Japanese semiconductors, making a fortune in silence

When it comes to the winners of the semiconductor market in the past year, the first thing that comes to mind is either product sellers like Nvidia or design sellers like Broadcom, and at most, contract manufacturers like TSMC.

These three companies have been analyzed and discussed in many articles in the past, and I believe that readers are familiar with them. With their strong technical strength and rich ecosystem, they have established a dominant position in the AI wave. Unlike other companies that use AI to decorate themselves, the big winners seem to be sitting at home waiting for money to come in, which is enviable.

Behind these giants, the support of the semiconductor equipment and materials industry is indispensable, especially the wafer foundries responsible for production. When TSMC's performance is soaring, the upstream manufacturers cooperating with it are also overjoyed, and the biggest beneficiaries are the Japanese manufacturers known for their equipment and materials.

In 2022, four Japanese companies have entered the ranks of the top ten semiconductor equipment manufacturers in terms of sales. These four companies are: Tokyo Electron (TEL) ranked fourth, Advantest ranked sixth, Screen ranked seventh, and Kokusai Electric ranked ninth. Hitachi High-Tech, Nikon, Canon, and other companies closely follow. It is precisely because of these equipment manufacturers that the Japanese media and government have the confidence to declare that "without Japanese-made semiconductor equipment, semiconductor manufacturing would be impossible."

Similarly, Japan also holds a very large share in the semiconductor materials. According to Omdia's data, in 2022, Japan's semiconductor materials accounted for 48% of the global market share, with some key materials accounting for an even larger share. For example, EUV photoresist is a key material used in the production of chips below 7nm, and Japan almost monopolizes this field with nearly 100% market share. ArF photoresist, used in the manufacturing of chips with a process ranging from 130nm to 7nm, also has an 87% market share in Japan.

As the semiconductor industry advances due to the AI boom, some well-known Japanese manufacturers have made a fortune, while smaller Japanese manufacturers have also seized their own opportunities and quietly made a fortune.

Winner in Semiconductor Equipment

Towa, founded in the suburbs of Kyoto, Japan in 1979, has a history of more than 40 years. Its stock price has nearly quadrupled in the past year, thanks to its development of milestone chip sealing technology widely used today. As the cost of inserting more transistors into silicon wafers continues to rise, Towa's technology for vacuum sealing fine wires without generating bubbles has become a crucial technology.

According to research company TechInsights, Towa holds two-thirds of the global market share in chip molding equipment. This is a crucial step in wrapping chips and wires with resin, protecting them from dust, moisture, and impact, allowing them to be safely stacked together, and helping Nvidia's GPUs to better train artificial intelligence.

Currently, the largest memory manufacturers on the market, such as SK Hynix, Samsung Electronics, and Micron Technology, are all purchasing Towa's chip molding equipment. According to data, starting from last summer, SK Hynix and Samsung have ordered a total of 22 Towa machines, each costing about 300 million yen (about 2 million US dollars), with some gross margins exceeding 50%.

Hirokazu Okada, President of Towa, pointed out in an interview, "Our customers say that without our technology, they cannot produce high-end chips, especially chips used for generative artificial intelligence." He also revealed that the company almost monopolizes the market share in the field of high-end chip molding machines.

Okada claimed in the interview that the company is currently preparing for the next product, aiming to halve the molding cost and double the processing speed. He stated that the development of the new machine is almost complete, and customers will soon be able to test its capabilities. Mass production of this equipment will begin in 2028.

"We are not interested in markets where we have to lower prices to compete," Okada said. "We hope that the results of the technology we provide are enough to offset our prices."

It is reported that Towa holds a patent for a technology that immerses chip molds in resin, using less material, thinner chip packaging, and producing fewer defects.

The company's competitors include Apic Yamada in Nagano, Japan, and ASMP in Singapore, but Towa is unique in the field of chip molding. Mitsuhiro Osawa of Ichiyoshi Research Institute said that other companies have also tried to develop competing technologies, but Towa has key patents and deep relationships with major customers, "It seems impossible to imitate them," he said.

In fact, Towa has been producing packaging equipment for a long time, but usually only sells one or two specific machines related to HBM each year. However, with the arrival of the AI boom, the demand for HBM has rapidly expanded. By the end of this fiscal year alone, Towa has received orders for more than 20 machines. As long as companies like Nvidia continue to produce GPUs such as H100 and B200, the demand for HBM will only increase, especially after the introduction of new standards for HBM in the future, making Towa's packaging equipment even more sought after.

Another company benefiting from the hot semiconductor equipment market is Lasertec, headquartered in Yokohama, Japan. The company was established in 1960 as Tokyo ITV Laboratory, designing and developing X-ray television cameras for medical applications. In the mid-1970s, it expanded to provide inspection systems for the semiconductor industry. In the mid-1980s, the company was renamed Lasertec.

Lasertec, a relatively unknown company, produces indispensable inspection systems for the semiconductor industry today. Its system for verifying chip designs manufactured using EUV technology, which was first introduced in 2017, quickly became the choice of foundries such as TSMC.

Lasertec almost monopolizes the inspection systems based on EUV operations, which is good news for the company's stock price in the chip boom. Over the past five years, Lasertec's stock price has risen by more than 1,500%, and it has been a member of the top-tier market on the Tokyo Stock Exchange since April 2022.

In terms of sales proportion by country/region, the United States (including TSMC's Arizona factory) has the highest proportion at 30%, followed by China at 28%. Especially in China, after hitting bottom in the first quarter, it quickly recovered and ranked first with 34% in the fourth quarter. Despite the export restrictions from the United States to China, active capital investment in China's market continues. Rorze's orders in the Chinese market mainly come from domestic semiconductor companies. Interestingly, Rorze stated that it received many inquiries from Chinese equipment manufacturers at SEMICON China 2024 held in Shanghai in March 2024, and it is expected that the sales in the Chinese market will continue to grow.

For the fiscal year ending in February 2025 (fiscal year 2024), Rorze expects sales to increase by 30% year-on-year, reaching 120.7 billion yen, setting a historical record high. The operating profit is also expected to increase by 31% year-on-year, reaching 31.6 billion yen, mainly due to the increase in sales of semiconductor-related equipment. It stated that in the future, it will strengthen its response to demand growth by establishing equipment assembly factories in Vietnam and China and ensuring large-scale production systems.

Well-known Japanese semiconductor equipment manufacturers have been in the limelight, while some lesser-known equipment manufacturers have been quietly making a fortune in unseen corners.

Winners in Semiconductor Materials

After discussing Japanese equipment, let's talk about the niche manufacturers of semiconductor materials in Japan.

First, let's talk about the sealing materials used in semiconductor containers. In fact, this field is dominated by a single Japanese company, Valqua, including the help of large steel tanks used by TSMC. This company, founded in 1927, now generates over half of its sales from the semiconductor industry and holds about 30% of the global market for fixed liner tanks.

Mitsuhiro Osawa, an analyst at Ichiyoshi Research Institute, stated that it is the largest supplier of such tanks globally to date, overshadowing some smaller competitors in Taiwan and elsewhere, and it provides almost all tanks for the world's largest contract chip manufacturer, TSMC.

Yoshihiro Hombo, the president of Valqua, said in an interview, "Molecular-level impurities can render the entire chemical solution tank ineffective, as it significantly reduces the yield of cutting-edge chip manufacturing. We support the entire supply chain by manufacturing, transporting, and storing these solutions under ultra-clean conditions, which is not easily replicable."

Various chemicals and acids used in semiconductor manufacturing processes must be free of contaminants. The purity requirements for chemicals used to clean chips are equivalent to finding a dust particle one-tenth the width of a human hair around the Earth. Hombo stated that these stringent requirements make it difficult for small companies to enter this industry and are unattractive to large companies. Semiconductor manufacturers choose Valqua because of its custom production and non-replaceable tanks (which may be used for ten years or more).

Since there are no standardized container shapes or sizes, each chip factory's containers (usually hundreds per factory) must be produced to order. These containers can have a diameter of up to 4 meters and a height of up to 9 meters, and Valqua lays fluororesin sheets inside the containers. Skilled workers' hands are required to perfectly adhere these thin, non-elastic, non-sticky sheets to the curved surfaces. The pipelines connecting the tanks and machines must also undergo lining treatment, and the entire tank production process takes place in a clean environment.

For TSMC, the leading wafer foundry, Valqua's sealing materials and accompanying tanks are indispensable in production and are difficult to find alternatives in the short term.

In the field of materials, there are also some emerging companies. In the field of advanced semiconductor materials, leading companies with excellent technical capabilities are in a monopolistic position, but latecomers that improve material durability are also striving to gain market share.

In the field of pellicle protective films, previously dominated by Japan's Mitsui Chemicals, which entered the business as early as 1984 and held the top global share, the company basically monopolized the market for advanced semiconductor products after acquiring the business from its competitor Asahi Kasei in 2022.

In the past two years, the large Japanese special adhesive tape and paper manufacturer LINTEC has developed thin film products for protecting the electrodes on chips in the backend process of semiconductor manufacturing. Compared to situations where this product is not used, the strength (durability) against temperature changes can be increased by 2.5 to 3 times, potentially extending the lifespan of semiconductor products.

LINTEC has developed new materials for protecting the semiconductor circuit substrate (photomask) using "Pellicle" protective film. The role of the Pellicle is to prevent scratches and dust from adhering to the substrate when drawing circuits on semiconductor wafers. It is an essential component for improving the efficiency of this process.

Extreme ultraviolet (EUV) exposure equipment is used to manufacture semiconductors with finer circuit line widths. To improve production efficiency and achieve refinement, it is necessary to increase the output power of light, which generates higher heat. Therefore, it is necessary to improve the heat resistance of the Pellicle. LINTEC has increased the heat resistance to more than twice that of traditional products using polycrystalline silicon by using carbon nanotubes (CNT) that are not prone to chemical changes and do not easily reduce in strength at high temperatures. It plans to invest approximately 5 billion yen by the fiscal year 2025 to establish a mass production system and aims to achieve sales of around 30 billion yen within a few years when combined with surrounding materials.

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