Japan lost its early lead in chips to companies in Korea and Taiwan. Now a new TSMC project could lead the way to ‘a renaissance of semiconductors’

Morris Chang, founder of Taiwan Semiconductor Manufacturing Company, gave a bold prediction when he opened the chipmaker’s new facility in Japan’s Kyushu island on Feb. 24. Chang predicted that the new foundry, backed by billions of dollars in Japanese government money, would spark “a renaissance of semiconductors” for the Asian country.

Most chip conversations focus on Taiwan or South Korea, which host some of the world’s leading chipmaking companies. Governments are courting firms like TSMC, Samsung and SK Hynix to set up new facilities in their countries, ostensibly to boost supply chain resiliency.

But it was a different picture 50 years ago. In the 1980s, six of the top 10 chip manufacturers were Japanese. The country’s manufacturers controlled about half the market in 1988. But Japan’s chip dominance faded due to a combination of changing market trends, the rise of new competition, and geopolitical pressure.

Now, Tokyo hopes it can revive its chip fortunes with a new government strategy backed by billions of dollars—with TSMC’s plant as the first stage in Chang’s predicted “renaissance.”

TSMC's new plant on 'Silicon Island'

Much like how the U.S. has Silicon Valley and Taiwan has Hsinchu Industrial Park, Japan has its own chipmaking hub: “Silicon Island," the industry's nickname for the island of Kyushu.

Some of the companies with bases on Japan’s third-largest island include Tokyo Electron, Sony and Renesas. And now it’s also home to a new plant from the world’s leading producer of leading-edge chips: TSMC. The world’s largest contract chip manufacturer opened the plant on Feb. 24 in Kyushu’s Kumamoto prefecture.

The plant is a joint venture including local heavyweights Sony and Denso. The Japanese government chipped in too, allotting 476 billion Japanese yen ($3.2 billion) in grant money. Tokyo is promising an additional 732 billion yen ($4.9 billion) in further support for a second TSMC plant. The Taiwanese chipmaker said in early February it was opening a second plant with Toyota joining as a new investor.

The TSMC plant is the first step in what Tokyo hopes will be a revival of Japan’s chip industry. In June 2021, the Japanese government released a strategy that put semiconductors at the center of its economic security policy. Tokyo promised subsidies for domestic chip manufacturing, a research center for advanced chips, and a deeper partnership with the U.S.

“If TSMC is there, that means [Japan’s chipmaking] capacity will be much bigger than before,” says Helen Chiang, who leads Asia semiconductor research at the consulting firm IDC. “It can attract other companies to invest in Japan, like Intel or Samsung.”

A chip renaissance

Japan used to dominate the semiconductor industry. Large domestic demand for chips helped to support the sector between the 1960s to 1980s, expanding Japan’s share of semiconductor design and manufacturing. Japanese firms also had easier access to financing than their U.S. counterparts. Soon, companies like NEC, Hitachi and Toshiba were taking over the global market.

But eventually Japan lost ground to other economies like South Korea and Taiwan. While some observers point to the rise of firms like TSMC and Samsung that invested in foundries, or missed opportunities during the PC boom, Chiang thinks the reason for Japan’s decline is partly due to geopolitics. The U.S. saw Japan as an economic rival starting from the 1970s, and may have worked with South Korean firms as an alternative, she suggests.

In the 1980s, U.S. companies complained that Japanese firms were dumping chips onto the U.S. market. The Semiconductor Industry Association in the U.S. and companies like Micron and Intel filed anti-dumping lawsuits against Japanese exporters in 1985.

One year later, Japan agreed to voluntarily limit its sales to the U.S., and pledged to open up at least 20% of its own market to foreign producers.

Today, Japan is nowhere near the cutting-edge when it comes to chip production, with its most advanced foundries producing chips that are a decade behind what TSMC can do, at best.

Yet Chiang emphasizes that Japan still has a firm grip on the market when it comes to supplying equipment to make semiconductors.

And that gives Japan some leverage in the chip industry. In early 2023, Japan and the Netherlands agreed to limit the export of advanced chip making equipment to Chinese companies, aligning themselves with U.S. efforts to constrain China’s chip sector. That had an unexpected consequnce: Chinese companies scrambled to grab chipmaking tools that were not subject to export restrictions. Strong demand for chip making tools helped grow Japan’s exports to China by 29% in January.

Japan’s next steps

TSMC’s current plant in Japan will begin production by the end of the year, and will develop chips in the 12 nanometer to 28 nanometer range, which will be the most advanced semiconductors produced in Japan.

That advanced production will raise the level of talent in Japan, Chiang says. Japanese firms can learn from being a part of TSMC’s production in the country. Companies may even be able to build a long-term relationship with TSMC, perhaps working with the Taiwanese manufacturer with its planned facility in Germany, scheduled to start operation in 2027.

TSMC isn’t the only chipmaker attracted by Tokyo’s offer of money. Samsung and U.S.-headquartered Micron are also planning massive investments in Japan.

“Japan will play a more important role” in the chip sector going forward, Chiang says. “It will not only have the stream of materials and equipment, but [Japan] will enlarge [its] influence in foundries.”

Japanese officials are already hopeful that the TSMC project will boost the surrounding economy. Above-average pay at the plant is already having “a ripple effect” on the surrounding area, Ken Saito, Japan’s economy minister, said at the opening ceremony on Feb. 24.

But there’s still more work to be done to reverse the country’s fortunes. "To revive the Japanese chip industry, this is where the real challenge begins,” he said.

This story was originally featured on Fortune.com