In the sweeping tide of the semiconductor industry, Japan quietly emerges as a significant victor in this grand technological competition, adopting a subtle yet robust approachThe recent statistics released by the Semiconductor Equipment Association of Japan (SEAJ) indicate that sales of chip-making equipment in Japan reached an impressive 4.05788 trillion yen (approximately 27.6 billion USD) in November 2024, a remarkable increase of 35.2% compared to the same month last year.

The potency of Japan's semiconductor equipment sales can be further understood through several key indicatorsNotably, sales figures have shown year-on-year growth for 11 consecutive months, with an impressive double-digit growth rate (exceeding 10%) for the last eight monthsNovember marked the largest year-on-year growth in the past 26 months, with monthly sales consistently surpassing 300 billion yen for the last 13 months

Additionally, it achieved the highest sales record since the SEAJ began tracking, a feat not witnessed since 1986, undoubtedly highlighting the fervor surrounding Japan's semiconductor equipment.

From a cumulative perspective, the sales figures for the period from January to November 2024 reached 39.92235 trillion yen, marking a significant growth of 20.9% compared to the same period last yearThis figure surpassed the previous record of 35.45102 trillion yen set in 2022, thus marking a historic high.

Japan's journey within the semiconductor equipment landscape has been marked by both challenges and growthRenowned for its dominance in semiconductor materials, Japan's position as a powerhouse in this field is well-established, with numerous leading companies originating from the nation, some holding monopoly status over specific productsHowever, the realm of semiconductor manufacturing equipment is where Japan traditionally remained competitive yet faced stark competition, particularly from the United States.

Until 2010, Japan salvaged a close contest with the U.S

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for market share supremacyHowever, since 2012, there's been a sharp decline, with Japan's market share plummeting to less than half that of the U.Sby 2022, settling at a mere 24%. Yet, in global terms, Japanese manufacturers still rank among the leaders in semiconductor equipment.

The landscape of global semiconductor equipment manufacturing in 2023 was dominated by a handful of key players: ASML, Applied Materials, Lam Research, Tokyo Electron, KLA, Dean Technology, ASM International, Advantest, Disco, and TeradyneHere we see Dutch companies such as ASML and ASM International alongside American giants like Applied Materials and Lam Research, as well as notable Japanese companies including Tokyo Electron and Advantest.

Reports indicate that Japanese chip equipment holds a significant market share of about 30% globally, second only to the United StatesAt present, the core bottleneck in AI chip manufacturing lies in the capacity constraints of TSMC's advanced packaging solutions

Following the acquisition of Innolux's Nanke factory, TSMC's CoWoS capability is expected to expand significantly by late 2025, indicating a projected capacity increase from 60,000~70,000 units per month to between 90,000 and 100,000 units, resulting in an estimated annual capacity of 700,000 or more, which will be double the estimated output for 2024.

Amidst these developments, major packaging and testing companies are actively enhancing their 2.5/3D packaging platforms and transitioning into phases of aggressive capacity expansionThe anticipated growth in advanced packaging capacity globally is likely to spike orders for backend equipment, with clear rising demand for frontend processing equipment like photolithography, coating and developing machines, and wet etching devicesAs more intricate processes demand advanced capabilities, the usage and requirements of advanced packaging equipment will differentiate themselves from traditional systems, necessitating machinery like placement machines, grinders, temporary bonding/release devices, and testing machines.

Japanese manufacturers such as Tokyo Electron offer a diverse range of products including coating and developing devices, thermal processing machines, and dry etching equipment, while companies like Dean Technology focus on etching, coating, and cleaning devices

Notably, products from Advantest encapsulate backend testing machines and sorting equipment, and Disco’s trademarks involve precise cutting, grinding, and polishing devices tailored for semiconductor processesDisco's market dominance in thinning and cutting equipment stands at approximately 75%, while Advantest boasts a market share exceeding 50% in testing machines.

China now stands out as a key export market for Japan's semiconductor equipmentAccording to trade statistics from Japan's Ministry of Finance, exports of semiconductor manufacturing equipment and components to China accounted for over 50% for three consecutive quarters starting from July to September 2023. Since 2021, Japan’s equipment exports to China have remained at the forefront, eventually leading to a notable surge in demand, particularly for photolithography equipment from both Dutch and Japanese companies.

As for trends in exports of Japanese semiconductor equipment in 2024, the SEAJ has highlighted that the first quarter of 2024 alone recorded exports valued at approximately 521.2 billion yen to China, marking an astounding increase of 82% compared to the same period in 2023. By the mid-2024, nearly 50% of the sales were directed towards mainland China, where overall semiconductor sales climbed by 1% year-on-year, reaching 53.2 billion USD with mainland sales amounting to an estimated 24.73 billion USD, signifying a staggering 180% jump from the previous year.

This uptick sheds light on two crucial points: firstly, China has become a principal export destination for Japan's semiconductor equipment; secondly, the Chinese semiconductor market is expanding exponentially

The rapid growth is distinctly influenced by U.Sexport controls, compelling Chinese manufacturers to pivot towards Japanese equipment.

On May 23, 2023, Japan’s Ministry of Economy, Trade, and Industry enacted amendments to the Foreign Exchange Act, designating 23 categories of semiconductor equipment necessary for advanced chip manufacturing as subject to export restrictions, which came into effect on July 23. Although equipment not classified as advanced products remains unrestricted, anticipation is growing that restrictions may extend to these devicesTokyo Electron's CEO, Toshiaki Kawai, noted a rising trend of pre-orders from China, aligning with increased demand.

ASML's CEO Christophe Fouquet stated, "The demand from mainland China is robust and is expected to remain strong." During the first half of 2024, ASML reported that the Chinese market constituted an impressive 49% of their sales, tripling from the previous year

In contrast, sales outside mainland China decreased by 27%, indicating a cautious investment atmosphere as sectors like the smartphone and personal computer markets continue to recover slowly, exacerbated by slowing growth in the electric vehicle (EV) sectorAlthough investments in advanced semiconductors for AI applications are surging, they are insufficient to offset the declines in other segments.

The performance of Japanese semiconductor equipment firms underscores the importance of the Chinese marketTokyo Electron reported that over 47% of its revenue sources arose from mainland China by the end of the first quarter of 2024, approaching nearly 50% by the end of the second quarterThe company noted a strong growth trend supported by China's proactive investment in mature semiconductors.

Dean Technology revealed its revenue from mainland China soared by an impressive 193% in the second quarter, while Advantest revises its performance forecasts upwards, reaping the benefits from the burgeoning Chinese market

Over recent years, Advantest's overseas operations have emerged as a primary revenue driver, consistently accounting for over 95% of their totalRecent adjustments highlight a projected revenue growth to approximately 640 billion yen (about 4.19 billion USD) in the 2024 fiscal year, a 31.6% increase year-on-year, driven by demands from generative AI-related semiconductor usage along with a thriving SoC and HBM equipment business.

The SEAJ recently revised Japan’s semiconductor equipment sales forecast upwards, anticipating that for the fiscal year 2024 (April 2024 to March 2025), sales will surpass 4 trillion yen for the first time, reaching 4.2522 trillion yen with a projected growth of 15% year-on-yearSimilarly, the estimate for 2025 has been adjusted, reflecting strong anticipated growth in logic/foundry and memory chip investmentsLooking further ahead, projections for 2026 suggest that sales could witness a similar ten percent increase, potentially crossing the 5 trillion yen threshold for the first time in history.

In summary, annual growth rates for Japan's semiconductor equipment sales are expected to yield a compound annual growth rate (CAGR) of 11.6% from 2024 to 2026, and Japan’s share in the global semiconductor equipment market, estimated at 30% by sales value, stands second globally

Current trends indicate that AI capabilities will increasingly permeate PCs and smartphones beyond serversKawai has posited that by 2027, 30%-40% of PCs and smartphones will deploy AI functions, likely catalyzing even larger demands for semiconductor equipment than what’s expected from servers.

Regarding mainland China's market, Kawai emphasized the sustained robust demand due to inadequate self-sufficiency in semiconductor manufacturing equipmentAs a result, this ongoing scenario will likely amplify the demand for Japanese semiconductor equipmentConcurrently, local Chinese semiconductor manufacturers are gaining momentum, with North Huachuang announcing revenues of 22 billion yuan, reflecting a remarkable 50% YoY growthThis is a landmark achievement for the Chinese company, marking its debut in the global top ten ranking of semiconductor equipment manufacturers, denoting not just its growth but also a broader emergence of China’s semiconductor equipment industry on the world stage.

As the semiconductor landscape continues to evolve on a global scale, the rise of domestic semiconductor equipment firms in China represents a paradigm shift, enabling a reduction in reliance on imports and securing supply chain stability