Following U.S. on China chip export curbs would hit Japan's industry hard

beijingwalker · Nov 17, 2022

Following U.S. on China chip export curbs would hit Japan's industry hard

The Japanese government has yet to clarify its stance on U.S. semiconductor export regulations to China, but if Tokyo were to go along with Washington, it’s unlikely that the Japanese chip industry would manage to remain unscathed. | REUTERS
BY KAZUAKI NAGATA
Nov 17, 2022

The U.S. has recently implemented unprecedented steps to control semiconductor exports to China in an attempt to stop the world’s second-largest economy from getting ahead in the tech race, with Washington also calling on allies, including Japan, to follow suit.

The Japanese government has yet to clarify its stance, but if Tokyo were to go along with Washington, it’s unlikely that the domestic chip industry would manage to remain unscathed, industry observers said.

They added that the impact on chip equipment- and material-makers would be more significant than on chipmakers, as Japan’s powerful global players are concentrated in those areas.

“There is still some uncertainty over how the restrictions would work, but if we interpret them straightforwardly, the damage to Japan’s chip industry would be massive,” said Akihiro Morishige, a researcher at the Mitsubishi Research Institute.

In early October, Washington expanded its chip export curbs in an effort to contain China’s ambitions on developing advanced chips that can be used for military applications and key technologies, such as supercomputers and artificial intelligence.

Under the new rules, U.S. companies are required to obtain licenses when they ship items to production facilities in China for relatively high-tech chips, including logic chips under 16 nanometers, DRAM memory chips below 18 nm, and NAND chips with 128 layers or more.

Generally, logic chips — which are processing chips that include computer processors — are more advanced and more technologically challenging to make as the nanometer size gets smaller. DRAM chips are commonly used for computer memory, while NAND chips are also called flash memory.

The new U.S. restrictions also cover chip-manufacturing related goods while targeting items produced in other countries that will be used for supercomputers in China.

Observers have said, however, that if Japan decides to follow the U.S., the new regulations would likely cause problems for Japanese companies shipping their chip-related products overseas.

“They need to know where those items will end up and what they will be used for,” Morishige said. “Otherwise, they can’t decide whether it’s right or wrong.”

He added that just having to confirm that information would already be a burden for companies, and if they find their products fall into a gray area, they may play it safe and cease exports.

Masayuki Kimura, chief operating officer at Deloitte Tohmatsu Venture Support, said the new regulations will hobble Japan’s chip material- and manufacturing equipment-makers rather than its chipmakers, which do not have the technologies to produce advanced chips, such as those used for high-end smartphones.

“When thinking about Japan’s strengths (in the global chip industry), they are manufacturing machines and materials, so (those firms) will be affected more,” Kimura said.

Exports of semiconductor manufacturing equipment has grown in recent years, and China has been one of the main destinations.

Last year, the value of such exports hit a record ¥3.3 trillion ($23.67 billion at current exchange rates), and China accounted for the largest share, at about 39%. This year, the January-September figure alone has already topped ¥3 trillion.

Some chip-related firms have already factored in the potential impact and are cautiously watching how the situation will develop.

Chip gear firm Tokyo Electron, which boasts strong market shares for some essential semiconductor production machines, revised its sales forecast down for this business year by ¥250 billion to ¥2.1 trillion, saying half of the cut is due to the new export curbs.

China was the biggest market for the firm in its last business year, with sales from there accounting for 28.3% of the total.

Tokyo Electron CEO Toshiki Kawai said it’s likely that clients targeted by the U.S. will need to change their investment plans.

“It will be tough to manufacture (chips) when U.S. equipment-makers are unable to provide their machines,” Kawai said during a news conference last week, implying the measures will also affect Tokyo Electron.
Tokyo Ohka Kogyo, JSR and Shin-Etsu Chemical are some of Japan’s globally competitive chip-material companies. Along with other domestic firms, they dominate the market for extreme ultraviolet photoresists, which are used for cutting-edge chips.

While China has yet to acquire the necessary technologies to develop ultra-advanced chips used for supercomputers and artificial intelligence, the country has been bolstering its efforts to catch up by making massive investments in its domestic chip industry, and it has set a goal of achieving a 70% chip self-sufficiency rate by 2025.

“China was expected to manufacture cutting-edge chips more and more, but Japan will not be able to cater to those demands (because of the U.S. restrictions), so the impact is quite big” for Japanese chip gear- and material-makers, Kimura said.

He added that many of the Japanese chip-related makers he has talked to were already being careful about doing business in China even before the expanded restrictions were introduced.
“They are voluntarily reducing or stopping shipments to China. The new restrictions are even stricter, so it will cost them more,” Kimura said.

While the new export controls have spurred a lot of uncertainty, Washington has urged Japan and the Netherlands to get on board.

Industry minister Yasutoshi Nishimura said earlier this month that the government is communicating with the U.S. and conducting discussions with domestic companies.

Nishimura also said that the ministry has not received reports saying the export curbs will significantly impact the industry, but it will continue to monitor how the U.S. manages the rules.

In the Netherlands, Roger Dassen, CFO of Dutch chip manufacturing equipment firm ASML Holding, a dominant producer of photolithography machines for chip production, said last month that the company “will do whatever it takes to follow those” rules.

He added that the impact will be “fairly limited,” but the firm is still evaluating the potential affects.

According to some media reports, Taiwan Semiconductor Manufacturing Co., the world’s largest chip manufacturer, also said that it will follow the new rules.

Given the level of cooperation the U.S. is receiving from overseas firms, “it will be tough” for Japan to ignore Washington’s request, Kimura said.