Post-Quake Japan Should Aim Beyond Chips

About a year ago, EBN and others were reporting about the devastating earthquake and tsunami in Japan. The area around the Fukushima nuclear plant remains a wasteland, but the semiconductor industry didn't suffer as badly as expected from the quake. According to IHS iSuppli, Japan's leadership in the semiconductor industry was already under siege years before the earthquake:

Unfortunately for Japanese semiconductor companies, the disaster uncovered an issue that had been known but not openly acknowledged: Japan is no longer in a leadership position for the manufacturing of semiconductor components. The long-overdue revitalization of the Japanese semiconductor industry has surfaced as the real issue.

The market research firm also questioned whether the Japanese chip industry will ever bounce back. I think a better question is whether returning the country's semiconductor manufacturing industry to pre-2011 levels a good idea for the industry or for Japan? I think the answer is “no” in both instances.

Before 2011, the semiconductor manufacturing industry was concentrated heavily in Japan. IHS iSuppli says suppliers headquartered there generated 27 percent of global semiconductor revenue in 2003. By 2011, that figure had dropped to 19 percent, but Japan was still providing a significant portion of the global supply — to the extent that a shortage was widely anticipated after the quake. That didn't happen, largely because of excess inventory building in the electronics supply chain. Suspension of some manufacturing in Japan, combined with diligent inventory management, helped avert a drastic shortage.

As the world is now discovering with China, concentrating an industry in one place is a dangerous practice. This is as much an economic problem as a geographic one. A disaster the size of last year's earthquake and tsunami could wipe out any number of industries if it were centered in the wrong place. We saw this with the flooding in Thailand and the hard disk drive industry.

China's domination of the manufacturing industry is finally raising red flags through the global economy. Stocks rise and fall depending on China's economic outlook, and any movement in its currency sends shock waves throughout the financial markets. Now the world is worried about the global supply of REEs and China's control of the minerals.

Simply replacing Japan's semiconductor factories could put the electronics supply chain back to where it was before 2011 in terms of concentration. Japan and the electronics industry should invest in rebuilding the country's semiconductor industry, as long as the effort focuses on next-generation technology. According to IHS iSuppli:

Of the major global semiconductor manufacturing regions, Japan now has the smallest number of number of advanced 300-millimeter wafer fabs and the largest number of mature 6-inch wafer fabs. Companies in Japan have resisted the trend of closing mature facilities and either outsourcing manufacturing or rebuilding manufacturing facilities to current state-of-the-art facilities. Once one of the world’s most advanced semiconductor producers, Japan’s semiconductor manufacturing operations have become senescent relative to the rest of the world.

Rebuilding this industry shouldn't involve a one-for-one swap to bring the country's fab population back to 2011 levels. Investment should be carefully orchestrated and balanced. Perhaps the semiconductor industry can move toward adjacent technologies, such as displays. LCDs are manufactured much like semiconductors. Better yet, there aren't many OLED factories anywhere in the world. In addition to semiconductor fabs, Japan has strength in chip manufacturing and test equipment. OLEDs require deposition equipment (more like inkjet) as well as glass, circuits, and equipment for cutting, sizing, and testing. There's an opportunity here to leapfrog the current display infrastructure — which, by the way, is heavily concentrated in Taiwan.

According to IHS iSuppli, a proposal emerged last month that would undo some of the damage from the earthquake. The plan called for the consolidation of manufacturing operations at {complink 12722|Renesas Electronics Corp.}, {complink 2149|Fujitsu Ltd.}, and {complink 4185|Panasonic Corp.}:

The plan separates out design and manufacturing into two separate companies. Furthermore, the proposal calls for a large capital injection to revitalize the manufacturing company.
Sadly, the plan is really a well-disguised roadmap for significant reduction in semiconductor manufacturing.
Can the plan actually lead to the revitalization of wafer manufacturing in Japan? IHS believes it is highly unlikely.
As the leading chip manufacturing companies transition to sub-28-nanometer manufacturing, Japan is facing the fact that it currently has no company capable of volume manufacturing using this advanced technology node. History has shown that success is driven by experience. Without a strong technical platform on which to gain experience and move forward, there is little chance of the country achieving the transition to sub-28-nanometer production.

I don't think the outlook for Japan is that dire, unless the country wants to bring itself back to parity with 2011. As it has shown the world again and again, the country can reach any goal it sets. It should reach beyond repairing the damage and aim for something higher. This is the country that redefined automotive manufacturing and became a leader in consumer electronics and chip manufacturing. It's damaged, but it isn't broken.

5 comments on “Post-Quake Japan Should Aim Beyond Chips

  1. _hm
    March 20, 2012

    What you narrated is very much true. However, this extends beyond chips and electronics industry. This is also true for auto industry and many other. Also, they are becoming very price competative.


  2. syedzunair
    March 21, 2012

    I agree, Japan needs to diversify into other opportunities like OLED's as mentioned by Barbara. They have the skillset and the technology to manufacture electronic equipment at competitive prices and with high quality. They need to prioritize their manufacturing, focus on a market segment and then invest in it to become large scale producers. 

  3. syedzunair
    March 21, 2012

    As the world is now discovering with China, concentrating an industry in one place is a dangerous practice. This is as much an economic problem as a geographic one.

    @Barbara: It is one of the biggest concerns in manufacturing industry today. With concentration of manufacturing in a few countries we are prone to be hit badly in case of disasters. Similarly, if the industry spreads to new geographical regions it will create employment and will offer consumers substitutes. This will also reduce the monopoly of certain countries in terms of production and will also effect the price setting mechanism. 

    The only problem that I see here in diversifying is the technological infrastructure in the host country. 

  4. Daniel
    March 22, 2012

    Barbara, I think companies have to diversify their investment policies. As of now almost all countries are blessed by nature in different ways like better availability of raw material, skilled manpower, better manufacturing environment, resources availability etc.  At the same time it can effect negatively by natural calamities, terrorism, instable government, political issues etc. By considering all these positive and negative aspects, companies has to diversify their presents in different countries, rather than narrowing to a particular location. I mean global presence by Globalization.

  5. Mr. Roques
    March 23, 2012

    Are companies thinking of moving all their operations out of China, have a backup or balance production among factories in several regions? 

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