The United States and Japan have joined forces to suppress Chinese semiconductors. What should China worry about?

"A strong semiconductor industry will determine the fate of the country," said Hiroshi Kajiyama, Japan's Minister of Economy, Trade and Industry. This statement is particularly profound at a time when the semiconductor industry is undergoing a turbulent change.

In order to maintain its status as the leader in the semiconductor field and to curb the rise of Chinese semiconductors, the United States has taken frequent actions and started to win over its allies to fight against China. As early as April 2, there were reports that the United States and Japan would initiate communication and dialogue to discuss plans for cooperation in establishing a semiconductor supply chain and consider jointly establishing a chip production network that is not overly dependent on any country, such as Taiwan, China, which has higher geopolitical risks, and mainland China, which is deepening its confrontation with the United States. On the 16th local time, US President Biden formally met with visiting Japanese Prime Minister Yoshihide Suga. According to reports, the United States and Japan will jointly invest in 5G, artificial intelligence, quantum computing, semiconductor supply and other fields.

How much "lack of confidence" is hidden behind the United States joining forces with Japan to fight against Chinese semiconductors? Why did the United States choose Japan as an ally?

Concerns about semiconductors in the US and Japan

As Hiroshi Kajiyama said, the status of semiconductors is becoming increasingly important. At a press conference in February this year, US President Biden held a semiconductor chip in his hand and excitedly said, "This chip, which is smaller than a postage stamp, contains 8 billion transistors. This is the magical component that holds the key to innovation."

Since 2020, the COVID-19 pandemic has caused a series of chip shortages. This small component is turning the global semiconductor industry, as well as consumer electronics and automotive industries upside down. Take the automotive industry, which has been hit the hardest, as an example. Due to the chip shortage, since March this year, nearly 10 automakers around the world have announced plans to adjust production or shut down factories, involving dozens of factories. 

Today, the global semiconductor shortage continues, and both the United States and Japan are under great pressure from the lack of chips. Therefore, how to stabilize the semiconductor supply is a common goal of the United States and Japan.

In addition, the United States and Japan are both on high alert against the backdrop of growing global demand and further transfer of the semiconductor industry chain to China. From the perspective of the United States, the technological and commercial advantages of the U.S. semiconductor industry are becoming smaller and smaller. According to data from the Boston Consulting Group, the proportion of semiconductor production in the United States has dropped from 37% in 1990 to 12% in 2020. As one rises and the other falls, mainland China, which has invested heavily in subsidies in this field, will increase from 20% in 2020 to the world's largest in 2030. 

At the same time, China is becoming the world's largest chip consumer market. According to statistics from the China Semiconductor Industry Association, China's total integrated circuit imports in 2020 reached US$350 billion, a year-on-year increase of 14.6%, making it the world's largest chip importer and consumer market.

The continued rise of China's semiconductor industry has brought a great sense of urgency to the United States. First, the Trump administration imposed sanctions on specific companies such as Huawei Technologies, and then the Biden administration clearly supported the industry. In March this year, American chip giant Intel said that as part of its plan to increase production in the United States and Europe, it would invest $20 billion to build two new chip factories in Arizona, USA. Then in April, the Biden administration decided to ask Congress for $50 billion in subsidies to promote semiconductor production.

However, this is far from enough for the United States. How could the United States, which is good at forming cliques, leave behind its allies this time?

The intention of the alliance with Japan

The United States chose Japan as its ally to fight against China. In addition to maintaining a high degree of consensus on the common goal of "encircling and suppressing" Chinese semiconductors, it also took a fancy to the advantages of Japanese semiconductors.

Although Japan's leading position in the electronics and semiconductor industries in the world has been continuously caught up and surpassed by latecomers in recent years, the Japanese semiconductor industry has not been content with the status quo. Instead, it has kept a low profile and maintained strong R&D capabilities and absolute leadership in the field of semiconductor equipment manufacturing and materials by relying on long-term technological accumulation.

Image source: Nikkei Chinese website

In terms of materials, according to SEMI, Japanese companies account for about 52% of the global semiconductor materials market. The production of semiconductor chips requires 19 essential materials, and most of them have extremely high technical barriers. Japanese companies have long maintained an absolute advantage in 14 important materials such as silicon wafers, synthetic semiconductor wafers, photomasks, photoresists, target materials, protective coatings, and packaging materials.

In the field of semiconductor equipment, Japanese companies have a market share of more than 50% in 10 of the 26 essential semiconductor equipment. In particular, they almost monopolize the market for important front-end equipment such as cleaning equipment and oxidation furnaces.

In fact, in today's global division of labor in semiconductors, Japanese semiconductors not only occupy a pivotal position in the fields of chip production equipment and production materials, but also have a semiconductor industry with a full process, a complete system, and comprehensive patent coverage. Without Japanese products, many products cannot be produced at all. Take production equipment for example, Japan has Tokyo Electron (TEL)'s coating and developing machine (Coater Developer), TEL and Kokusai Electric's heat treatment equipment, SCREEN's batch & single-wafer cleaning equipment, Hitachi High-Tech's length measurement SEM, etc.

Source: Market size of major technologies in production equipment and ranking of companies (2017), from biz-journal

In addition, although the equipment is made in Europe, there are countless Japanese parts and components in the equipment. Moreover, Japanese products account for a high proportion of materials such as hydrogen fluoride solutions, wafers, and photoresists.

More importantly, as China and the United States engage in a new round of technological confrontation over semiconductors, Japan's industrial chain has also become a valuable external resource for China. The position of Japan's semiconductor industry in the Sino-US chip game cannot be ignored.

According to Bloomberg's analysis of official trade data on February 3 this year, mainland China purchased nearly US$32 billion of equipment from Japan, South Korea, Taiwan and other places for chip production in 2020, an increase of 20% over 2019. As can be seen from the figure below, in the past two years, Japan has been the largest source of semiconductor equipment imports for mainland China.

Image from: Bloomberg, data source: General Administration of Customs of Mainland China

Correspondingly, according to a report released by the Semiconductor Equipment Association of Japan (SEAJ), Japan's semiconductor manufacturing equipment sales are expected to reach 2.2181 trillion yen in 2020, a year-on-year increase of 7% over 2019. The reason why semiconductor equipment can "stand out" in the slow-growing Japanese economy is that China has increased its procurement of Japanese semiconductor equipment, raw materials, and semi-finished products under the background of the Sino-US technology game. In fact, for many years, China has been the largest export market for Japan's integrated circuit industry, and China's purchases of Japanese integrated circuit products account for an average of about 27% of its total exports. Some Japanese media even said that Japan seems to be expected to continue to be the "Plan B" for Chinese companies' semiconductor supply. For this reason, it is undoubtedly the best choice for the United States to join forces with Japan to fight against Chinese semiconductors.

How will China respond?

Although the United States has been trying to break away from China's semiconductor industry chain, such behavior is not realistic in the eyes of industry insiders. TSMC's head Liu Deyin publicly pointed out on April 1 that from an economic perspective, it is unrealistic for the United States and Europe to try to work hard to expand the production capacity of semiconductor factories to meet their own needs. In particular, if the entire semiconductor supply chain is transferred to the United States and Europe, it will generate a large amount of "unprofitable production capacity."

According to data, the Semiconductor Industry Association of the United States estimates that to establish a self-sufficient supply chain, the United States needs an initial investment of 350 billion to 420 billion US dollars, while mainland China needs 175 billion to 250 billion US dollars. If these costs are directly passed on to semiconductors, the price will increase by 35% to 65%. On the other hand, if the previous tight supply and demand situation tends to normalize, there may be a risk of oversupply next.

It can be seen that the cost and risk of self-sufficiency may bring more damage than the current semiconductor shortage, resulting in a backlash effect. Therefore, in this process, we need to be vigilant about the "real purpose" of the United States to break away from the Chinese semiconductor industry chain. Mo Dakang, a well-known figure in the industry, pointed out that will the United States really break away from the Chinese semiconductor supply chain? He analyzed that the United States is unlikely to promote complete decoupling because it is not in the interests of the United States to maximize.