On Dec. 21, Japanese Prime Minister Fumio Kishida announced that Tokyo would collaborate with Samsung Electronics, South Korea’s largest tech firm, to establish a semiconductor research facility in Yokohama, a venture valued at $281 million of which Japan will fund up to $135.7 million.
While this initiative represents Japan’s commitment to bolstering its supply chains and economic security, it simultaneously presents a spectrum of operational and strategic risks for South Korean companies like Samsung entering the Japanese market.
This collaboration reflects a notable step in Japan’s engagement with foreign technology firms, as seen in its support for Taiwan Semiconductor Manufacturing Company (TSMC) and its semiconductor fabrication plant in Kumamoto, a province on the western edge of Japan.
However, the policy has prompted internal discussions in Tokyo about the strategic direction of Japan’s semiconductor industry, particularly in the context of competing with global players and addressing past shortcomings.
Further, Tokyo’s openness to foreign investment brings with it a set of challenges rooted in the complex dynamics of regional politics and the evolving landscape of economic policies. For South Korean firms like Samsung Electronics, entering the Japanese market entails navigating these challenges, while Japan’s evolving policies and market conditions could pose challenges in the long term.
LATENT RISKS
Tokyo’s decision to collaborate with Samsung Electronics is part of a broader narrative involving significant geopolitical shifts and strategic alignments.
The establishment of the “Fab 4” or “Chip 4” alliance by the U.S., which includes South Korea, Japan, and Taiwan, signifies a concerted effort to create a self-sufficient loop in semiconductor production, aiming to reduce reliance on Chinese imports. Further, major global chipmakers committed to multi-billion-dollar investments in Japan during the Hiroshima G7 Summit in May, a decision that excluded Chinese firms.
Japan’s rationale behind these alliances and investments is to cement its position in the global semiconductor value chain and to leverage foreign direct investment, including from South Korea, to strengthen its economic and technological infrastructure.
This approach is also a response to the increasing Chinese pressure on Taiwan, spotlighting a role for South Korean semiconductor manufacturers in Japan’s and the U.S.’ market strategies.
However, Japan’s welcoming of foreign investment and collaboration in this sector is not without potential risks. While the short-term benefits of such partnerships may seem evident, Japan has in place policy measures that could, in the long run, shift the dynamics of production capacity and competition in favor of Japanese firms.
These measures, designed to protect the national security interests of Japan’s semiconductor industry, could introduce significant risks for South Korean companies like Samsung Electronics. The possibility that Japan might invoke these policy measures, particularly in scenarios perceived as threats to its national or economic security, represents a latent risk.
Japanese Prime Minister Fumio Kishida (center) speaks at a public-private sector meeting to promote investment in Japan, Dec. 21, 2023 | Image: Prime Minister’s Office of Japan
DOUBLE-EDGED SWORD
Like most East Asian economies, Japan does not shy away from government intervention in the economy, posing legal challenges for South Korean semiconductor firms.
The Japanese government’s previous actions, such as its intervention during Toshiba’s sale of its flash-memory chip division in 2017 and the acquisition of JSR Corp by Japan Investment Corp last year, highlight Tokyo’s strategy to strengthen the nation’s self-reliance through a series of state-backed acquisitions of domestic firms vital to its semiconductor supply chain.
These moves, alongside the establishment of new fabrication plants by public-private consortiums like Japan’s state-backed Rapidus, signal Tokyo’s intent to bolster its semiconductor sector internally.
For foreign companies like those from South Korea, navigating this environment means facing a dual role of the Japanese government: as an enabler of foreign investment and a guardian of domestic interests. This balance is particularly precarious in sectors deemed crucial to national security, like semiconductors.
Further, Japan’s announcement during the G7 summit in May that it would bring in more foreign chipmakers was made only one month after Tokyo announced that it would expand its foreign direct investment screening regime to include semiconductors.
While screening regimes cannot be used retroactively, the inclusion of semiconductors within the scope of Japanese national security means that they pose further risks to South Korean firms that seek to establish fabrication plants and advanced research institutions in Japan. Possible repercussions range from financial agreement adjustments to more severe actions such as business license revocations or the expropriation of physical and intellectual properties.
It is worth noting that while diplomatic relations between the ROK and Japan have improved significantly since last year, constant shifts within the two countries’ domestic political spheres mean that the current warm ties might not last indefinitely. The fluctuating nature of ROK-Japan ties poses a distinct challenge for South Korean companies.
Political shifts in either country could abruptly change the business landscape, with companies potentially facing increased scrutiny or allegations of technological theft or industrial espionage. Future governments in Japan might adopt stricter measures if they perceive Korean chipmakers as a security risk.
Such a scenario could lead to the implementation of stringent policies in both countries — a reality that companies must be prepared for.
For conglomerates like Samsung Electronics, with its robust legal and financial foundations, navigating these risks might be part of their business strategies. However, that will not hold true for smaller firms considering entering the Japanese market.
While investment incentives might appear appealing initially, the sensitive nature of technology sectors will require a thorough evaluation of long-term risks and geopolitical sensitivities.
NOBLESSE OBLIGE
In this context, the example of TSMC in Kumamoto is noteworthy. Beyond the employment of 1,700 Japanese workers and economic activity resulting from the new fabrication plant, which has been marketed at $2.3 billion, TSMC has also made significant economic contributions and efforts to integrate into the local community.
For instance, the company intends to finance the construction of a new metro station to further stimulate local economic growth and ease Kumamoto residents’ commute, showcasing a model of corporate responsibility that extends beyond the factory floor.
This raises questions about Samsung Electronics’ strategy for community integration and local investment in Japan. At a time when economic nationalism is on the rise and countries are increasingly protective of their national interests, such gestures of local investment may elicit a negative response from South Koreans.
Prospects of South Korean citizens’ negative reaction to their nation’s largest conglomerate investing in Japanese infrastructure, particularly in a period of modest economic growth, will likely impact Samsung’s considerations.
For South Korean semiconductor firms like Samsung Electronics, venturing into the Japanese market is fraught with inherent risks. These firms must navigate a financial and geopolitical landscape where the benefits of foreign investment must be carefully weighed against domestic sentiments and the intricacies of international relations.
Source: Korea Pro
