Japanese makers of semiconductor materials currently hold a combined 50% share of the global market. However, they are facing challenges due to an impending wave of industrial consolidation. Many of these Japanese companies are relatively small, which makes them attractive targets for foreign companies. However, Japan Inc. sees them as crucial for bolstering the nation's semiconductor industry.
To maintain competitiveness and get ahead of the consolidation wave, JSR, a major chipmaking materials producer listed on the Tokyo stock exchange, announced in June that it would accept a takeover bid from Japan Investment Corp. (JIC), which is government-backed. The reason behind this bid, according to Shogo Ikeuchi, CEO of JIC Capital, is that the investment efficiency in the Japanese chip materials industry is currently lacking due to its deconcentration. Compared to their American and European counterparts, Japanese chipmakers spend less on research and development (R&D) mainly because of their smaller size.
JSR, for example, holds approximately a 20% share of the global market for photoresists, which are materials used in the front-end process of chipmaking. The company's market capitalization is around 850 billion yen ($5.75 billion), significantly lower than the 10% market share holder DuPont of the U.S., whose market capitalization is five times that of JSR. Another major photoresist maker, Tokyo Ohka Kogyo, which leads the global market, has an even lower market valuation of 420 billion yen.
Similarly, Kanto Denka Kogyo and Resonac Holdings have a combined market share of over 50% in the global market for etching gas, used to remove foreign substances from silicon wafers. However, their combined market capitalization is only one-twentieth of Germany's Merck, which controls around 20% of the market.
Many Japanese chip materials producers have price-to-book ratios below 1, indicating that they may be undervalued. This makes them susceptible to takeovers by larger investors. For instance, as of June 30, Sumitomo Chemical had a PBR of 0.6, Resonac's was 0.8, and Kanto Denka's was 0.9.
Historically, Japanese companies have excelled in time-consuming R&D programs, giving them a competitive edge over foreign firms. However, their competitiveness has been weakened due to the lack of economies of scale, which is a crucial factor in the investment-intensive semiconductor industry.
In the 1980s, Japanese companies like NEC and Hitachi dominated the global semiconductor industry, with a combined market share of 50% in 1988. However, they were gradually overtaken by rivals from South Korea and other countries. By last year, their combined global chip market share had fallen to 9%, as per Omdia, a UK-based research company.
In contrast, Japanese companies have maintained a strong presence in the markets for chipmaking materials and equipment, with shares ranging from 30% to 60%, according to the Center for Security and Emerging Technology at Georgetown University in the U.S. The importance of these materials has grown in the context of the U.S.-China conflict.
According to data from Omdia, Japan holds a 48% share of the semiconductor materials market, followed by Taiwan at 17% and South Korea at 13%.
To stay competitive and navigate the ongoing consolidation in the industry, experts suggest that Japanese chip materials makers need to step out of their comfort zone. They may need to collaborate and secure a collective share in the market rather than solely relying on individual companies' efforts. For example, three years ago, GlobalWafers of Taiwan attempted to acquire Siltronic, the fourth-largest silicon wafer maker in the world. However, the German government intervened and blocked the deal, saving Siltronic.
The challenges faced by Japanese chip materials makers highlight the need for them to adapt and cooperate strategically in order to secure their position in the global semiconductor industry.
