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Economy & Tech

Xi Jinping’s Technology Buying Binge Generates Profits for Tokyo and Partners, but Also Risks

Japan should take note of reports in July that the Biden Administration told the Dutch Government that they will not approve of Dutch company ASML’s export of advanced technology to China.

Noboru Ikeda

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China is buying Japan’s advanced technology. In addition to automobiles and IT equipment, Chinese buyers are purchasing manufacturing equipment for semiconductors, which are essential for the military. 

The amount of purchases continues to escalate, with a sharp increase of about 2.3 times in April 2021 compared to the same period one year earlier. 

The U.S. government moved to restrict the exports of U.S. products during the administration of former president Donald Trump, due to the intensifying conflict between the United States and China. However, Japan’s equipment technology, which is at the top level in the world along with the United States, has been flowing quite freely into China. 

Someone needs to ask, aren’t there any security concerns with this reality?

Xi’s Rush For Domestic Production, Global Dominance

According to Ministry of Finance trade statistics, the growth rate in the export of semiconductor manufacturing equipment from Japan to China has been from a low of 30% to more than 60% since January 2021. Including the sharp increase in April, the first half results for 2021 up to June hit a high 66.4% growth.

Behind this is an increase in investments to resolve the global semiconductor shortage, along with ramped-up domestic production of semiconductors to secure a supply network from the viewpoint of economic security. 

According to SEMI, an international organization for the semiconductor industry, the number of beginning semiconductor factories in 2021-22 is expected to reach 29 worldwide, the highest level in the past 10 years. And it seems that there is also competition in placing orders for manufacturing equipment. 

Specifically, in China, which is competing with the United States for dominance, the Xi Jinping administration is advancing a national “Made in China 2025” strategy. In order to promote domestic production in the high-tech industry, it needs a semiconductor supply base and is in a hurry to secure semiconductor manufacturing equipment.

Expansion Within the U.S.-China Conflict

Japanese equipment manufacturers are not the only ones that are increasing sales in response to China’s pushes. In the midst of the U.S.-China conflict, American equipment manufacturers are also expanding their business with China.

In the most recent financial results (May to July) of the American company Applied Materials, the world’s largest semiconductor manufacturing equipment company, the data shows that China’s share in the company’s sales by region was 36%, up 3 percentage points from the same period last year. 

In fact, there has been only selective application of the tough export restrictions put in place by the former Trump Administration. This is what we found. 

For a semiconductor, the narrower the width of the circuit, the higher the performance, and the model at the forefront of current mass-production technology is a mere 5 nanometers (one nanometer is a billionth of a meter). The U.S. Department of Commerce has imposed export restrictions on companies such as the Semiconductor Manufacturing International Corporation (SMIC), the largest semiconductor commissioned production company in China, and has in principle placed an embargo on the export of manufacturing equipment for circuits less than 10 nanometers wide, which includes the most cutting-edge technology. 

On the other hand, other products are judged on a case-by-case basis, and the door for exports is not completely closed. This flexibility is likelUS y what led to China’s increase in purchases of products from American makers.

Global demand for semiconductors is expected to continue at a high level, in part because of the expansion of the electric vehicle (EV) market, where the number of semiconductors installed is increasing. The use of 5th generation (5G) mobile communication systems also plays into the increased semiconductor demand. 

SEMI predicts that sales of manufacturing equipment will reach a record high of more than $101.3 billion USD (about ¥11.2 trillion JPY) in 2022, and if the U.S.-China conflict does not become a major obstacle, Japanese and U.S. equipment manufacturers can expect good business.

However, whether this situation will continue is unpredictable.

The Necessity of Responding to Technology Leaks

The Center for Information on Security Trade Control (CISTEC) in April compiled U.S.-China regulatory trends and points to keep in mind, in which they noted that the U.S. Congress has expressed concerns about exports of semiconductor manufacturing equipment from Japan to China. 

Furthermore, the Biden Administration has set up the “Multilateral Semiconductors Security Fund,” which requires export controls equivalent to those the U.S. applies to American companies. The fund is a framework based on the U.S. National Defense Authorization Act that was built with allies such as Japan to strengthen cooperation in high-tech industries. 

In mid-July, the New York Times and the Wall Street Journal, the leading U.S. newspapers, reported that the Biden Administration told the Dutch Government that they will not approve the bid by one of that country’s leading semiconductor manufacturing equipment producers, ASML, to export their advanced technology to China. 

ASML’s advanced technology of extreme ultraviolet (EUV) exposure equipment is indispensable for the production of semiconductors of 5 nanometers or less, and the former Trump Administration had also requested an embargo on China. The Biden Administration has the same hard-line stance to prevent cutting-edge semiconductor technology from falling into the hands of China. Japan is involved, too.

There are various types of semiconductor manufacturing equipment, but Tokyo Electron, the largest Japanese manufacturer, has a global market share of about 90% in the technology of coating and developing equipment, and boasts a 100% share in EUV exposure equipment.

In June, the company agreed with ASML to conduct joint research on integration of the next-generation equipment of both companies, to support circuit widths of 3 nanometers or less. The Biden Administration will naturally feel nervous about Japan’s advanced technology, with Tokyo Electron at its forefront, being exported to China. 

In the future, as the cooperative relationship is strengthened between the Japanese and U.S. governments relating to semiconductor supply, domestic Japanese companies may be forced to take new measures to prevent not only the exports of sensitive equipment, but also the outflow of technology, including human resources. 

China’s Distant Domestic Production of Semiconductors

Nevertheless, the increase in Beijing’s purchases of semiconductor technology from Japan and other foreign countries indicates that it is not easy for China to produce that technology domestically. 

An expert analysis in the New York Times pointed out that it would take at least 10 years for China to develop independent manufacturing capacity to produce advanced technology at the level of ASML. Also, according to a report in April 2021 for the Boston Consulting Group and the Semiconductor Industry Association, it would cost at least $1 trillion USD for China to domestically construct the functions of the current global semiconductor supply network. Moreover, if it did so, one consequence would be a significant rise in the price of semiconductors. Full self-sufficiency is not realistic.

IC Insights, a U.S. research firm, predicts that China’s semiconductor self-sufficiency rate in 2025 will remain at 19.4%, compared to the government’s target of 70%. Japan must be vigilant about the outflow of advanced technology, but China has a long way to go to domestically produce semiconductors.

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(Read the Sankei Shimbun report in Japanese at this link.)

Author: Noboru Ikeda, Economy Department