Source: Compiled and translated from NetworkWorld

Japan once dominated the global semiconductor market. However, policy shifts, rigid corporate culture, and the tide of global competition have led to a decline that has lasted for 30 years. Let’s review the decline of Japan’s semiconductor industry and its future development direction.

The global industrial competition has entered an era where "whoever controls semiconductors controls the future." According to Gartner’s forecast, the global semiconductor market size is expected to reach a record $733 billion by 2025. Semiconductors are the core of many cutting-edge technologies, including artificial intelligence, electric vehicles, space exploration, and quantum computing. No longer just components, semiconductors have become "strategic materials" that form the cornerstone of national security, industrial infrastructure, and technological advantages.

Japan was once at the forefront of this global competition. From the late 1980s to the early 1990s, Japan’s semiconductor industry accounted for more than half of the global market share, ushering in a golden age known as the "Nisshōki Semiconductors" (referring to semiconductors leading Japan’s technological prowess, named after the Japanese national flag). In 1986, Japanese companies took the top three spots in Gartner’s semiconductor rankings: NEC ranked first, Hitachi second, and Toshiba third, with six Japanese firms making it into the top 10.

Yet, due to flawed institutional design and structural rigidity, this glory faded rapidly. In Gartner’s 2024 forecast, no Japanese company made it into the top 10.

Japan’s ability to lead the world in semiconductors was underpinned by its advanced manufacturing technology and a management model based on the General Electric (GE) model. Semiconductor technology was originally developed in the United States, but in Japan, general electronics manufacturers such as NEC and Toshiba actively entered the semiconductor market. A major advantage of Japanese companies was their internal product portfolio with clear purposes (for export), such as home appliances and personal computers. This clear export strategy allowed them to easily predict demand and operate efficiently through a vertically integrated management structure covering design, manufacturing, and sales.

Another factor behind Japan’s success was the relatively small scale of semiconductor investments at the time, which enabled flexible and rapid investment decisions at the business unit manager level. Additionally, Japan saw the emergence of many highly competitive semiconductor manufacturing equipment and material manufacturers, allowing it to build a comprehensive system from design to manufacturing and sales, thereby establishing international advantages. Back then, semiconductors in Japan were mainly produced by general electronics manufacturers, and Japan was fortunate to have internal suppliers of semiconductors needed for home appliances and personal computers.

The loss of competitiveness in Japan’s semiconductor industry was not due to a single cause but the complex interaction of multiple factors. The biggest turning point was the policy failure marked by the U.S.-Japan Semiconductor Agreement. Initially, the U.S. held an overwhelming share of the semiconductor market, but Japanese companies quickly enhanced their technological capabilities and production capacity, solidifying their position in the global market. However, for the U.S., semiconductors were also the core of its defense industry, and concerns about Japan’s dominance grew from a security perspective. Faced with mounting public opinion, the U.S. government began to strongly urge Japan to open its market.

On the other hand, adhering to the GE management model, Japan focused on domestic demand and vigorously promoted mass production. While this expanded market share, intense price competition led to practices deemed as dumping. Furthermore, Japanese companies had a strong tendency toward self-sufficiency and were reluctant to proactively adopt U.S.-made semiconductors in their products.

Against this backdrop, in the first phase of the U.S.-Japan Semiconductor Agreement reached in 1986, the Japanese government promised, in the form of a "side agreement" (a confidential document), to increase the market share of foreign-made semiconductors to 20%. This essentially constituted market intervention and had a significant impact on Japan’s domestic industrial structure. Moreover, the second phase of the agreement explicitly set this market opening share target, increasing pressure on the structural transformation of Japan’s semiconductor industry. This gradually eroded the competitiveness of Japanese companies and led to a decline in their global market position.

By the late 1980s, Japan held more than 50% of the global semiconductor market. However, a large portion of this was in DRAM (Dynamic Random-Access Memory), and the vertical integration model prevented Japan from shifting to logic chips (for logical operations) and ASICs (Application-Specific Integrated Circuits) in a timely manner. As a result, profit margins continued to shrink, and the business lost its appeal. Additionally, the expansion of DRAM production capacity led to a surge in capital investment scale. While investment decisions were initially made at the department manager level, the growing scale required company-wide decision-making—and if senior management lacked professional expertise, decisions were delayed. The advantages of the GE model had 反而 become a hindrance. Meanwhile, overseas markets were shifting toward horizontal division of labor (separating design and manufacturing), and large foundries (contract manufacturing enterprises) emerged. Japan’s insistence on vertical integration meant it could not invest promptly when investment needs increased, severely undermining its competitiveness.

The silicon cycle is highly volatile, and for a general electronics manufacturer, this had an excessive impact on performance. This is why they sought to spin off their semiconductor businesses. Takashi Kitaoka, who served as president of Mitsubishi Electric at the time, made this decision early on and faced considerable criticism. However, it ultimately proved to be the right choice.

At the same time, the rise of emerging companies represented by South Korea’s Samsung Electronics was another major factor pushing Japan’s semiconductors into decline. Samsung was an owner-managed enterprise, enabling rapid decision-making and large-scale investments. Japan’s strong culture of vertical division of labor and horizontal integration hindered its shift to a horizontal division of labor model. The vertical integration model was highly effective in the early stages of semiconductor development, but as the scale expanded, it lost flexibility and could not respond quickly—and this, I believe, was the core problem.

Furthermore, the collapse of Japan’s bubble economy in the 1990s made Japanese manufacturers reluctant to invest. In addition, the restructuring of Japanese companies and the retirement age system forced a large number of engineers to retire, and South Korean companies recruited them with high salaries. The result was an outflow of Japan’s technical talent, which to some extent contributed to the decline in the competitiveness of Japanese manufacturers and the rise of South Korean manufacturers.

After the Plaza Accord was signed in 1985, the yen appreciated rapidly. Concurrently, the U.S.-Japan Semiconductor Agreement was signed in 1986. Affected by the yen’s appreciation, Japan’s economy fell into recession, and overseas sales faced significant difficulties. Moreover, in 1990, quantitative restrictions led to the burst of the real estate bubble, and corporate investment enthusiasm cooled sharply. This dealt a major blow to the semiconductor industry, and the "proactive investment" seen earlier was no longer sustainable.

Subsequently, Japan’s Ministry of International Trade and Industry (MITI, now METI) used the restructuring model of the three major computer groups in the mainframe era (Fujitsu + Hitachi, NEC + Toshiba, Mitsubishi Electric + Oki Electric) as a template for the grouping of the semiconductor industry. Later, the government led the establishment of the "Nisshōki Alliance," giving birth to Elpida Memory (which merged the DRAM businesses of NEC, Hitachi, and Mitsubishi) and Renesas Technology (which merged the system LSI businesses of Hitachi and Mitsubishi). However, since these alliances were spun off from their parent companies, decision-making was slow and accountability was unclear. In the end, Elpida was acquired by the U.S.-based Micron Technology, and Japan’s semiconductor industry was swallowed up by global competition. A similar failure occurred in the liquid crystal display (LCD) sector: when parent companies were overly concerned about saving face, flexible restructuring became impossible.

Since then, most of Japan’s major vertically integrated semiconductor manufacturers have disappeared, but material manufacturers and equipment companies remain thriving. Does this mean Japan’s semiconductor industry is poised for a rebirth?

One reason for this is that semiconductor manufacturers need to invest heavily in domestic manufacturing processes, but equipment and material manufacturers can expand into overseas markets. Thus, even if Japan’s domestic market is sluggish, their businesses can continue as long as there is demand. However, it is also true that manufacturers in countries like South Korea have built up strength by supplying such equipment and materials overseas for many years. While South Korea has an advantage in finished semiconductor products, it still relies heavily on Japan for many components and materials. On the other hand, it can be said that the birth of Rapidus and TSMC’s entry into Japan—key factors determining the future rise or fall of Japan’s semiconductor industry—are made possible precisely because of the excellent equipment and material manufacturers remaining in Japan.

In the second decade of the 21st century, the impact of the COVID-19 pandemic led to a global semiconductor shortage and supply chain disruptions. As a result, even semiconductors used in industrial machinery such as automobiles could not be reliably supplied. Until then, Japan had relied on overseas markets and pursued a procurement policy of "buying parts wherever they are cheapest." This global procurement approach may have been correct when the global economy was operating smoothly, but it failed during times of crisis.

Japanese experts argue that maintaining a certain level of domestic manufacturing capacity is crucial. Semiconductors are not just components but the "nervous system" of the entire industry. To safeguard Japan’s industrial competitiveness, the country aims to rebuild its domestic semiconductor manufacturing and supply system. But can this succeed?

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