Political Pulse

Curtain Rising on Era of ‘diplomatic War’ over Semiconductors

The Yomiuri Shimbun
Prime Minister Fumio Kishida (third from the front in the right row) meets with executives of overseas semiconductor manufacturers at the Prime Minister’s Office in Tokyo on May 18.

By Akihiro Okada

8:00 JST, August 5, 2023

Semiconductors are used in a wide array of products, including personal computers, smartphones, automobiles, home appliances and artificial intelligence. They have become essential devices that determine competitiveness in a diverse range of fields.

They are also becoming increasingly important from a national security perspective. Ensuring stable procurement has become an urgent issue for many countries.

Major countries are entering an era of “diplomatic war” over semiconductors.

Let’s look at the history of Japan’s national strategy regarding the semiconductor industry.

Japan’s semiconductor companies flourished in the 1980s. They dominated the world with their high-quality DRAM (dynamic random-access memory) devices and, by 1990, had about 50% of the world market. The United States, overtaken by Japan, felt a strong sense of crisis, and the two countries experienced severe trade friction on the matter. To resolve it, they agreed to the first semiconductor agreement from 1986 to 1991, and the second one from 1991 to 1996.

The Japan-U.S. semiconductor friction was exacerbated by a big gap in the perception of semiconductors between the U.S. and Japan.

The Japanese side saw the semiconductor trade friction as an extension of earlier trade friction over industrial products such as textiles and automobiles. In contrast, the U.S. side viewed the decline in the competitiveness of its domestically produced semiconductor chips as a threat to national security. The reason was that semiconductors, which determine the performance of weapons, are essential products for the U.S. military-industrial complex.

When the United States took a hard-line stance in negotiations over the semiconductor agreement, Japan failed to understand the true meaning of their repeated statements that “this is a matter of national security.”

The Japanese negotiating structure was less potent than that of the United States. The Japanese side was led by the Foreign Ministry, the now defunct Ministry of International Trade and Industry (MITI), and private organizations. At the same time, the U.S. side had a system to promote discussions not only within the Office of the United States Trade Representative (USTR) but also at various levels elsewhere, from the National Economic Council (NEC) at the cabinet level to interagency meetings at the level of section chiefs across government departments.

Today, Satoshi Nohara is in charge of Japan’s semiconductor industry strategy, as the director general of the Commerce and Information Policy Bureau of MITI’s successor entity, the Economy, Trade and Industry Ministry (METI). Regarding the history of Japan-U.S. bargaining over semiconductors, Nohara remarked, “In retrospect, the U.S. outmaneuvered Japan.”

At the time, the U.S. side criticized Japan as acting unfairly by “free riding” on U.S. technological development. They also repeatedly criticized the Japanese government’s generous industrial subsidies.

But even while ostensibly criticizing Japan’s industrial policy, the U.S. copied it. It even used the Pentagon’s budget to subsidize the semiconductor industry. As part of the military-industrial complex, it promoted the competitiveness of the semiconductor industry.

On the other hand, the Japanese side, in its simple honesty, worked to develop basic research to avoid criticism from the United States.

The semiconductor agreement, an arrangement under which the U.S. government sets prices, made it difficult for Japanese firms to sell at lower prices. The numerical target of increasing foreign manufacturers’ share of the Japanese semiconductor market to 20% also dealt a blow to Japanese manufacturers.

Nohara said, “The semiconductor agreement may not be the only reason for the decline of Japan’s semiconductor companies, it became the starting point for the fall.”

Japan needed a comprehensive and well-developed national strategy like the United States. Perhaps the Japanese government and private sector were too naive.

After that, Japan’s semiconductor strategy continued to go astray.

The Japanese government led restructuring measures in the electronics industry, raising great expectations for “Hinomaru semiconductors.” However, its efforts only resulted in a “coalition of the losers.”

In 1999 Hitachi, Ltd. and NEC Corp. merged their memory divisions to establish Elpida Memory, Inc. — but it went bankrupt in 2012.

In 2003, Hitachi and Mitsubishi Electric Corp. merged their semiconductor divisions to form Renesas Technology Corp., which in 2010 added NEC’s semiconductor division to Renesas Electronics Corp. However, performance remained sluggish, and the company underwent significant restructuring in the 2010s.

Tsugio Makimoto, a pioneer in the Japanese semiconductor industry who oversaw the semiconductor business at Hitachi and was involved in the Japan-U.S. semiconductor negotiations, made the following observation in his 2021 book, “The Road to Revival of Japanese Semiconductor Industry”: World leaders, including current and past presidents of the United States, are highly enthusiastic about semiconductors. However, as far as he knows, no Japanese leader since the 1980s has been as directly involved in semiconductors as those leaders are.

Unfortunately, the Japanese government has wasted over a quarter-century without developing an effective semiconductor strategy.

The United States has consistently positioned the semiconductor industry as an essential one for national security and has tirelessly updated its national strategy to maintain high international competitiveness.

And now it is waging a fierce “war” in the semiconductor industry against China, which it positions as the “only competitor with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military, and technological power to advance that objective.” With that in mind, the United States is implementing a series of export controls.

Japan is beginning to see prospects for a revival of its semiconductor industry by riding the wave of these geopolitical changes.

In June 2021, METI formulated the “Semiconductor and Digital Industry Strategy,” to which Prime Minister Fumio Kishida has become deeply committed.

Driven by these changes in international politics, the government fully supported the establishment of a new company called Rapidus Corp. last year to produce next-generation semiconductors in Japan.

The narrower the circuit line width of a semiconductor chip, the higher its performance. Until now, Japan has only been able to manufacture chips with lines down to 40 nanometers; IBM Corp. has the technology to manufacture them at 2 nanometers and has agreed to provide generous support for Rapidus.

IBM is a company with close ties to the U.S. government, and it appears likely that the U.S. government was behind its technical cooperation with Rapidus.

The United States is aware of the risk that the supply of semiconductors from Taiwan’s TSMC Corp., which has an extremely high market share for the most advanced chip products, would be disrupted in the event of an emergency in Taiwan. The United States can mitigate this risk by decentralizing the locations of advanced semiconductor manufacturing plants.

The U.S. government has persuaded TSMC to set up some of its most advanced semiconductor plants in the United States. American chipmaker Intel Corp. also has a high manufacturing capacity. U.S. policymakers probably see Japan as an additional piece of the puzzle for stable procurement of semiconductors.

It is a welcome development that the national interests of the United States and Japan coincide in shaping the supply chain for the advanced semiconductor industry.

In the semiconductor trade friction of the 1980s, the U.S. and Japan were enemies. Now, the U.S. is working with Japan to counter a common foe, namely China.

There is a striking passage in Chris Miller’s 2022 book “Chip War” about the semiconductor industry.

In the 1980s, the major players in Silicon Valley fully supported South Korea’s efforts to manufacture cheaper products. If Korean manufacturers, with their significantly low wages, could make great strides in churning out affordable products, they could undercut Japanese companies’ strategy of selling products at low prices without regard to cost. The U.S. would be able to focus on value-added products and be on its way to winning the international competition. And so, Korean manufacturers did what the U.S. wanted and beat Japan with their cheaper products.

The logic was simple. As Jerry Sanders, then CEO of Advanced Micro Devices, Inc., explained: “My enemy’s enemy is my friend.”

We must remember the reality that every nation builds its strategy with its own national interests foremost in mind. We should rebuild our strategy based on Japan’s national interests.

Political Pulse appears every Saturday.