TSMC in Japan: Geopolitics, inward investment, and semiconductors

However, concerns emerged over the fact that TSMC, the world's most important and largest manufacturer of leading-edge semiconductors, is based on a high-risk geopolitical fault line that is Taiwan. There, TSMC’s production facilities are entwined with a complex and sophisticated supply chain built up over many decades, which makes it difficult and costly to relocate production capacity overseas. Moreover, TSMC is constrained by domestic law in exporting its most advanced production technologies. This policy could be seen as something of a political hedge by the Taiwanese government, keen as they are to maintain US military security assurances. TSMC and its supporting supply chain are central to this ‘silicon shield’. But while Taipei would like to keep TSMC at home, others are keen to see the opposite.

In response to these dynamics, the company has undertaken a series of overseas investments, including the establishment of a subsidiary, Japan Advanced Semiconductor Manufacturing (JASM), in Kumamoto, Japan. It’s also building greenfield plants in Arizona, US, and Dresden, Germany. This flurry of activity reflects TSMC's efforts to balance geopolitical imperatives, mitigate potential disruptions at home, and preserve its dominance in the global market.

Japanese firms once dominated the semiconductor market, accounting for 51% of global sales in 1988. Japan Inc., the name given to the model of close industry and government collaboration practiced in the country in the post-war period, contributed to the success. In time, the model also attracted the critical attention of US industry and eventually Washington. Intense US pressure to limit chip exports, together with other factors including domestic economics and corporate-level strategy missteps, led to the erosion of Japan’s competitiveness in chip making throughout the 21st century. While Japanese firms can source the chips they need from elsewhere, increasing concerns about economic security in the geopolitical context have in recent years led to the emergence of new industrial policy to support the sector.

TSMC’s investments in Kumamoto come at a timely juncture for Japan. Not only do they align with fundamental national strategies to bolster economic resilience, but they also serve to address another policy priority – regional economic revitalization – as rural areas become depopulated due to a plummeting birthrate and young people moving to big cities.

To date, however, inward investment in Japan has been lower than in other developed economies, with much of it concentrated in non-manufacturing sectors. Additionally, Japan’s aging population means it’s facing a shortage of labor, particularly skilled engineers. These issues raise questions about Japan’s ability to fully absorb and benefit from foreign direct investment in its manufacturing sector.

So why did TSMC invest in Kumamoto? For one, the prefecture, located in Kyushu, one of Japan’s four main islands, has an existing cluster of semiconductor firms and a related ecosystem developed over many decades. Proximity to clients, including the automotive sector, and excellent transportation infrastructure are equally important, as is a stable supply of electricity (Kyushu is home to four nuclear plants) and abundant high-quality water, thanks to the island’s geology. Given the presence of many chip manufacturers over the years, Japan also has a relatively experienced labor pool. Strong support from the local government, including subsidies, as part of the nation-wide strategy of regional revitalization is of course vital as well.

TSMC’s investment in Kumamoto is expected to have an overall positive ripple effect. Japan’s Ministry of Economy, Trade and Industry estimates that 10,700 new jobs will be created in the area alone as a result of JASM’s presence. Higo Bank, part of the Kyushu Financial Group, noted that 72 foreign firms, mostly Taiwanese, have invested in Kumamoto following TSMC. Bucking the national trend, Kumamoto’s population recorded a 0.3% increase in the five years to April 2024.

Ultimately, TSMC's investment in Japan represents a strategic alignment of interests, addressing both geopolitical imperatives and domestic economic goals. The success of this venture will have implications not only for Japan and TSMC but also for the broader global semiconductor industry and the future of international trade and investment.

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