Japan defends its turf in the global chip wars

TOKYO—Toppan is a 124-year-old Japanese company known for printing magazines and newspapers. Since the start of last year its stock price has doubled.

The rise isn’t from a surge in subscriptions. Rather, the Tokyo-based company holds a leading position in a type of packaging board for semiconductors, a part in high demand thanks to the artificial-intelligence boom.

Japan is a quiet powerhouse in the rarely mentioned corners of the chip supply chain: chemicals, packaging materials and tools. Its companies account for nearly half of the world’s six crucial semiconductor materials, according to Omdia, a market researcher.

“If you don’t have these, the defense industry that the U.S. gets most worried about can’t function," said Toppan’s semiconductor business head, Akihiko Furuya, gesturing to some of his products.

As countries around the world race to make more chips at home, Japan now feels its pole position is under threat.

Companies such as Toppan sit at the heart of Japan’s effort to stay ahead. Tokyo is pumping billions of dollars into the country’s menagerie of obscure suppliers, viewing its dominance there as important to the country’s national security.

Having control of an important link in the semiconductor supply chain solidifies Japan’s military ties with its main ally, the U.S., because it can contribute its technology to the alliance rather than simply relying on American hardware. And officials say this control ensures Tokyo has a seat at the table when the U.S. counters China’s bid to gain semiconductor dominance.

This month, a Japanese state-backed fund will complete its $6 billion acquisition of JSR, which was originally a rubber producer and is now valued for making a resin called photoresist used in transferring a circuit pattern onto a chip.

The fund urged more action through aggressive investment and mergers: “We must raise our international competitiveness," it said, “by pursuing a bolder overhaul of the industry."

Smaller amounts have flowed to Toppan and other chip-related companies under government subsidy programs. Government officials say they don’t want to see a rerun of the 1990s when Japan lost its lead in the overall semiconductor industry to the U.S., Taiwan and South Korea.

While the U.S. is working to eliminate dependence on China, it still says it intends to rely on democratic allies for chips and chip-making materials.

Japan showed the potential geopolitical value of its chip-materials dominance by using it against South Korea in 2019 when the two Asian neighbors were squabbling over historical issues. Tokyo threatened to block South Korean semiconductor makers such as Samsung Electronics from obtaining Japanese photoresist and other materials.

Nearly three years later, a new president took office in Seoul with a more conciliatory line on history. Japan dropped its threats.

Specialized clusters

Types of semiconductor expertise have a way of clustering in single countries or regions. South Korea dominates in advanced memory chips, factories in Taiwan make most of the world’s best logic chips, and a single company in the Netherlands—ASML—has a lock on the most advanced chip-making lithography machines.

Japan is the origin of many specialized materials used in chip making. Often the makers are companies with roots in pre-computer-age businesses such as fertilizer, monosodium glutamate, printing and photography film.

Toppan and another Japanese company, Dai Nippon Printing, hold much of the world’s market share for photomasks, a kind of master plate for printing circuit boards, not including those made in-house by chip makers.

Fujifilm, best remembered for the green packages of film that competed with Kodak’s yellow-packaged film in the previous century, is among the Japanese companies that make much of the world’s chip-making slurry, a chemical mix used to polish and flatten the surface of chips. Most of the photoresist for chip making comes from JSR, Fujifilm and their domestic rivals.

Old-economy companies have found these niches because there are deep connections between chip making and technologies from earlier eras. Imprinting a circuit pattern on a silicon wafer adapts many of the techniques of book and art printing, a strength of Japanese craftspeople going back to the woodblock prints that charmed Westerners in the 19th century.

Tetsuya Iwasaki, general manager of Fujifilm’s electronic-materials division, said the principle of photoresist—exposing a photosensitive material to a pattern of light to create an image—was the same whether the outcome was a photograph or an integrated circuit.

“In that sense, this is an area our company is really good at," he said.

Iwasaki said Fujifilm entered the photoresist business in the 1980s because rival Kodak was doing it. Long after Kodak filed for bankruptcy protection, Fujifilm’s stock price closed at a record high Thursday and is up 30% this year, partly on the back of plans to double the Japanese company’s semiconductor materials revenue to more than $3 billion by around 2030.

Remaining global

The U.S. says it expects to work with such companies as it pumps tens of billions of dollars of subsidies into new chip plants, including those built by Intel, Samsung Electronics and TSMC in Ohio, Texas and Arizona.

“Semiconductor supply chains will remain global, so international collaboration is critical to our collective success," said a U.S. Commerce Department representative.

Still, U.S. companies are wary about supply-chain chokepoints and are pressing Japanese suppliers to diversify their production. In March, Toppan said it would add a factory in Singapore to make its specialized type of chip-packaging board, which it currently produces at a single plant in Niigata, Japan.

“I’ll be honest, that was what customers demanded," said Furuya, the Toppan semiconductor head. He said Broadcom of the U.S. was among them. Broadcom didn’t respond to a request for comment.

Furuya said the customers’ view was: “It’s going to be a huge mess if you’ve got some kind of production stoppage because of an earthquake or a natural disaster."

Megumi Fujikawa contributed to this article.

Write to Peter Landers at Peter.Landers@wsj.com and Yang Jie at jie.yang@wsj.com