the same direction.”
Japan’s strategy marks a departure from previous attempts to support its chip industry that largely assumed it didn’t need outside help -- and ended in failure.
Along with TSMC, Micron Technology Inc., ASML Holding NV and Samsung Electronics Co. are also investing in production or research facilities in Japan as companies look for the best deals for shoring up their future output in an uncertain world.The speed of Japan’s assistance contrasts with the policy gridlock of the US. The 2022 Chips and Science Act set aside $39 billion in direct subsidies to ramp up manufacturing in the US, but the first major award of $1.5 billion only got announced this week. Labor and cost challenges have also delayed the start of production at TSMC’s new facility in Arizona. Over in Germany, budget turmoil has raised concerns about subsidies for TSMC and Intel Corp.“Japan this time has taken a bold approach and has implemented very quick decision-making,” Belgium-based microelectronics research hub Imec Chief Executive Officer Luc Van den hove said. “If I look back 20 years ago or 15 years ago, I think there was much more a closed policy especially from the government.”
The TSMC plants have ample reason to be successful. The technology for the first plant’s products, 12nm to 28nm logic chips, is already established. Kumamoto is on Japan’s southern island of Kyushu where there’s an ecosystem of about 1,000 related tech companies. And there are customers – including Japanese carmakers.
TSMC’s second foundry, officially announced earlier this month, will make 6nm to 7nm chips nearby. By 2037, tax revenues from the foundries are likely to have paid back the initial government outlays, according to lawmaker Yoshihiro Seki, secretary general of a coalition within Japan’s ruling party dedicated to chips.
Japan is an attractive location for other reasons, too. It has a highly disciplined workforce and reliable services. The plunge in the Japanese yen to its weakest levels in decades has also helped make the country far more affordable as a production base.Japan is also a key global supplier of some of the chemicals and equipment used in chipmaking. Some of those Japanese suppliers, including Tokyo Electron Ltd., have taken advantage of the flipside of the economic security concerns by tapping into a surge of Chinese demand as Beijing looks to ramp up its existing know-how before any more restrictions emerge.
While some of the reasons for Japan’s attractiveness as a chip-making base also hold true in northern Japan, the circumstances are quite different. Rapidus is starting out in a long-forgotten region for manufacturing with only about 20 local businesses related to chip making.Read More: Japan-Backed Startup Woos Suppliers to Make Chip Hub in HokkaidoExpertise at Japan’s national technology institute has long been stalled at 45 nm, so for Rapidus to reach significant output of 2nm chips using unproven IBM technology in around five years looks a very tall order. Even if Rapidus is able to hit its target by 2027, TSMC and Samsung will likely have already jumped into the market at volumes that will give them a cost advantage.
Shigeru Fujii headed chipmaking at Japan’s Fujitsu Ltd. when it lost out to cheaper Taiwanese and South Korean rivals in past decades. He’s yet to see evidence that Rapidus can break into the cut-throat global market.“The problem is: Will there be any customers?” Fujii said.
This time will be different, said Rapidus’s Shimizu, who worked under Fujii at Fujitsu. As its name suggests, Rapidus will add value to its products by shortening delivery time for its bespoke chips – not just via the manufacturing process, but also by helping customers shorten the time-consuming design process, he said.The company won’t be able to compete against TSMC and Samsung for commoditized devices so the company will aim for more of a premium niche market, Shimizu indicated.
A shift in technology could also help Rapidus, Shimizu added. The 2-nanometer chips it envisages will use a Gate-All-Around transistor structure instead of the current FinFET structure, making it easier for newcomers to break in, Shimizu said.“We can do it,” he said. “I don’t see any reason why we can’t.”
The government has so far promised ￥330 billion and earmarked an extra ￥646 billion in a fund to support the Rapidus project. That should cover half of an initial ￥2 trillion investment, but the private company has yet to say how it will raise the remaining cash or an extra ￥3 trillion needed to expand operations after the foundry is launched.In contrast to the government support Rapidus enjoys, the reaction from corporate Japan has been lukewarm. Big firms such as Toyota Motor Corp. have pledged only ￥7.3 billion for the venture so far.
What Bloomberg Intelligence Says…“The Japanese government's latest chip strategy looks better thought out than on previous occasions. The balance is a little skewed toward Rapidus and Kumamoto. Perhaps more could be done to support domestic chip design companies. The challenge for Rapidus is huge, and success probably shouldn't hinge on profits. If it can make any reliable 2 nanometer chips by 2027 that would be a success for Japan in terms of economic security.”-- Masahiro Wakasugi, BI industry analyst
Even if IBM trains engineers for the company, Rapidus will struggle to hire the 1,000 or so engineers and workers needed to launch the foundry, experts say. Japan’s chip sector hemorrhaged around 30% of its jobs in the two decades through 2019 as its share of the global chipmaking market fell from over 50% to less than 10%. That leaves a shortage of at least 40,000 workers over the next decade as the population declines, according to METI.
Takashi Yunogami is a former Hitachi Ltd. engineer who made news by fiercely criticizing past government initiatives in parliament right before the chip strategy was released. He likens Rapidus’s 2nm goal to a little leaguer in baseball trying to turn into superstar Shohei Ohtani overnight.
“Kids should dream, but if a baseball boy says he is trying to do well as a two-way player starting from tomorrow, I’d say, ‘Hold on. Let’s take it step by step,’” Yunogami said.
Still, in addition to the support from IBM, California-based Lam Research Corp. and Imec are planning to open shop in Hokkaido. Rapidus has also struck an agreement with Canada’s Tenstorrent Inc. to jointly develop semiconductor intellectual property in AI devices.“There are so many risks and challenges for Rapidus. It’s still in a research and development stage before becoming a business,” said METI’s Nishikawa.
Still, Japan’s hefty subsidies show a renewed determination at the trade and industry ministry to take advantage of a window of opportunity to claw back some of the nation’s chip power. They also reflect the view that in an increasingly hostile world it’s better to throw money at chip technology than to have no contingency plan at all.Russia’s invasion of Ukraine, North Korea’s launching of missiles and China’s posturing toward Taiwan have reminded the world of the vital importance of securing chip supplies and strengthening defense systems.“Chips are used for drones, fighters, submarines and missiles,” said the LDP’s Seki. “If we can make others feel Japan can halt chip exports if they mess with us, that will mean our investment has served as a war deterrent, too.”
--With assistance from Takashi Mochizuki, Yuki Furukawa, Peter Elstrom and Vlad Savov.
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