Japan starts subsidy scheme to revive domestic chipmaking, with US$3.46 billion going to TSMC and Sony

Taiwan Semiconductor Manufacturing Co. (TSMC) and a unit of Sony Group Corp have unveiled plans for a new production facility in southern Japan, becoming the largest beneficiaries to date of the subsidy scheme set up by the Japanese government as the first step in regenerating the domestic chip industry.

TSMC has collaborated with Sony Semiconductor Solutions Corp (SSS) to set up Japan Advanced Semiconductor Manufacturing Inc (JASM) and plans have been drawn up for a new fabrication plant in Kumamoto. Construction is scheduled to commence this year and the first 12-inch wafers are expected to roll off production lines in 2024. The plant will have a monthly capacity of 45,000 wafers.

The Japanese government is providing a subsidy of around Y400 billion (US$3.46 billion), equivalent to around half the total construction cost of the facility, with one of the strings attached to the deal a commitment for semiconductors to be produced at the plant for at least a decade.

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The government's contribution is the largest under the subsidy programme, which has been introduced after the weaknesses of global supply chains were made clear in recent years. Stresses on the delivery of microchips - and countless other components critical to modern industry - were particularly evident last year and caused problems for many sectors of Japanese business, but most notably the auto sector.

International trade disputes have been exacerbated by geopolitical differences of opinion, most notably between the United States and China, as well as the ongoing coronavirus pandemic. Political pressure exerted by Beijing on Taipei remains a worrying undercurrent in the semiconductor industry as Taiwan has emerged as arguably the world's most important source of chips.

Meanwhile, South Korea is also promising subsidies to ramp up chip production while Europe earlier this week launched a plan to raise tens of billions of euros to boost semiconductor production. The US House of Representatives recently passed a bill to earmark US$52 billion in funding for semiconductors.

As a consequence, the Japanese government is increasingly keen to bring home a significant proportion of domestic firms' production capacity, a decade or more after the accepted course of action was to offshore manufacturing to take advantage of cheaper labour and production costs.

Yet analysts warn the money being provided by the Japanese government - a total of Y600 billion (US$5.19 billion) is being suggested - is still far short of the funds other countries are investing.

Damian Thong, head of Japan equity research at the Macquarie Group in Tokyo, points out that major global players, like Intel and TMSC, are investing around US$20 billion in plants in Ohio and Arizona, with the support of Washington.

"Other governments are being aggressive in their support, but Japan believes this level of domestic manufacturing capacity is enough," he said.

Thong also points out that the new Kumamoto plant will not be manufacturing the most cutting-edge microchips, although there is still extremely strong demand for the older chips that will be produced.

"If Japan wants to match Taiwan in production, then Tokyo would have to spend vast amounts to catch up with TMSC," he said. With that unlikely to happen, he said, Japanese firms will continue to outsource their needs to the Taiwanese firm, which becomes more straightforward if the manufacturing is being done in Japan.

In an interview with the Asahi newspaper this week, Tetsuro Higashi, the former president of semiconductor-production equipment maker Tokyo Electron Ltd., echoed concern at the scale of financial support that Tokyo is making available to the industry.

Higashi said the Japanese government needs to commit to a 10-year plan to revive the domestic industry and spend an eye-watering Y10 trillion (US$86.45 billion).

He said the government should create the "technological foundation centred on TSMC" and focus its efforts on logic chips, required for processing, a sector where Japan has notably fallen behind its rivals in recent years. The first five years of the decade-long plan should be used to set up the technology and train personnel, with the next five years devoted to "allowing the sector to get fully back on track."

Martin Schulz, chief policy economist for Fujitsu's Global Market Intelligence Unit, said the Japanese government now recognises the true scale of the threat to the nation's economic security from supply chains that are overextended and is determined to "make those supply chains secure and bring them much closer to Japan."

"The Japanese government has put a serious amount into encouraging TSMC to set up in Kumamoto, but we must also remember that Japan is a very attractive environment for chip producers as it has high levels of capital, high levels of technology and people with the skills that are required," he said.

Japanese firms that develop niche products are also among the best in the world and that is likely to continue, but collaborations such as the one between TMSC and Sony to meet the large-scale demands of domestic industry are likely to be the blueprint for future development in Japan, he suggested.

This article originally appeared on the South China Morning Post (SCMP).

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