Semiconductors: Japan’s place in the global chip market

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In 2021, chip makers shipped an incredible 1.15 trillion semiconductors for use across the global economy. That’s the equivalent of more than 36,000 every second of the year. And demand will undoubtedly grow further as the Internet of Things – which involves adding sensors and other digital hardware to everyday objects – increases connectivity, and the explosion of data creates favourable tailwinds for the sector.

Accessing this opportunity, however, is no easy feat. The chip industry has always been plagued by politics, dating back to when it emerged from the Cold War military-industrial complex of the 1960s. It is also highly cyclical, with periods of over- and undersupply. Covid-19 brought much of this to the fore, highlighting how a handful of vulnerable choke points can cause far-reaching disruption.

Where does Japan fit in this dizzyingly complex supply chain?

Japan was once the industry’s epicentre, manufacturing over half of the world’s semiconductors in the 1980s. The ingenuity of Sony’s co-founder Akio Morita, and others, played a large role. They created customised chips for consumer electronics, powering Casio’s calculators, Nintendo’s game consoles and, of course, the Sony Walkman.

Supply chain niches

Although Japan’s dominance has since eroded, it still leads in several fields, including:

• Memory – especially NAND chips, a form of storage that doesn’t need power to hold onto data
• Sensors – Sony has about 50 per cent of the global market
• Power semiconductors – these are used as switches or a means to convert one type of electrical current to another. They feature in everything from toasters to electric-powered tractors
  
  

The country also plays a critical role in the broader chip supply chain. It makes more than a third of the specialist equipment used to manufacture semiconductors worldwide. And it provides about half of the raw materials required.

ROHM and Murata are prime examples of Japan’s formidable position in this field.

ROHM manufactures integrated circuits (ICs) and discrete semiconductor devices1. Its edge, however, is in ‘wide-bandgap’ materials2, specifically silicon carbide (SiC) chips – a third-generation substrate3 that brings clear efficiency gains over pure silicon.

We’re beginning to see rapid adoption of this technology because of the enormous miniaturisation advantages it brings to high-power applications, such as electric vehicles. 

Murata operates in a highly correlated area of passive components4, notably capacitors, resistors, filters and electromechanical devices. What links these together is the company’s expertise in ceramic materials, its back-end technology and its monozukuri expertise5. These factors enable it to mass produce the parts reliably and to a consistently high standard.

Like ROHM, Murata expects the industry to be buoyed by accelerating demand from automakers and spending on the infrastructure required for 5G data. To meet this demand, Murata has raised its capacity by 10 per cent per annum over the past five years.

Makers of the specialist equipment used to make semiconductors should also reap the benefits. They include Tokyo Electron, JEOL, and DISCO – all three of which are held by Baillie Gifford, the latter two in Japanese Equity funds.

DISCO makes grinding and dicing machines that are used to cut chips in the ‘back-end stages’ of manufacturing. The machines deal with near-finished products that have gone through a costly process, requiring a high level of precision and reliability. These qualities favour the established industry incumbent, in this case, DISCO, which has a dominant 80 per cent market share. Its customer base is fragmented, with no single client accounting for more than 5 per cent of sales. That makes the company more immune than most to the geopolitics at play within the industry. 

SoftBank is also a prominent player in semiconductors because of its ownership of Arm. The UK-based chip designer is its crown jewel and single largest position.

Arm was founded in 1990 as a joint venture between Acorn, Apple and VLSI – a company whose founders included a trio from Fairchild Semiconductor6. SoftBank acquired the business in 2016 for $32bn. Arm now has a market-leading, highly penetrated and entrenched position in providing semiconductor architectural design7, used in circa:

• 95 per cent of smartphones
• 63 per cent of Internet of Things devices
• 24 per cent of cars
• 5 per cent of cloud computer servers

In conclusion

Japan remains critical to the global semiconductor ecosystem. Its government is keen to re-energise the chip industry to ensure a stable supply, as evidenced by Prime Minister Fumio Kishida’s attendance at the Tokyo SEMICON exhibition in December. The state is also subsidising a new joint venture, named Rapidus, which includes eight major companies, including Sony, SoftBank and Denso. It aims to deliver next-generation 2-nanometre chip technology8, in addition to a project that involves Taiwanese chip manufacturer TSMC expanding its operations in the Kumamoto prefecture.

Although these actions may help at the margin, our focus remains on the fundamentals of those leading the charge. While others obsess over semiconductor cycles and vulnerability to trade friction crossfire, we will continue to focus on and back businesses well-positioned to capitalise on the more stable drivers of this growth opportunity.

Deeper carve-outs

How could Japan fare if deglobalisation/China rhetoric rises?

Japanese semiconductor production equipment and semiconductor material makers are well placed to benefit in the near-to-medium term from the deglobalisation of the industry’s supply chain and the build-out of new capacity in countries, including at home.

However, Japanese companies risk missing out on longer-term opportunities in China as they get increasingly dragged onto the side of the US in the new technology ‘cold war’. The same is true of Dutch companies, including ASML. 

What is the role of 5G?

The Internet of Things and 5G data will create opportunities for the physical world to be more directly integrated into digital systems and spur massive demand for connectivity.

Autonomous driving, for example, will require:

• higher data transmission speeds
• much lower latency – the ‘lag’ between sending data to a remote server and receiving the response
• greater data capacity – the amount of information a network can handle at any point in time
  
  

All this will generate unprecedented demand for Murata’s components.

How did Japan lose its lead in semiconductors?

Trade frictions with the US played a role.

In the early 1970s, Japan restricted imports of US-made chips, which Silicon Valley rivals claimed was unfair. Even after the Japanese government dropped its quotas, it continued to subsidise its semiconductor industry. In addition, Japanese firms could raise capital at a lower cost. All this led American firms to perceive they were at a disadvantage, particularly regarding memory chips.

The dynamic encouraged US firms to send orders to and create joint ventures with the Korean chip makers that emerged in the 1980s. It also encouraged them to deal with the Dutch lithography9 specialist ASML rather than Canon and Nikon once GCA, an American competitor, collapsed in 1993.

Other factors that played a role included the rise of the yen against the US dollar in the late 80s and early 90s, which reduced demand for Japan-made consumer electronics, and the failure of Japanese chip producers to adapt to the ‘foundry’ model pioneered by TSMC. This involved the Taiwanese firm manufacturing chips on others’ behalf but not products of its own. This freed its clients of the need to invest in the increasingly expensive equipment required and allowed TSMC to gain huge scale.

What are the three main types of chips?

Memory chips:

These store data and include:

• Dynamic random access memory (DRAM)
• Static random access memory (SRAM)
• NAND memory (the name isn’t an acronym but refers to ‘not and’ logic gates, which its circuitry design resembles)
  
  

The memory space is commoditised, very cyclical, and consolidated. Toshiba, NEC and Samsung are key players. When thinking about ‘enabling’ technological advances, it’s fair to say that memory chips are less impactful than other types because the function they fulfil is less demanding.

Logic chips:

A catch-all term for chips that control operations by processing data. They include:

• Commoditised ‘standard’ ICs, which are produced in large volumes for routine tasks
• Programmable chips, including central processing units (CPUs) and graphics processing units (GPUs), which are effectively the brains in most computers
• Application-specific integrated circuits (ASICs), which are customised for use in a specific task and offer resulting efficiency gains. Examples of their use include military hardware and cryptocurrency mining

Analog chips:

While digital chips only distinguish between binary ‘on’ and ‘off’ signals, their analogue counterparts can handle gradations in between. That makes them well-suited to ‘real world’ functions, such as sensing temperatures, speed, sound and electrical currents. Power supply semiconductors – which effectively act as switches, transferring power and converting currents – are also usually analog chips.

1. An integrated circuit is a set of electronic circuits featuring transistors, resistors, capacitors and other tiny components built into a semiconducting material. These are commonly used to carry out different functions and are what people commonly refer to when they talk of a ‘chip’. By contrast, a discrete semiconductor refers to a component that’s only capable of carrying out a single function and is produced as a standalone unit. For example, a special type of transistor or diode. This keeps their price low, making them particularly suited for use in prototypes.

2. Wide-bandgap semiconductors have electronic properties that help devices handle higher radio frequencies, temperatures and voltages than conventional semiconductors. By incorporating them, the electronic components can be more powerful and energy efficient.

3. In this context, substrate refers to the ‘wafer’ that holds together the other elements of a semiconductor device.

4. Passive components can only receive energy. They then dissipate, absorb or store it but cannot amplify or otherwise deliver power to an electric circuit.

5. Monozukuri is a Japanese term that refers to making products with great skill, passion and pride, resulting in excellence and the continued refinement of the process involved. Japanese manufacturers and engineers widely study the concept, but it does not have an exact English translation.

6. Chip pioneer Fairchild Semiconductor built the first complete set of circuits embedded into a single silicon wafer – what’s known as a monolithic integrated circuit – in 1961. It only featured four transistors. But over time, the firm discovered ways to up the count and, importantly, to produce its chips reliably. This ultimately paved the way for the situation today, where chips often feature billions of transistors. The company also secured its legacy by expanding the market for its products beyond defence and space uses to civilian uses. However, the booming market it created led many of its top minds to jump ship to run companies of their own.

7. This includes instruction set architectures, which define how software controls a processor, as well as designs for central processing units (CPUs) and graphics processing units (GPUs), which clients can adapt or use unchanged to make chips. Arm doesn’t build or sell chips of its own.

8. In the past, when semiconductor makers described chips in terms of nanometres, they were referring to the length of their transistor gates – the part that controls conductivity to either let electricity pass through or not. Today, it’s more of a marketing term to distinguish different product generations. But the significance is that as transistors shrink in size, more can be packed into the same space, allowing a chip to become more energy efficient and capable of carrying out faster calculations.

9. Lithography refers to the process used to burn complex patterns of transistor circuitry onto the surface of wafers.

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