Japan Chases Chip Dream Again in the AI Age

Mou ikkai is a popular Japanese phrase among anime lovers, for the energy it infuses. It means one more time. 

The phrase reminds me of Shōyō Hinata, a character from the Haikyu!! manga. Hinata is a tiny, energetic boy who chases the dream of becoming an ace volleyball player despite being an underdog.

Japan’s dream of leading the global chip industry is very similar to Hinata’s goal. 

Once a leader in the global semiconductor industry, Japan got lost somewhere in the last three decades. Now it wants to revive its semiconductor industry and climb to the top one more time. Mou ikkai.

How? 

It has a three-pronged strategy for that: Attract foreign chipmakers to promote chip manufacturing, develop next-generation semiconductor tech with the US, and forge international collaborations for future semiconductor technologies. 

Japan seems to be right on track, so far.

Many American giants are already betting on Japan’s dream of becoming an AI powerhouse. 

• Earlier this April, Microsoft revealed its plans to invest almost $3 billion in Japan. The Silicon Valley giant wants to strengthen its AI capabilities, cloud computing, and data structure infrastructure in the country.

• IBM partnered with Japanese government-backed startup Rapidus in late 2022 to bring advanced chip technology to the country. How advanced? IBM has the world’s first 2-nanometer chip (45% better performance, 75% more energy efficient than leading 7-nanometer chips). Using IBM’s tech, Rapidus will build a semiconductor fabrication plant on the island of Hokkaido by 2025. Japan has set aside almost $6 billion in subsidies for this project.

• American Chipmaker Micron Technology plans to invest up to 500 billion yen ($3.2 billion) in Japan over the next few years. This includes a manufacturing line for state-of-the-art memory chips at its Hiroshima plant.

• US next-generation computing startup Tenstorrent has recently joined hands with a Japanese government research group known as Leading-edge Semiconductor Technology Center or LSTC for AI chip designs, which Rapidus will produce.

Is the Japan-US Partnership a Big Deal? 

Three decades ago, the US triggered the decline of Japan’s once-shiny semiconductor industry with a trade pact that left Japanese manufacturers at the mercy of the US policymakers.

Now to counter China’s rising influence in AI and dominate the global AI race,  the US wants to help Japan in bringing back its chip industry. Hit two birds with one stone. 

You see, back in the 1970s and 1980s, Japan rose to prominence in the semiconductor industry, overtaking the US as the world leader. This rubbed the US the wrong way.

How Did Japan Become a Semiconductor Giant?

• The Japanese government’s increased spending: Funding for R&D in semiconductor manufacturing equipment rose from 2% to 26% of Japan's total R&D budget between 1970 and 1977.

• The power of collaboration: The Japanese government put in $300 million to set up a joint technology research project involving major companies like Fujitsu, Hitachi, NEC, Mitsubishi Electric, NTT, and Toshiba. Together, they researched fundamental technology for semiconductors and worked on design and device tech.

• Technological innovation: The collaboration between tech giants led to many groundbreaking inventions. One among them was electron beam lithography, a revolutionary chip-making technology that helped produce more complex semiconductors at scale.

What Was the US Doing Then?

In the 1960s and 1970s, there were no trade conflicts between the two countries. Japan was producing semiconductors for consumer electronics, like radios and TVs. While the US was focused on semiconductors for the military and spacecraft.

In 1971, Intel invented the world’s first microprocessor, and personal computers were born. By the mid-1970s, they became a thing in the US. During this boom, Japan started producing a memory chip called DRAM, mirroring the US. That eventually changed the dynamics between the two.

What Went Wrong?

By 1981, Japan overtook the US for the first time in memory chip sales. The US became cautious.

By 1986, Japan overtook the US in overall semiconductor sales with its cutting-edge DRAM technology. All hell broke loose.

The US launched an investigation and concluded that the Japanese firms sold memory chips at subsidized prices in the American market, pushing local firms out of business, without giving access to foreign companies in its domestic market. 

Later in 1986, the US forced Japan into an agreement that allowed it to set memory chip prices for Japanese firms. On top of that, it asked Japan to increase the share of foreign companies in its domestic semiconductor market from 10% to 20%.

This agreement gave Japan a blow. American and Korean semiconductor companies could offer slightly lower prices than Japanese companies to capture more market. And the rivals could enter its local market under the expanded quota.

Japan persisted. Even though the US imposed sanctions on Japanese firms in 1987 for violating the trade pact, Japanese semiconductor firms accounted for 51% of worldwide sales in 1988. All credit for this should go to innovation commercialized by companies like ASML, Nikon Corporation, and Canon Inc.

But what seemed like a big win for Japan, was in fact the beginning of its decline and the rise of American companies like Intel.

By 2021, Japanese firms had less than a 10% share in the global semiconductor market.

The Crushing Fall

When it rains, it pours. That’s what happened with Japan’s chip industry. 

The pact, enforced with sanctions, eroded the competitiveness of Japanese firms. But Japanese firms also didn’t want to adapt. Against the global trend of specialization in semiconductor designing or manufacturing, they didn’t want to give up on either.

Moreover, Japanese companies, at large, didn’t invest in digitization, hence semiconductor demand stagnated. That left Japanese semiconductor firms with less money in the kitty to boost R&D.

Finally, the Japan-US semiconductor pact was dissolved in 1996. By that time, the world had begun moving from analog to digital. The already weakened Japanese semiconductor industry was late to the party. It lost out in the PC era.

Japanese pursuit of self-sufficiency in the post-1990s disconnected Japan from the global innovation ecosystem, impacting its semiconductor industry's competitiveness.

The losses piled up and in the 2010s, it missed the smartphone opportunity.

What’s the Plan?

Japan is no longer lingering over spilled milk. It has turned its attention to robotics, drones, and self-driving cars. That’s why it’s focusing on AI chip manufacturing.

To make its three-pronged strategy (mentioned above) work, it has decided to invest up to 10 trillion yen ($65 billion) in semiconductors over the next decade.

Beyond the US, the revival is centered on its partnership with Taiwan’s TSMC, the world’s largest semiconductor maker.

No longer stuck on making its own semiconductors, Japan convinced TSMC to build a $7 billion plant in partnership with Sony Group in 2021. Earlier this year, TSMC announced a second chip factory in Japan for automotive, industrial, consumer, and high-performance computing-related applications. With TSMC, Japan will produce advanced 12-to-16 nanometer chips as well as 22-to-28 nanometer chips by 2025.

But the thing is, when it comes to chips, the smaller, the better.

That is why Japan set up a mass production center called Rapidus in 2022 for next-generation semiconductors with the ambitious goal of making 2-nanometer semiconductors by 2027.

Now the world has its eyes on Japan as it chases its dream of reviving its long lost semiconductor industry.

Mou ikkai!

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