2024-01-02 20:48:17 ET
Summary
- Japan has approved $6.8 billion in funding for domestic semiconductor investment, aiming to regain its position in the global semiconductor market.
- Japanese equipment companies, including Disco and Tokyo Electron, are experiencing growth and benefiting from the incentives, as well as sales to China.
- Disco’s equipment is primarily used at the start of the semiconductor manufacturing process (wafer grinders) or end of the process (wafer dicers for singulation of chips).
- Since China uses Disco’s equipment and its chips are above 14nm (except for SMIC), Disco will not be directly affected by U.S. sanctions.
I discussed in my January 18, 2023 Seeking Alpha article entitled “ KLA Corp.: My Top Equipment Company With Strong Tailwinds From National Chip Incentive Programs ,” that in addition to the $52.7 billion U.S. CHIPs act, nine other countries/regions have their own Chips Incentives Programs. Among the nine is Japan, which approved 774 billion yen ($6.8 billion) in funding for domestic semiconductor investment.
Chart 1 In 1986, Japan held a dominant 39.7% share of the global semiconductor market, which was valued at $28.4 billion at that time. Fast-forward to 2022, and Japan's share had dwindled significantly, accounting for just 8.4% of the global semiconductor market, which had grown to a staggering $574.1 billion.
This drop from nearly 40% to 8.4% is a significant decline compared to Japan's status in the 1980s when it was the world's largest semiconductor producer, commanding over 50% of global semiconductor production. This transformation reflects the shifting dynamics and challenges faced by Japan's semiconductor industry as it adapted to evolving market demands and global competition.
Chart 1
The incentives money has attracted Japanese startups as well as foreign companies to build chips in Japan. The most noticeable is Japan’s Rapidus, which is set to collaborate with IBM ( business Machines Corporation"> IBM ), targeting the commencement of mass production for 2-nanometer node chips by 2027. Additionally, the company will engage in technological cooperation with IMEC, a nanotechnology research center located outside Brussels, widely utilized by leading chip manufacturers for prototype development.
The collaboration between Rapidus, supported by the government and Japan's major corporations, and IBM in advancing chip development highlights the emergence of industrial alliances among allied nations. This trend reflects their shared goal of decreasing reliance on chips manufactured by the Taiwan Semiconductor Manufacturing Company (TSMC) ( TSM ).
Nevertheless, TSMC stands to gain as well. TSMC's subsidiary in Japan, Japan Advanced Semiconductor Manufacturing ("JASM"), has outlined its goal to secure 60% of equipment and materials from Japanese suppliers for its 12-inch (300mm) fabrication plant currently under construction in Kumamoto Prefecture by the year 2030.
Chipmaker TSMC plans to set up a second semiconductor manufacturing plant in Japan with an investment of about $7.4 billion, Japanese newspaper Nikkan Kogyo .
TSMC will build the new plant in the southwestern region of Kumamoto to manufacture 5nm and 10nm chips from 2025
In addition to TSMC, Tokyo has secured investments from Micron Technology ( MU ), Samsung Electronics ( OTCPK:SSNLF ), and Powerchip Semiconductor Manufacturing Corp.
Japan Equipment Companies Benefiting
Also benefiting from these incentives will be Japanese equipment companies, which are already growing strongly in share price performance. Yuichi Horita, the president of TSMC's subsidiary JASM, conveyed this objective during a speech at Semicon Japan 2023. Currently, the proportion of equipment and materials sourced from Japan for the wafer plant in Kumamoto stands at approximately 25%. JASM aims to boost this ratio to 50% by 2026 and further increase it to 60% by the year 2030.
Shown in Chart 2 are share prices of top semiconductor equipment companies for a 1-year period. Share price growth ranges from 57.25% for Ebara ( EBCOF ), which makes CMP equipment and is Applied Materials ( AMAT ) chief competitor in the sector, with the five Japanese companies topped by Disco ( DSCSY ) growing 153.2%.
Disco is a Japanese company primarily focused on the production and distribution of semiconductor manufacturing devices and precision processing tools, along with associated maintenance and services. The company specializes in offering a range of precision processing equipment, including dicing saws, laser saws, grinders, polishers, and surface planers. Additionally, Disco provides precision processing tools such as dicing blades, grinding wheels, dry polishing wheels, and grindstones for cutting and grinding processes. The company plays a vital role in the semiconductor industry by supplying essential equipment and tools for the manufacturing and processing of semiconductor components.
Chart 2
Table 1 shows Disco’s revenues for FY 2022 (ending March 30, 2023) and estimated F23 3Q, showing a continuing recovery in a down year for the semiconductor industry. A loss of profit amounting to approximately JPY 7.5 B is due to the reconstruction of its Haneda R&D Center included for the third quarter (October to December).
Chart 3 shows sales by application for the company for the past ten years. A drop in 1H revenues is largely attributed to sales to the IC industry (yellow bar) but the “Other Semiconductor” (purple bar) category, which includes Power Semiconductors such as Silicon Carbide (“SiC”) devices remained strong.
As I noted in my December 21, 2023 Seeking Alpha article entitled “ NXP: My Top Automotive Semiconductor Manufacturer Pick ,” I forecast the SiC market to grow at a CAGR of 42.5% between 2021 and 2026, making it a key differentiator for Disco’s business strategy.
Chart 3
Another Japanese company, Tokyo Electron ( TOELY ), is Asia's largest semiconductor equipment manufacturer. The company has successfully mitigated the impact of export controls to China by expanding its sales of less advanced products to the country's chip industry. This move comes in response to heightened restrictions on exports imposed by Japan since July, requiring clearance from export control officials for certain shipments to China.
Tokyo Electron has capitalized on the demand for less-advanced semiconductor equipment, experiencing a significant increase in revenues from China. In the third quarter, the company generated 43% of its revenues from China, marking a substantial rise from the 24% reported in the same period a year earlier. This strategic shift allows Tokyo Electron to navigate export controls effectively while maintaining a robust market presence in China's chip industry.
More details are available in my August 21, 2023 Seeking Alpha article entitled Tokyo Electron: World's Third-Largest Equipment Company Is Oversold As Japan Sanctions On China Begin .
In addition to the above companies, Accretech, Okimoto, Toyo, and Disco collectively control a 95% share of the global market for equipment required in wafer crystal machining.
Also, Rorze, Daifuku, and Muratech, other Japanese firms, hold an 88% share of the global market for wafer handling equipment, according to The Information Network’s report entitled Global Semiconductor Equipment: Markets, Market Shares and Market Forecasts .
Investor Takeaway
Japanese companies, as well as U.S. and European companies, are also benefiting from sales to China. Table 2 presents data on the Top 6 Semiconductor equipment companies, including their China revenues and the percentage of revenues derived from China for the years CY 2019 and 2020 (pre-sanctions) and the first three quarters of 2023 (Q1-Q3). Notably, in Q3, the percentage of revenue was consistent across companies, suggesting that Chinese semiconductor firms are importing equipment regardless of the type of process equipment.
During 2019 and 2020, before the imposition of sanctions, there was an insignificant difference in the percentage of revenues generated by non-Chinese companies from sales to China. However, these companies managed to navigate around sanctions, leading to a substantial surge in revenues in Q3 2023, accompanied by a tendency for Chinese companies to stockpile equipment.
During 2019 and 2020, before the imposition of sanctions, there was an insignificant difference in the percentage of revenues generated by non-Chinese companies from sales to China. However, these companies managed to navigate around sanctions, leading to a substantial surge in revenues in Q3 2023, accompanied by a tendency for Chinese companies to stockpile equipment.
However, Disco’s Chinese revenues have been relative flat. This is a good sign, because additional sanctions imposed by the U.S. government in October 2023 will reduce sales to China in 2024. A further advantage of Disco is that these U.S. sanctions are focused on equipment capable of making ICs smaller than 14 nm. Disco’s equipment is primarily used at the start of the semiconductor manufacturing process (wafer grinders) or end of the process (wafer dicers for singulation of chips). Since China uses Disco’s equipment and its chips are above 14nm (except for SMIC which I discuss below), Disco will not be directly affected by U.S. sanctions.
On SMIC (Semiconductor Manufacturing International Corp), I was the first to report that SMIC had reached the 7nm node in my May 17, 2022 Seeking Aloha article entitled SMIC May Have Reached 7nm Node Capability But Still Behind TSMC , months before it was reported by Techinsights. But the number of chips at this node are less than 1% of the total number of chips made in China.
The five Japanese equipment companies listed in Chart 2 above, are on the U.S. stock exchange. The Japan Chips Act will benefit Japanese semiconductors, which will then purchase equipment from Japanese suppliers. Material companies in Japan, although they have a dominant global presence, will also benefit from domestic demand for their products.
Disco will benefit from these activities. I rate the company a Buy.
For further details see:
Japan's Semiconductor Resurgence Is Likely To Benefit Disco And Other Domestic Equipment Suppliers