During the 1980s Japan accounted for 50% of the world’s semiconductor production, which has fallen back to only 9% in recent years. Meanwhile, following a similar act coming out of the US, with the passing of its 2023 Chips act the EU is set to secure the procurement and production of high-end computer chips needed in everyday objects. The COVID-19 pandemic and the consequent serious disruption of global supply chains had proved the vulnerability of several key industries when supply became insufficient. Wireless communication, automotive parts and data storage industries accounted for 60% of the impacted sectors. Like the US, the EU wanted to ensure a steady future supply. For the supply of computer chips, one of the answers could be to move production to countries more friendly to the EU, like Japan for instance.
The European Chips act is set to mobilise 43 billion EUR to prevent future semiconductor shortfalls, but is falling behind US lead efforts. The EU shares US interests, but has decided to adopt a different strategy. As a result, the European Chips act focuses on generating local solutions to the problem and investments in manufacturing within EU territory. Yet, ample opportunity also exists beyond the EU borders. Japan’s investments in the sector and push for further development has created fertile ground for more enhanced cooperation. Nevertheless, the EU has been lagging behind in its efforts and European outreaches to partners with existing infrastructure has been limited, while the US approach has already created results.
While both the US and the EU have passed their respective Chips acts, Japan has made some moves towards the EU, perhaps as the US has been verging towards strengthening their domestic production. The EU, on the other hand, has mainly focused on improving existing supply chains, even though local production is also ramping up and being ventured. Taiwanese industrial manufacturer TSMC has invested in a new facility to be built in Dresden. This is in line with Japanese strategic thinking, as security assurances are the country’s main strategic goal, having outlined security as the central point in its foreign policy. But even with investments from the EU, Canada and the US in their own production of computer chips used in everything from cars to high-end appliances, Japan might find itself a niche in the market. Japan has recently been a hotbed of investment from Taiwanese firms focusing on high-end chips, while having built many new plants to facilitate the production. In some regards, moving the focus on semiconductor manufacturing from Taiwan to Japan can be considered an instance of “Friend shoring”. Japan has mobilised their industry as an example of such “Friend shoring”, where a country can shore up its support with friendly partners to increase their own security and stability. Japan’s foreign policy is in some regards laser focused on security, and by tying EU supply chains closer to its domestic production, it can make the EU more invested in the situation in the Pacific, a similar strategy as employed by Taiwan. Taiwan has grown to be the biggest manufacturer of semiconductors and computer chips in the world, and with it, has made sure that global powers have a stake in the fate of the island.
With that background, expansion towards Japan has increased over the recent years. Both the government, foreign countries and private firms have invested in production in Japan. As Japan had already been the dominant producer of semiconductors in the past before falling behind other manufacturers, it has the necessary infrastructure, educated workforce and economic incentives to take up a large part of the global semiconductor production line once again. This could bring new opportunities both for Japan and its potential markets, including the EU.
In June 2021, Japan’s Ministry of Economy, Trade, and Industry (METI) announced a core strategy for the nation’s semiconductor and digital industries, including these elements:
- Formation of a partnership with the United States
- Development of “game-changing” future semiconductor technologies
- Establishment of new chip manufacturing bases to make legacy devices
- Subsidies for domestic chip manufacturing
These elements have fuelled a growth in the semiconductor production, spurred by the shortage experienced by the high-end manufacturing sector and major manufacturers following the COVID-19 pandemic. The US has introduced its Chips act in 2022, in reaction to the strains on global supply chains. This intensified investment in semiconductors has provided the necessary incentive for increased production. The US and Japan, together with South Korea and Taiwan, are part of the Fab 4, a US-East Asia Semiconductor Supply Chain Resilience Working Group. This group had its first meeting in 2023, and is set to grow the industry even more in the coming years. This is where the shortcomings of the EU approach become apparent. The EU has been reluctant to reach out to manufacturers outside its borders, while the US has been quick to court foreign cooperation.
When the shortcomings of the supply chains became obvious, the US and the EU took widely different paths. While both included investments for domestic production of high-end chips, the US CHIPs act included foreign investments too. The European Chips act wanted to incentivize private investments within the EU. While this is a good choice, as domestic policies would be more in line with the current EU strategies, it has made the transition difficult. Building new factories, developing a workforce and expertise takes time, while the US has instead invested in increased foreign production while they get their own production up and running. This has made foreign firms more willing to work with the US as they have an established relationship. It has led the EU to trail the US in establishing their own production, but the US approach has not been without its flaws.
The US approach has hit some problems. A plant in China owned by a South Korean company has been caught in the crossfire of restrictions and incentives in the US strategy to limit Chinese influence in the industry. The US has tried to support friendly companies while keeping its foes from gaining a majority control over the production of semiconductors and technology overall. The US seems set to counter Chinese interest in semiconductor production. So to improve its own influence over the production of semiconductors, the US has incentivized development of the semiconductor industry in friendly nations, primarily Taiwan and Japan. This investment pattern can also work to the benefit of the EU. Japanese producers are looking to shore up their investments by courting new markets, and the EU can provide broader safety for the new production by providing access to their internal market.
In the long run, the EU will become more invested in supporting their own supply chains, and Japan will ramp up their home production. With these priorities in mind, there is ample opportunity for growth for both parties. The EU can gain a steady supplier and a strengthened partnership in the region, while Japan gains a new market and more investments in their already growing industry, as well as enhanced security for their own nation. The EU has taken its usual calm, steady and conservative approach to remedying the shortcomings presented during COVID-19. However, the US has shown that there can be more success found in a broader approach. A proactive effort to not only build domestic infrastructure, but invest in allies and friendly nations housing production. In this case specifically, the EU has failed to properly reach out to partners like Japan. Japan is a highly developed nation with values that closely align with those of the EU. But the last major cooperation between the two partners, besides the 2022 Digital partnership, was the 2019 EU-Japan Economic Partnership Agreement. New projects could take inspiration from the US CHIPs act, as it has provided more promising results. Investments beyond the borders of the EU must be taken into account, as the global supply chain shows that the EU can not simply rely on its own domestic production. Even after realizing the shortcomings of European supply chains, the EU has failed to adequately work with Japan as a producer of Semiconductors. While it is understandable that relationships with Taiwan can be complicated, Japan is a favoured, like-minded nation to invest in for these products, and has the infrastructure. Japan can also be a “middle ground” for EU and Taiwanese companies to build closer partnerships that would make the future construction of new facilities in Europe easier. Yet, nothing will happen without action from the EU side. Japan is looking for partners in this venture, an opportunity the EU should not miss out on.
Author: Kasper Melhus Danielsen, EIAS Visiting Fellow
Photo credits: Pixabay