Japan's Semiconductor Boom: Quietly Thriving

In the rapidly evolving landscape of the semiconductor industry, the past year has witnessed remarkable success stories, with key players like NVIDIA dominating sales, Broadcom excelling in design, and TSMC thriving as a foundry partnerEach of these companies has garnered a considerable amount of media attention and analysis, showcasing their robust technological capabilities and expansive ecosystemsThey have effectively capitalized on the burgeoning AI wave, seemingly waiting for profits to roll in, while their competitors scramble to catch upThe successes of these giants might evoke admiration, but they are also a testament to the intricate web of support provided by the semiconductor equipment and materials sectors, particularly from Japanese firms known for their expertise in production.

Leading the charge are four prominent Japanese companies that made it to the top ten semiconductor equipment manufacturers in terms of sales in 2022. Tokyo Electron secured fourth place, followed by Advantest at sixth, Screen Holdings at seventh, and Kokusai Electric at ninthThis impressive representation highlights Japan’s strategic importance in the semiconductor equipment landscape, giving local media and government officials the confidence to declare, “Without Japanese semiconductor equipment, we would not be able to manufacture semiconductors.”

Japan also holds a significant share of the semiconductor materials marketAccording to data from Omdia, Japan accounted for 48% of the global semiconductor materials market in 2022, with even larger shares in certain critical areasFor example, Japan dominates the production of EUV (Extreme Ultraviolet) photoresists used in manufacturing chips with node sizes below 7nm, capturing nearly 100% of that market segmentIn addition, it holds an 87% market share in ArF (Argon Fluoride) photoresists, essential for fabricating chips in the 130nm to 7nm range.

As the semiconductor industry propels forward, fueled by the demand stemming from AI advancements, many well-established Japanese manufacturers are reaping substantial financial rewards

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Furthermore, smaller companies are quietly harnessing new opportunities for growth within this booming sector.

One noteworthy standout in the semiconductor equipment sphere is Towa, which was established over 40 years ago in Kyoto, JapanThe company has witnessed its stock price skyrocket nearly fourfold in the past year, primarily due to its pioneering advancements in chip molding technologyTowa's innovations facilitate the vacuum sealing of delicate wires without the inclusion of any air bubbles, a process essential for the increasingly dense transistors stacked onto silicon wafers.

Data from TechInsights indicates that Towa controls two-thirds of the global chip molding equipment market, a critical step where resins encase chips and wires, safeguarding them from environmental contaminants and physical shocksThis technology enables companies like NVIDIA to enhance the training efficiency of their AI systems.

The largest memory producers, including SK Hynix, Samsung Electronics, and Micron Technology, are among Towa's clienteleReports show that since last summer, these companies have collectively ordered 22 units of Towa’s molding machines, each costing approximately 300 million yen (around $2 million), with some yielding profit margins exceeding 50%.

In an interview, Towa's president, Hirokazu Okada, emphasized the software's critical role, stating, “Our customers have expressed that they couldn't produce high-end chips without our technology, particularly those needed for generative AI applications.” He revealed that Towa nearly monopolizes the market for high-end chip molding machines.

Okada further indicated that Towa is on the verge of launching a new machine designed to halve molding costs and double processing speedsThis innovative equipment is in final testing phases, with hopes for commercial rollout starting in 2028.

“We’re not interested in a market where we have to compete on price,” he asserted, “The results of our technology must outweigh our costs to demonstrate our value.” Moreover, Towa holds a patent for a specialized immersion method involving resin for chip molding, which optimizes material usage and enhances packaging efficiency while minimizing defects.

Competitors such as Apic Yamada in Nagano and ASMP based in Singapore have attempted to develop products to rival Towa, but their efforts have been thwarted by Towa's proprietary technology and established relationships with major clients

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Mitsuhiro Osawa from Ichiyoshi Research noted, “Others have tried to create competitive technologies, but Towa has crucial patents and deep connections—imitation is virtually impossible.”

Towa's operations in packaging equipment have refreshed since AI demands surged, leading to a significant uptick in orders over the past fiscal yearThe company anticipates continuing demand for High Bandwidth Memory (HBM) as NVIDIA and others produce cutting-edge GPUs like the H100 and B200.

Parallelly, Lasertec, headquartered in Yokohama, Japan, has also thrived in the semiconductor device marketEstablished in 1960 originally as Tokyo ITV Laboratories, the firm pivoted to semiconductor equipment in the 1970s and rebranded in the 1980s.

Initially a little-known entity, Lasertec's detection systems have become indispensable parts of the semiconductor manufacturing processTheir systems for verifying chip designs manufactured with EUV technology have rapidly gained preference among foundries, including major companies like TSMC since their introduction in 2017.

Currently, Lasertec enjoys a near-monopoly in providing EUV operational verification systems, a factor that has mirrored positively on the company's stock performanceOver the last five years, their shares have soared more than 1500%, with the company firmly established in the top tier of Tokyo's stock market since April 2022.

Lucy Chen, an industry analyst, commented, “Lasertec has cemented its position in the EUV detection sector and has established collaborations with leading foundries such as TSMCFrom my observations, their systems outperform competitors' offerings.”

Having recognized the significance of EUV two decades ago, Lasertec's strategic emphasis on this technology began roughly ten years back during financial downturnsUnder the leadership of President Yoshio Kamiyama, the firm began developing testing equipment necessary for photomasks and substrates for circuit designs as a pathway for future growth.

Despite being a small company with only around 400 employees, Lasertec’s business model focuses on capturing vast shares in niche markets that are difficult for larger corporations to penetrate

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By concentrating on design and development while outsourcing significant portions of production, they adopt a “fab-lite” approach to maximize efficiency in the burgeoning market for EUV testing equipment.

Despite recent downturns in the semiconductor market overall, Lasertec continues to report significant increases in sales and profitsIn the six months ending December 31, 2023, the company's net sales reached 95 billion yen ($628 million), reflecting a year-on-year growth of 72.4%. Net profits soared to 22.2 billion yen ($147 million), marking a 63.4% increase.

In a statement made in February, Lasertec credited the forecast of a market recovery in 2024 to robust investments in artificial intelligence and signs of revived consumer demand.

With its commanding presence in niche markets, Lasertec is also exploring new avenues for revenueAccording to reports, the company sees potential in developing testing equipment for Silicon Carbide (SiC) wafers, which are recognized for their efficiency in power managementConsidering the widespread adoption of electric vehicles, demand for this equipment is expected to rise, prompting Lasertec to strengthen R&D efforts in this area.

While these equipment manufacturers play key roles directly in chip manufacturing, there are lesser-known companies operating in seemingly unrelated fields that are also producing essential technologies that amplify the influence of Japanese equipment suppliers.

Rorze, established in 1985, is a prime example of a Japanese company quietly leading in wafer handling systemsAlthough not widely recognized in China, Rorze excels in technology that ensures the cleaning processes for wafers, which are fundamental to semiconductor production.

Wafers, which are the building blocks of semiconductors, traverse hundreds of processes across multiple devices where dust becomes a significant adversary

Rorze specializes in equipment and robots designed to transport wafers and masks, incorporating automated systems that minimize particle contamination during transfers.

Design, development, and sales for Rorze take place in Japan, while until 2021 manufacturing was primarily based in VietnamIn September 2022, the company announced the completion of a new manufacturing facility in Shanghai and the establishment of a subsidiary for operations in ChinaWith ongoing investments in wafer fabrication, Rorze has also benefited from the continuous demand linked to AI advancements.

In April this year, Rorze shared a financial summary for the fiscal year ending February 2024. Despite a year-on-year sales decline of 1.3%, they reported a consolidated revenue of 93.25 billion yen, surpassing original projections by 5.9%. Operating income saw an 8.6% decrease to 24.14 billion yen, yet still surpassed planned figures by 11.7%, with net profits amounting to 19.58 billion yen, indicating an overall surplus relative to projections.

The report detailed that, despite the capital investment slump in the semiconductor sector, the demand trends have been recuperating, especially in Q4 after reaching a low in Q1, ultimately setting new historical records for the fourth quarter ending in February 2024.

From a geographical standpoint, the United States, including the new TSMC factory in Arizona, forms the largest part of Rorze's sales at 30%, followed closely by China at 28%. Notably, after a dip in the first quarter, the Chinese market rebounded swiftly, capturing 34% of fourth quarter salesDespite US export restrictions affecting China, investments continue to flourishRorze's orders largely stem from local semiconductor companies in China, with the firm also preparing for increased inquiries from Chinese manufacturers during SEMICON China 2024 slated for March.

For the fiscal year ending February 2025, Rorze anticipates a 30% increase in sales to reach 120.7 billion yen, setting an all-time high, along with an estimated operating profit rise of 31% to 31.6 billion yen, driven by sales growth in semiconductor-related equipment

It aims to bolster response capabilities for demand surges by expanding equipment assembly facilities in Vietnam and China.

While larger Japanese equipment manufacturers have taken center stage, little-known firms are quietly striving for success, garnering significant benefits in the shadows of the industry.

Transitioning to the materials side, it is essential to underscore Japan’s dominant specialization in the production of semiconductor packaging materialsA notable firm is Valqua, which provides sealing materials used in semiconductor containersEstablished in 1927, Valqua has carved a niche, capturing over 30% of the global market for fixed linings of storage tanks that are vital for semiconductor manufacturing.

Yoshihiro Hombo, president of Valqua, highlighted, “Molecular-level impurities can render an entire chemical solution tank ineffective, significantly impacting yield in advanced chip manufacturingWe support the entire supply chain by working closely with chemical manufacturers to produce, transport, and store these solutions under ultra-clean conditions, which is challenging to replicate.”

In semiconductor fabrication, all chemicals and acids must be free of contaminantsCleanliness standards are so rigorous that they approach levels of cleanliness that, in essence, allow for no dust particles wider than a tenth of a human hairValqua’s precise custom production and long-term reliability of their storage tanks make them an attractive choice for semiconductor manufacturers.

Valqua has positioned itself uniquely within the semiconductor production landscape, as each container, often exceeding hundreds in a plant, must be created to meet specific dimensions tailored to individual clientsThese tanks can have diameters up to 4 meters and heights reaching 9 meters, with a fluororesin lining meticulously installed by skilled workers in cleanroom environments.

For leading foundries such as TSMC, Valqua’s sealing materials and accompanying tanks have become integral to operations, with few rivals in sight.

In the field of advanced semiconductor materials, while established firms typically dominate, up-and-coming companies are strategizing to capture market share, enhancing material durability and performance.

In the domain of pellicles used to protect photomasks, Mitsui Chemicals previously held a monopoly

Having ventured into this business since 1984, their acquisition of Asahi Kasei’s relevant operations in 2022 solidified their dominance in the production of products necessary for cutting-edge semiconductor manufacturing.

Meanwhile, LINTEC, a major player in producing specialty tape and film, recently launched a product designed to protect electrode layers during semiconductor fabricationThe durability against temperature variations can enhance performance by 2.5 to 3 times compared to using conventional materials, thus improving the lifespan of semiconductors.

LINTEC developed a new material for protective films used in semiconductor circuits, essential for maintaining efficiency during the photolithography processPellicles act as crucial barriers, preventing dust and blemishes while projecting circuits onto semiconductor wafersEnhancing production efficiency in this manner is of paramount importance.

EUV exposure tools, which produce intricate semiconductor features, necessitate increased power output, thereby generating excess heat, highlighting the need for more durable pelliclesLINTEC has raised thermal resistance to levels exceeding traditional products by deploying carbon nanotubes that maintain structural integrity at elevated temperatures.

In anticipation of production growth, the company intends to invest approximately 5 billion yen to establish scalable manufacturing capacities before 2025, targeting yearly sales of 30 billion yen from these advancements.

In a similar vein, the domain of ABF insulation films, historically monopolized by Ajinomoto since the 1990s, is witnessing new challenges as lesser-known competitors emergeAjinomoto converted a byproduct of glutamate production for insulation film manufacturing and has controlled this supply for decades.

AGC, another prominent Japanese materials firm, has developed a thin film that operates without utilizing traditional epoxy resin

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