Japan once led the world in microchips; now, it’s racing to catch up

TOKYO (NYTIMES) – It was the spring of 2021, and demand for new cars was spiking. But, as consumers, flush with savings amassed during the pandemic, rushed to dealerships around the world, one Japanese automaker after another idled production as they waited for imports of a critical component: semiconductors.

Coronavirus outbreaks had shut down chip plants, and an unanticipated surge in demand for electronics from people riding out the pandemic at home had constrained supplies. Nissan alone predicted a cut in output of half a million vehicles.

The chip shortfall – a blow to “the head” of Japan’s economy, in the words of Mr Yoshihiro Seki, a lawmaker who leads a study group on semiconductors – woke up the country to the fragility of the supply chains that undergird its most important industries.

That has driven a broad reconsideration of how Japan can protect its economy, the world’s third largest, against both unforeseen economic shocks like the pandemic and looming risks like the rising tensions between the United States and China.

Those risks were highlighted this week as House Speaker Nancy Pelosi visited Taiwan, prompting an angry response from China.

End of an era

The reconsideration covers an array of sectors, including energy, but semiconductors are among the top concerns.

To increase production, the Japanese government is investing billions of dollars in its domestic chip industry and providing enormous subsidies for joint ventures with companies from Taiwan, a crucial semiconductor supplier, and from the US.

In a break with its past economic nationalism, it is also seeking to form a coalition with allies such as the US and the European Union to build a semiconductor supply chain that is less geographically concentrated and so better insulated from disasters and geopolitical instability.

The latest move came on July 29, when Japan and the US announced that they would create a joint research centre for advanced semiconductors that would be open to other “like-minded” nations.

“The era where the world is at peace and it doesn’t matter who supplies our semiconductors is over,” said Mr Kazumi Nishikawa, a director at Japan’s Ministry of Economy, Trade and Industry, or METI.

New efforts

For both Japan, once the world’s largest chipmaker, and the US, the birthplace of the semiconductor, a decades-long erosion of their chipmaking capacities has left them playing catch-up.

Last week, Congress passed a huge industrial policy Bill that included US$52 billion (S$72 billion) in subsidies and incentives to revitalise the US chip industry.

The new efforts are seen in both countries as critical to economic and national security as China expands its share of the chip market and takes an increasingly aggressive stance towards Taiwan that raises the risk of disruptions to the flow of chips made there.

The question is whether the initiatives will be enough.