Japan's Semiconductor Red Carpet
Phoenix should learn a thing or two from Kumamoto.
Over the weekend, while I was recovering from jetlag after attending a wonderful three-day, closed-door conference on China hosted by the Salzburg Global Seminar, TSMC quietly opened its first chip fab in Japan.
I only say quietly because very few mainstream English media outlets bothered sending a team, or even a single print reporter, to be in the room. Of course, the event (and the entire city) was packed with Japanese, Taiwanese, and Korean media. NHK, Japan’s national public broadcast media, sent a team of 50 people to take in this momentous occasion.
It’s too bad, because there is so much the US could learn from the opening of TSMC’s Japan plant, officially called JASM (Japan Advanced Semiconductor Manufacturing). Japan is making a concerted national and a local effort to attract TSMC and rekindle the country’s semiconductor industry. As an American who supports the CHIPS Act, believes in the national security imperative to onshore some advanced chip making capacity, but also frustrated by the slow progress (TSMC’s Arizona plant in particular), it would’ve been nice to absorb what’s working in Japan to see what we can do better in America.
Luckily, my Mandarin and elementary Japanese gave me enough access to local coverage to see what’s really happening. As it turns out, Japan has been aggressively courting TSMC for years, the Japanese people are rolling up their sleeves 24/7 (literally) to build, and the entire local community in Kumamoto, where the fabs are located, is doing their part to seize this opportunity and put this otherwise sleepy prefecture on the map.
The Kumamoto bear is running laps around America’s Phoenix, and for good reasons.
Kumamoto by the Numbers: Faster, Better, Cheaper
As Morris Chang, the 92-year-old founder and two-time CEO of TSMC, revealed at the JASM opening ceremony, Japan’s Ministry of Economy, Trade and Industry approached TSMC as early as 2019 to set up shop in Japan. Since that overture, the Covid-induced global chip shortage and geopolitical fissures that have made Taiwan a hotspot, has made global expansion from a nice-to-have to a must-have.
In November 2021, TSMC decided on Kumamoto as its future home in Japan. Then people got to work. The conventional wisdom is that it takes about three years to build a fab. Led by Kajima Corp., a 184-year-old construction company, the local workers got it done in 20 months!
How did it happen? By working 7 days a week and running 24-hour non-stop shifts. And not just to build the fab, but nice dormitories and other infrastructures too. It’s the kind of intensity that TSMC is used to in Taiwan. (In 2014, TSMC famously ran a 24-hour R&D operation called the “Nightingale program” to catch up with Samsung and win back Apple’s business.) It’s the kind of urgency that TSMC is not getting with its investments in the US so far.
In a not-so-subtle nudge, TSMC chose to hold this opening ceremony event on February 24 – a Saturday. Want advanced semiconductor manufacturing? You need to work on weekends.
The speed of construction was not the only thing showing TSMC that investing in Japan was a good idea. The Japanese government and industry was also quick in supporting its endeavors with both words and deeds.
TSMC’s first fab, the one built in 20 months, is receiving around $3.16 billion USD equivalent in government subsidies. It also counts Sony and Denso (a major automotive components manufacturer) as strategic investors with stakes in the business. Seeing great progress, TSMC decided to build a second fab in Kumamoto with more advanced technology (6-7 nm); this one is getting $4.86 billion USD equivalent in government subsidies and will count Toyota as a strategic investor (and customer).
TSMC has already received a total of $8 billion USD total in Japanese government subsidies. Meanwhile, it is still haggling with the US government and hasn’t seen a single cent from the reported $15 billion in tax credits and subsidies it is seeking. The Japanese government’s speed of execution is not reserved for just TSMC. Investments from Micro and Samsung have also been met with speedy government support. Japan really wants chips!
Not only does the government want TSMC, the local workers seem to welcome it too. And they come at an attractive rate, partially thanks to a tanking yen.
TSMC is offering new engineering graduates in Japan a monthly wage of 60,000 New Taiwan Dollars (NTD) – the equivalent of a bit less than $23,000 USD per year. It is a low wage by American standards, but very competitive in Kumamoto. It is also similar to what TSMC is offering to similar new grads in Taiwan – 62,000 NTD per month or a bit more than $23,000 USD per year. Meanwhile in the US, the same position costs TSMC 160,000 NTD per month, or about $60,000 USD per year. And that does not include costly healthcare insurance and other benefits, which usually adds 25-30% per person.
Even the cafeteria at TSMC’s Kumamoto fab is becoming an appealing place of employment. It is offering an hourly rate of 3,000 yen, more than twice as much as local restaurants. Local cooks and servers are flocking to TSMC to the chagrin of izakaya owners.
By the numbers, Kumamoto is proving to be a great bang for TSMC’s bucks. But there is more to Japan’s semiconductor red carpet than just dollars and sense (or yen’s and sense).
Other Soft Touches
A chip fab is only valuable if capable engineers, technicians, and operators are running it for a long, long time – what Morris Chang at a recent MIT lecture called Experience Curve Theory. It’s an advantage that TSMC took years to perfect and required a lot of human soft touches.
The key to operationalizing this Experience Curve Theory is large numbers of capable, disciplined, and loyal employees with a low turnover rate. To achieve this, employees and their families have to want to stay for many years, as they develop, retain, and pass on institutional knowledge to new generations of employees.
Kumamoto is pulling out all the stops to make incoming Taiwanese engineers and their families, who have been deployed to build JASM, happy and want to stay.
Supermarkets and shops are stocking up on popular Taiwanese foods, brands, and other products, many of which have sections clearly labeled “Taiwanese food” to help shoppers find them. Residential areas have put up new signages in traditional Chinese characters to help Taiwanese residents settle in more easily, with information on how to sort out recycling and garbage, as well as which day of the week they get picked up. A local international school has expanded its facilities and hired more Taiwanese teachers, specifically catering to the children of deployed TSMC families, who would like their kids to still study Chinese but also enjoy the English and Japanese materials of an international school abroad.
How thoughtful!
Meanwhile, local Chinese language tutoring programs are seeing an influx of new students, many of whom are Japanese engineers seeking to either improve their chances of getting a job at JASM or enable them to work better with their Taiwanese colleagues.
Despite some common, overly general assumptions that Taiwan and Japan share a lot of cultural similarities and affinities, due in no small part to their colonial past, there is still a fairly large language gap between the two people. This gap can be especially pronounced in a technical environment, such as working in a semiconductor fab.
It is a challenge that TSMC still has to solve, in order for its investments in Japan to pay dividends in the long run. But the Kumamoto local community is taking nothing for granted and putting on all the nice, human soft touches necessary to close this gap and maximize its chances of success.
Can Phoenix Compete?
Will Phoenix, Arizona do the same? So far, it does not look like it.
Then again, it is not a zero-sum competition between Kumamoto and Phoenix. They are both TSMC’s investments in its effort to diversify away from Taiwan, meet more of its customers closer to where they are, and reduce geopolitical risks.
The thing is, if Kumamoto races ahead and becomes TSMC’s preferred hub outside of Taiwan, the geopolitical risk for most TSMC customers is more or less removed. There would be less reason for TSMC Arizona to exist. The specter of China invading Taiwan – a single percentage probability event at most right now – is enough of a risk that TSMC must build redundant capacities elsewhere to make both customers and their respective governments feel comfortable. As the JASM Kumamoto operation fires on all cylinders, this problem is sufficiently derisked, because the probability of China and Japan having an armed conflict is as close to zero as aliens attacking earth. (Actually, I would assign an alien attack a higher probability.)
I’m not suggesting that TSMC Arizona will fold. Of course it won't, if only because there has been too much political capital spent on it and too much national security value assigned to it. It must succeed, however “success” is defined.
Two days after TSMC’s Kumamoto kumbaya, Commerce Secretary Gina Raimondo gave a speech at the DC think tank, CSIS, to update the public on the CHIPS Act. While her speech contained little substantive update – no new subsidy recipient nor any new policy was announced – she did share that she expects more than two leading-edge semiconductor manufacturing clusters to be built in America by the end of the decade. This is up from the original target of…two. Presumably, “leading-edge” means 7nm or smaller, and Arizona would be one of these clusters.
Raimondo also issued a fresh, headline-grabbing proclamation: she believes the United States is on track to manufacture 20% of the world's leading-edge logic chips by the end of this decade, from 0% today. 0% to 20% in six years!
It’s easy to poo-poo this wild-sounding 20% target, but as I said in the beginning, I sincerely want the spirit and intent of what the CHIPS Act embodies to succeed. But if this 20% projection were to be taken both literally and seriously, then Phoenix, along with many other American cities, will have to be humble and learn a thing or two from Kumamoto.
Fabulous read, Kevin! thanks for keeping us informed on this extremely important topic.
I read that South Korea is also making similar overtures to TSMC et al. Any other countries competing for chip mfg capacity?
Cheers!
I had a meeting with someone close to TSMC management when I visited Taiwan. He said TSMC was shocked to learn how “cheap” Japan has been. Land is cheap. Water is cheap. And, people are cheap. It happened because of the prolonged depression (20+ years) and falling yen in recent years. They found Japan’s manufacturing is quite competitive.