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Japan chip suppliers reap benefits of 'China exit' subsidy

Expansion of local production gives country potential boost amid global shortage

Japanese suppliers to the semiconductor industry are among the companies to have received government subsidies to strengthen domestic supply chains.

TOKYO -- Suppliers to the semiconductor industry are among a wave of Japanese companies that have used government money to boost their activities in the country as a global chip shortage heats up.

A dozen companies that provide niche services to the region's chipmaking giants such as Taiwan Semiconductor Manufacturing Co. received the "China exit" subsidy in the second round, announced at the end of last year.

Nearly a year in existence, the subsidy has financed over 200 companies with highly concentrated overseas production in strengthening their supply chains in Japan. 

Uyemura & Co., a chemical manufacturer that provides electroplating services to bind chip components, received the subsidy to diversify sources of raw materials and conduct its inspection process in-house. 

"Before COVID, we bought raw materials from China," said Shigeo Hashimoto, senior managing director at Uyemura. To ensure that new suppliers in India, Europe and the U.S. are maintaining the same quality as its previous Chinese sources, Uyemura plans to expand its factory near Osaka and purchase costly inspection instruments. 

Raw materials from Chinese suppliers previously flowed not only to Uyemura's domestic factory, but also to its production bases in Shenzhen, Malaysia and Taiwan. "Our subsidiaries have to use the same raw material," Hashimoto said. 

Japan's Ministry of Economy, Trade and Industry told Nikkei Asia that national security considerations were not a factor in selecting the recipients. But the subsidy has created an opportunity for METI to bring home industries that are not only considered critical to national industry, but also at the forefront of regional manufacturing competitiveness. 

After disbursing nearly 305 billion yen ($3 billion) to 203 companies, a third round is included in the next annual budget, a METI official who oversees the subsidy told Nikkei Asia. The Diet is expected to finalize the 2021-2022 budget plan in April. 

Aside from makers of personal protective equipment and medical devices, the recipient companies in the second round produce semiconductor parts, electric vehicle batteries and LED displays.

Mitsubishi Electric said its grant would go toward the acquisition of a factory in Hiroshima Prefecture that produces semiconductors for electric power generation. A previous announcement billed the investment at 20 billion yen. 

Initially panned as a protectionist response to the coronavirus, the subsidy does not appear to have induced Japanese manufacturing flight from China. While EV battery maker Envision AESC plans to use the subsidy to raise production capacity in Japan, it will also make further investments in its China branch. 

The company, an offshoot of Nissan Motor, will expand capacity in Kanagawa Prefecture from 2.6 to 10 gigawatt-hours of battery cells by 2023. A new facility in China is scheduled to reach 20 gigawatt-hours by 2023, after starting at 3 gigawatt-hours.

A spokesman for Envision AESC cited the growing demand for electric vehicles in China as the reason for concentrating on its new facility.

Another battery maker, Prime Planet Energy and Solutions, a joint venture between Toyota Motor and Panasonic, will open a new production line in Tokushima Prefecture while maintaining the output level at its China facility. 

For Ushio Inc., which works with leading chipmakers, China was not the weak link in its supply chain. Ushio's extreme ultraviolet light sources are used by chipmakers to check the quality of materials they use for etching thin, precise lines on silicon wafers.

"We are highly dependent on European suppliers for original parts," said Nobuhiro Inosako, general manager of Ushio's EUV business.

Ushio will use the subsidy to look for new parts suppliers while simultaneously testing in-house parts production. Uyemura, the chemical company, plans to hire 10 new employees for its expanded Hirakata factory. But the bounty may not trickle down as far as METI hopes. 

"The subsidy system does not require recipient companies to do something on employment," said Kei-ichiro Inaba, chief forecaster at the Japan Center for Economic Research. 

And while the subsidy may contribute to an increase in domestic business investment, Inaba saw limited potential for wider economic impact due to the program's modest price tag, as well as its design. 

"The subsidy system permits a recipient company to buy and install new machines in an existing factory," Inaba said. 

"Moreover, investment projects in the list of 'subsidized programs A' appear not to call for unskilled workers," he added. Subsidized programs A cover highly specialized manufacturing. 

Uyemura aims to implement its domestic production expansion within the year, while Mitsubishi Electric's new semiconductor factory is scheduled to go online in November. Ushio expects to finalize its new supply chain by 2023, right before the three-year subsidy period expires.

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