Nikkei: Western Digital's acquisition of Kioxia puts the US-Japan alliance to the test

Japanese memory giant Kioxia held an online board meeting on the 27th and planned to restart the IPO process. At the same time, there were reports that Western Digital of the United States was interested in acquiring Kioxia, and Japanese media pointed out that this transaction would test the US-Japan alliance.

According to Nikkei, Kioxia's IPO plan was approved by the Tokyo Stock Exchange in 2020, but the plan was disrupted due to Sino-US trade tensions, which affected the company's earnings. Since then, Kioxia has had new options for its future, including a merger with Western Digital.

But at a time when the United States and Japan are trying to build an alliance in the semiconductor field to counter the rise of China, both sides are somewhat sensitive about handing over too much control in such a key industry. Semiconductors are the cornerstone of the data society, and both countries are eager to consolidate their respective chip industries, so this deal may be a test of the US-Japan alliance in the coming years.

At the US-Japan summit held on the 16th of this month, US President Biden and Japanese Prime Minister Yoshihide Suga discussed the topic of semiconductors. Biden said that the United States and Japan will cooperate in a series of areas, "from promoting secure and reliable 5G networks to strengthening our cooperation in supply chains in key industries such as semiconductors, and promoting joint research in areas such as artificial intelligence, genomics, and quantum computing."

Nikkei pointed out that the reason why the United States wants to cooperate with Japan is to compete with China, which is sweeping the global market in cutting-edge technology. Many American chip companies now have no wafer fabs, and the US market share in global production has dropped from 37% in 1990 to 12% in 2020. This shows the risks of relying on the Chinese supply chain in important areas.

The Biden administration and Congress are considering a bill that would allocate $50 billion to support semiconductor production. The idea is to invest in the production of advanced semiconductors in the United States while increasing purchases of memory chips from allies such as Japan and South Korea.

Around the time of the meeting, discussions about the integration of the businesses between Western Digital and Kioxia gained traction, with the view that such a merger would fit perfectly into the semiconductor cooperation envisioned by the leaders of the United States and Japan. “I think Kioxia is a great partner for us, and we look forward to creating the future together,” said David Goeckeler, CEO of Western Digital, who has reportedly visited Japan several times despite the pandemic.

As a major player in hard disk drives, Western Digital entered the memory space after acquiring SanDisk in 2016. If the merger with Kioxia is successful, its size will be comparable to that of market leader Samsung Electronics. But Kioxia is reluctant to be swallowed up by Western Digital, and its major shareholders Toshiba and Bain Capital are said to prefer an IPO because it is an easier path to monetization.

However, negotiations are still ongoing, and according to Nikkei, the two sides have reached some compromises, such as equal partnership and sharing of board seats in the new merged entity. The main conflict is the location of the headquarters, with Western Digital believed to insist that the merged company be an American company for tax purposes.

But Japan's desire to revive its semiconductor industry is equally strong. In 2019, Japanese manufacturers' global market share fell to 10%, and 64.2% of domestic demand relied on imports. Japan's Ministry of Economy, Trade and Industry is eager to attract chip factories from countries without security risks to set up in Japan. Within the department, many officials are of the view that both factories and high-value-added R&D departments need to remain in Japan.

A core group within Japan's ruling Liberal Democratic Party, which was established in May, is also closely monitoring the developments in chip strategy. "If the merged company remains a Japanese entity with equal investment, we will welcome it," said a member, suggesting that moving the headquarters to the United States is unacceptable.