Chip Cities Rise in Japan’s Fields of Dreams

These nascent chip cities are leading a revival in a country that once dominated the industry — and aims to do so again. In 1989, the late Shintaro Ishihara, author and future Tokyo governor, urged Japan to “move at least five years ahead of other nations.” Instead, it stumbled due to US trade pressure and missteps during an industry transition. As South Korea and Taiwan took over, Japan’s share fell to less than 10%.

But by 2021, after the pandemic-triggered semiconductor shortage threatened to devastate Japan’s auto industry, an emergency government proposal called for chip development with allies and a boost to domestic production. The amounts being invested are staggering, the ambition unprecedented in the nation’s history. Success would boost its importance in Asia and provide leverage over allies and rivals alike.

I wanted to see what these projects meant at ground level. Decades of rural revitalization plans have failed to arrest the flow of workers from the countryside to Osaka, Nagoya and especially Tokyo which, like a black hole, expands as it absorbs every resource that falls into its orbit. Now, injections of cash are transforming once-sleepy areas, lifting stagnant house prices, triggering construction booms and upending lifestyles. It is creating third regions far from the traditional centers of industry, neither booming mega-urban centers nor declining countryside, that repudiate the myth of its dying hinterlands.

While Japan failed to invest in chips, it did continue to spend on one thing: infrastructure. Public works spending, a centerpiece of 1990s fiscal stimulus, was controversial. “Construction state” spending was seen as an excuse for putting off more fundamental reforms. That’s why these new projects matter more than just their impact on Japan’s chip self-sufficiency. If gambles like Rapidus cash out, they won’t just raise house prices and create local riches. They’ll be a call to action.

Ishiba, who hails from one of Japan’s most rural areas, has made regional revitalization one of his policy pillars. But he offers few practical solutions to achieve it. Restoring Japan’s hinterlands can’t be accomplished with a snap of the fingers — it requires practical steps, from creating basic infrastructure to developing or inviting businesses that will provide jobs. It’s training graduates and making supply chains.

As the UK wrestles with the consequences of austerity, Mario Draghi urges Europe to spend, and the incoming US administration ponders unleashing Elon Musk’s style of cost-cutting, Japan’s past decisions demonstrate the benefits of building. The merits of investment versus saving is a debate Tokyo has had, too, but there the austerity crowd has largely lost out. And although the country bears the weight of the debts accumulated over past decades, the benefits are evident in infrastructure-dependent chip cities.

Public works projects, from apartments to alleviate housing crises to Japan’s $60 billion maglev, are often denounced soon after they’re launched. But doing nothing is easy. Just as nations must avoid getting old before getting rich, so too must they build before they get old — something China has successfully done, despite recent jitters. Will the countries that skipped that hard building when times were good and money was cheap fare so well when times are tougher, rates are higher and populations are declining?

Much like the “Two Americas,” I often speak of Two Japans. Visitors are frequently bamboozled when they first land — having heard only stories of decline, it can be jarring to find the pristine streets and trains of Tokyo. But while major urban regions are booming, there is another Japan, one less seen: the rural areas left behind as younger people seek opportunity elsewhere, towns that are slowly returning to nature.

These nascent chip cities, with their combinations of geography, water, energy and infrastructure, may be a Third Japan: regional areas that can become vital economic powerhouses.

Hokkaido is one such place. In Chitose, even in early September, there’s a chill in the air. The sound of F-15 fighter jets launching from a nearby Self-Defense Forces air base frequently pierce the sky — and the smell of manure from local cattle farms wafts through the air. Farming and the military are the traditional industries that have sustained the economy. But the small town is pregnant with expectation of another.

As many as 6,000 laborers are employed to build Rapidus. But talk is of the arrival of permanent workers once test production begins. That’ll bring at least 1,000 high-earning jobs, along with their supply chains. On my visit, ASML Holding NV, the Dutch maker of chip-testing tools, had just opened offices, with 50 staff expected. Every second building seems to be being torn down and rebuilt.

The region will be more familiar to those outside the country as a skiing paradise; Niseko, famed for its world-class powder snow, is about 100 kilometers away. That brings a significant amount of cash to the prefecture. But with one estimate expecting Rapidus to have an ¥18 trillion ($116 billion) impact, it’s chips that are on everyone’s lips. In nearby Sapporo, the region’s capital, taxi queues on a weekday night were dozens deep; drivers fretted about the state of the worldwide semiconductor market.

The scale of the ambition creates the risk of spectacular failure, one many in Japan’s media fully expect. Skepticism is warranted, considering previous government-led efforts, from DRAM maker Elpida Memory Inc., sold to Micron Technology Inc. after its 2012 bankruptcy, to troubled Japan Display Inc.

The economy was already doing well even before talk of Rapidus, Mayor Ryuichi Yokota told me, describing the fab as a “Big Bang” that has the city scrambling. Yet at night, when the construction crews leave, the silence is deafening. I couldn’t feel the billions I expected to find flowing, just a cold wind that would soon begin to turn to snow.

Far to the south in Kumamoto, the weather is tropical. The city is located around the same latitude as San Diego, and the surrounding area is often called Hi-no-kuni, the Fire Country, perhaps because of the proximity of Mount Aso, one of the world’s largest active volcanoes.

Long the center of Japan’s chip industry through boom and bust, the prefecture offers a glimpse at what might await further north. TSMC’s plant is located in Kikuyo, a suburb that also houses Sony Group Corp.’s image sensor plant. From certain vantage points, the fab looms in the distance over kawara-tiled traditional houses like a feudal castle over its fiefdom. This is the center of Silicon Island, as the network of suppliers and businesses across Kyushu is called. Work has started on a second fab next door.

Everyone seemed to know a friend-of-a-friend who had sold a field to developers for previously unimaginable prices in Kikuyo or the bordering Ozu, small municipalities with limited resources that bear much of the brunt of this development. Those with assets might see great benefits, but for others growth brings little more than traffic jams.

It has been a “black ship” moment for the region, Takashi Kimura, the prefecture’s governor, told me, referring to the US vessels that forced Japan’s opening to the west in 1853. Here, the newcomers are Asian: Some 60% of TSMC workers from Taiwan live in Kumamoto City, the prefectural capital of nearly 800,000. The prefecture as a whole saw a nearly 25% increase in foreign residents last year, the biggest jump in the country. Foreigners now make up over 1% of the population for the first time.

Authorities are laying on language classes and providing support for everything from emergency services to garbage separation. So far, there seems surprisingly little strain. There have been few issues with labor unions or workplace culture, unlike TSMC’s fab in Arizona. Relations with Taiwan are more cordial than with other former Japanese colonies, and there seemed little concern of a threat to Kumamoto’s reputation as the safest of Japan’s major cities. There is talk of building a “Taiwan town,” while Mayor Kazufumi Onishi emphasized the efforts he’s taking to create a “positive relationship” with residents. Chinese was spoken everywhere; eating Kumamoto noodles at a heaving store I was convinced I was the only person there who spoke Japanese. My visit coincided with China’s weeklong holidays, bringing tourists seeking golf and hot springs.

That’s helped by the Kyushu Shinkansen high-speed rail, which now whisks travelers from the newly built station to Fukuoka, the region’s largest city, in 45 minutes; from there, to Osaka and beyond. For longer journeys, a new terminal has just opened at Kumamoto’s airport, complete with stylish beer and whiskey bars.

Kumamoto might be Fire Country, but it’s water that locals really care about. The city has “the finest groundwater resources of any city in Japan,” according to the government. Almost everyone mentioned it with pride; it’s one reason there’s no subway, the city instead depending on charming, if rickety, trams. It’s also what attracted TSMC. Chip production requires vast amounts of high-purity water, with the first fab alone set to use 8,500 tons daily. That has local residents concerned over the impact on tapwater, farming and other traditional industries.

It’s far from the only risk. From the mayor’s office, I saw a reminder: Kumamoto Castle, a centuries-old keep damaged in a devastating 2016 earthquake that killed nearly 300. Repairs to its walls will take three decades.

The economic damage was worst at Sony’s plant, beside what is now TSMC’s fab. The quake halted production for months, shaking clean rooms housing sensitive semiconductors. In Hokkaido, a 2018 quake left 3 million households without power for days. Both quakes were the strongest ever recorded in the regions.

The risk from disaster is unpredictable; but what if these experiments simply don’t work out? Japan has spent billions on subsidies to bring a foreign company in Kumamoto. And when it comes to Rapidus, the risks are immense. Even if the company can find the talent it needs (the country is expected to have a shortfall of 40,000 engineers), the technology succeeds and yields are acceptable, it still has to outcompete rivals — including TSMC — to attract customers with an unproven product.

Chitose mayor Yokota shrugged off these concerns. “I’m convinced it will succeed,” he said, resolute that researchers currently studying with IBM in the US will return, like Meiji-era scholars, with secrets Japan can use to rebuild.

Coming away from these regions, I keenly felt another risk: that of doing nothing. The easiest thing in the world is to defer or demur, to cite the dangers and send such projects back to be studied again — think how many public works projects in Anglophone countries, from high-speed rail to nuclear power, have been lost to this approach. But what is the alternative? When Japan was on top of the world’s chip business in the 1980s, Taiwan and South Korea didn’t say it was too perilous to try challenging it.

It might all fall apart, and Rapidus might fail. But it’s better to have tried, rather than shrink into irrelevance. In the Third Japan, as elsewhere, if you build it, it’s far from certain that they will come. But if you build nothing, surely they never will.

¹ A frequently misremembered quote from 1989's Field of Dreams; correctly, it is "If you will build it, he will come," referring to the ghost of baseball player Shoeless Joe Jackson.

---

A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.

Bloomberg News provided this article. For more articles like this please visit bloomberg.com.

More Active Management Topics >