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Tech war: Japan seeks bigger role in global chip supply chain as US tries to sideline China

Japan, host of this year's Group of 7 summit, is seeking a more prominent role in the global semiconductor value chain, as the US and its allies move to limit China's role in the future chip landscape.

Ahead of the gathering of G7 leaders in the Japanese city of Hiroshima, some of the world's largest chip makers, including Taiwan Semiconductor Manufacturing Co (TSMC), South Korea's Samsung Electronics, as well as Intel Corp and Micron Technology in the US, have agreed to invest billions of dollars into Japan, a development that is set to boost the country's importance in the global chip industry.

As part of the pact, Micron said it would invest up to 500 billion yen (US$3.6 billion) over the next few years, with support from the Japanese government. The company said its planned plant in Hiroshima would enable the next wave of advanced chip innovation, such as 1-gamma node memory chips, from 2025.

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In a statement, Japanese Prime Minister Fumio Kishida called Micron's investment "a great case of Japan-US semiconductor cooperation".

Micron's big bets in Japan mark a sharp contrast to its souring relationship with China, where it disbanded its chip design team in Shanghai last year even though the market accounted for 11 per cent of its sales. Micron products are currently being investigated by Beijing on national security concerns.

Japan's courting of global chip manufacturers follows similar efforts by allies like the US, European Union and, to a lesser extent, the UK, which are using money to entice semiconductor firms to relocate to their respective markets, according to Gareth Leather, senior emerging Asia economist with Capital Economics in London.

While Japan was once a major player in the global semiconductor industry with over half of the market share in 1988, Taiwan now makes the majority of the world's semiconductors, including over 80 per cent of the most advanced chips, according to experts.

However, growing geopolitical tensions between the US and China are pushing developed countries to diversify chip sourcing away from Taiwan, Leather said.

TrendForce, a global tech market intelligence provider, predicts that Taiwan's advanced chip process capacity will drop to 71 per cent by 2025, down 9 per cent from 2022.

U.S. President Joe Biden delivers a speech at a ceremony celebrating the construction of a TSMC factory in Phoenix, Arizona, in December 2022. Photo: Kyodo alt=U.S. President Joe Biden delivers a speech at a ceremony celebrating the construction of a TSMC factory in Phoenix, Arizona, in December 2022. Photo: Kyodo>

Washington has been the most aggressive in its attempt to reorganise the global semiconductor supply chain.

Last year, President Joe Biden signed into law the US Chips and Science Act, which allocates US$52 billion to fund domestic chip production and research. Recipient companies of the funding will be barred from building "leading-edge" chip factories in China for 10 years, a move seen to be designed to counter the country's technological advancement.

The US also leads a semiconductor alliance with Taiwan, Japan and South Korea, called "Fab 4" or "Chip 4", which experts say could further disrupt China's position in the global chip supply chain. The alliance held its first meeting in February, focused on semiconductor supply chain resilience and future cooperation.

As the four partners deepen their cooperation, TSMC, the world's largest contract chip maker, said on Thursday it would continue to invest in Japan, according to the Taipei Times.

The firm is already building a government-subsidised factory in Japan in partnership with Sony Corp.

A wafer seen as at a ceremony held by TSMC to mark the start of mass production of its most advanced 3-nanometer chips in Tainan, Taiwan, in December 2022. Photo: Reuters alt=A wafer seen as at a ceremony held by TSMC to mark the start of mass production of its most advanced 3-nanometer chips in Tainan, Taiwan, in December 2022. Photo: Reuters>

China's foreign ministry spokesman Wang Wenbin said at a routine press conference on Friday that the US Chips Act shows how Washington is using its power to force its allies into following its lead.

"If the G7 is set to discuss the issue of economic coercion, they should start by discussing how the US has used coercion against the other six members [in G7]," Wang said.

During the G7 summit, which kicked off on Friday and concludes on Sunday, Kishida and Biden are expected to announce a US$70 million deal to train 20,000 chip engineers at 11 universities in the US and Japan, including Purdue University, Hiroshima University and Tohoku University, according a Financial Times report on Thursday.

Meanwhile, Kishida and British Prime Minister Rishi Sunak have agreed for Japan and the UK to partner in semiconductor research and development, as well as skills exchange, as part of a new global strategic partnership called the "Hiroshima Accord", according to a UK government statement.

UK Prime Minister Rishi Sunak, left, and Japanese Prime Minister Fumio Kishida shake hands before a bilateral meeting ahead of the G7 leaders' summit in Hiroshima, Japan, on Thursday. Photo: Bloomberg alt=UK Prime Minister Rishi Sunak, left, and Japanese Prime Minister Fumio Kishida shake hands before a bilateral meeting ahead of the G7 leaders' summit in Hiroshima, Japan, on Thursday. Photo: Bloomberg>

Last year, the UK blocked the Dutch subsidiary of a Chinese company from acquiring Britain's biggest semiconductor maker, Newport Wafer Fab, on national security grounds.

As the US and its allies push to strengthen domestic semiconductor production in an attempt to isolate China, it could have implications for the world's second-largest economy, according to Gary Ng, senior economist for Asia-Pacific at French investment bank Natixis.

"China will face the nightmare of being unable to attract [foreign direct investment] and more import restrictions in chip production," he said.

For now though, the US and its allies seem to be focused on "containing China's tech advancement and rebalancing the production capacity", rather than asking chip makers to move out of China, Ng said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.