A meeting was underway in a mega factory of Fujian Jinhua Integrated Circuit Company (JHICC), a Chinese semiconductor manufacturer in the southern province of Fujian. The participants were discussing a plan to swiftly build a system to mass produce semiconductors. Two years before, the same factory, which stood on a compound eight times the size of Tokyo Dome, was shrouded in darkness.
The JHICC is an entity whose mission is to promote government policy backed by Chinese leader Xi Jinping. Its previous plan for mass production was stalled by U.S. sanctions imposed for the factory’s alleged involvement in the leak of U.S. technology through a Taiwanese company. Later, however, a settlement was reached at court, enabling the company to proceed with the plan to ramp up production. The JHICC contracted to purchase manufacturing equipment from several Japanese corporations.
Former U.S. President Donald Trump identified semiconductors as China’s Achilles’ heel and made this sector the focus of his attack. This prompted Xi to vigorously press for an increase in the ratio of China’s self-sufficiency in this sector. Semiconductor Manufacturing International Corporation (SMIC) and many other Chinese firms are expanding their production capacity. A manager of a Japanese producer of semiconductor-manufacturing equipment described the trend as “China’s semiconductor special procurement boom.”
Japanese equipment manufacturers send employees to Chinese semiconductor factories to install the equipment, and Japanese material manufacturers are enhancing local production in China. Even during the COVID-19 pandemic, with restrictions on cross-border movement, the Chinese government was willing to issue visas for people traveling to China for semiconductor-related business.
The Semiconductor Equipment Association of Japan (SEAJ) estimated in July that Japanese sales of semiconductor equipment will increase by 20% from FY 2020 to FY 2021, marking record sales for the second consecutive year. Since 2020 China-bound equipment shipments have ranked highest in sales. Globally, China is a leading buyer of Japanese semiconductor-manufacturing equipment.
“No one knows how long this boom for Japanese companies will continue,” says a source familiar with the situation, as the Chinese leadership’s goal is not only to increase the self-sufficiency rate for semiconductors, but also to build its own supply chain, including manufacturing equipment and materials production.
In FY 2019, the Chinese government established a national fund of 147.2 billion yuan (about 2.5 trillion yen) for promoting the transformation and upgrading of the country’s manufacturing industry and started providing capital to domestic semiconductor manufacturers. In July this year, another special-purpose fund was established in cooperation with the China National Building Materials Group to nurture the domestic industry to produce new materials for semiconductor production and other purposes.
The Chinese government is promoting M&As and aggressively recruiting human resources as well. The government-backed BOE Technology Group and other major Chinese companies are reportedly keen to purchase Japanese semiconductor manufacturers as well as other businesses that are considering downsizing or withdrawing from the market due to difficulty making a profit. Through these purchases, China hopes to acquire experienced personnel, such as foreign-trained technicians and scientists.
In the past, Japanese corporations maintained their competitiveness by shifting the focus of production from final products such as smartphones to core parts and manufacturing equipment. China, however, is now moving toward areas of Japanese expertise as part of the initiative promoted by Xi to build a semiconductor supply chain.
Of 200 companies on the list of suppliers for U.S. Apple, 51 are Chinese firms, putting the country at the top of the list, surpassing both Taiwan and Japan. Some of these Chinese suppliers are reportedly considering acquiring Japanese and other corporations.
A diplomatic source points out that along with Japanese companies engaged in local production in China, these acquisitions pose the risk of technology leaking to Chinese firms.
Japanese firms face the challenge of how to do business in China’s expanding market while protecting the technology that is the source of their competitiveness.