Japan fires up its semiconductor industry

After years of watching Asia's chip industry shift toward Taiwan and China, Japanese companies are once again investing heavily in semiconductors. NEC, Sony, Renesas Technology, Toshiba and others are in the midst of building or expanding fabrication facilities, or "fabs," and other plants, according to several executives and analysts.

"We've seen a significant resurgence in Japan. Japan has a reborn semiconductor industry and will once again be a world-class competitor," said Joe Bronson, chief financial officer of Applied Materials, the world's largest maker of semiconductor equipment.

The activity is widespread. Memory maker Elpida Memory, for instance, said in June that it will invest $4.1 billion to $4.5 billion in a new fab that will open in the second half of 2005. It also plans to increase production capacity at a Hiroshima fab this year from 22,000 to 28,000 wafers a month.

The companies are driven in part by sheer competitive necessity. The construction activity is concentrated on erecting new fabs--or expanding a few existing ones--that process wafers with a 300-millimeter diameter rather than the older 200-millimeter versions. These larger wafers allow manufacturers to produce about twice as many chips without inflating their operating budgets, thereby cutting costs immensely.

"Japan is investing very heavily to ensure they don't miss this decade," said Ray Bingham, chairman of Cadence Design Systems, which makes semiconductor design tools. NEC, for one, is very active, he said. "They lost an awful lot of electronics value in the '90s."

A downturn in Japan's gross national product in the second quarter, however, has dented the optimism.

Japanese companies need to keep pace with their rivals overseas. Manufacturers like Intel, IBM and Texas Instruments are expanding their own 300-millimeter operations. Many Japanese companies are also expanding operations and creating alliances in China to capitalize on low costs and local demand.

"Japan underinvested for the past eight or nine years. Now they have to catch up," said Anantha Sethuraman, vice president of strategic marketing at FEI, which makes imaging tools and microscopes that let manufacturers "see" the internal structure of chips. "Japan started coming back early last year. By the latter part of last year, Japan was investing like there was no tomorrow."

The increased investment also comes from a resurgence in confidence that had been building until recently. Japan's gross domestic product grew by just 1.7 percent in the June quarter, much slower than expected. Still, the International Monetary Fund said it expects Japan's GDP to rise by 4.5 percent this year, the fastest pace in a decade. Between October 2003 and March 2004, Japan's economy grew in the 6 percent range.

In July, the Committee of Silicon, an organization of Japanese wafer manufacturers, predicted that production of silicon wafers by Japanese companies would come to 5,700 tons this year, according to a report in EE Times. That's higher than its earlier 5,600-ton forecast, which itself represented a 15 percent increase over 2003.

Current technology trends play into traditional Japanese strengths. Games, consumer electronics and wireless communications have emerged as some of the hottest markets in IT, and the country has been a dominant player in these fields.

"Japan has always been a specialist in computer electronics. They are cutting-edge in wireless," said Bruce Beckloff, the Tokyo-based director of segment marketing for ARM, which licenses processor cores and intellectual property to chipmakers. "(Digital TV) is here. Sony and the gang are putting a lot of investment into it."

ARM does not break out its Japan-related revenue separately, but Beckloff said it is a growing part of the company's overall Asia business. In the second quarter, approximately 40 percent of ARM's bookings came from Asia, up from 33 percent at the same time last year. In the second quarter, the company announced four new licensing deals in Japan. NEC is also working with ARM to develop multicore chips for cell phones.

Consumer push
Toshiba is one of the companies, in particular, that is gearing up for consumer electronics. The company's first 300-millimeter fab, located in Kyushu, will start producing logic chips this fall. Toshiba is one of the companies involved in producing the Cell microprocessor for the next version of Sony's PlayStation, which some believe could become one of the most powerful processors for desktop game station devices.

Toshiba also plans to open, with SanDisk, a NAND flash memory plant in Yokkaichi that will process 10,000 wafers a month in the second half of 2005.

"We expect the market to see 30 percent annual growth from 2003 to 2005, from 380 billion yen to 680 billion yen," or from $3.5 billion to $6.2 billion, Makoto Yasuda, of Toshiba's corporate communications department, wrote in an e-mail.

NAND flash memory comes inside the memory cards found in cameras and phones, and has emerged as one of the fastest-growing markets in semiconductors. Toshiba invented it and, therefore, gets to collect royalties from competitors such as South Korea's Samsung.

Mergers over the past few years have helped the industry reawaken by spreading large capital equipment requirements over a larger base. Renesas was formed by merging the processor operations of Hitachi and Mitsubishi, noted Risto Puhakka, an analyst at VLSI Research. Elpida came from the merger of the memory divisions of NEC and Hitachi.

"Basically, they kind of woke up to the concept that if they don't invest in the industry, it will go away," he said.

Still, Puhakka noted that Japan must contend with the aggressive expansion plans of Chinese and Taiwanese companies. Not only will these companies compete against Japanese giants, but the overall effect of all this construction could lead to a glut.

"The concern right now is that we will reach overcapacity in mid-2005," said Bill Ong, an analyst at American Technology Research.