Source: Semiconductor Industry Watch
Author: Shao Yiqi

When it comes to the semiconductor market winners in the past year, the first thing that comes to mind is either$NVIDIA (NVDA.US)$They sell products this way, or$Broadcom (AVGO.US)$If the design is sold this way, at most, plus$Taiwan Semiconductor (TSM.US)$Such a foundry.

I'm sure all readers are familiar with these three companies. With their strong technical strength and rich ecosystem, they are in the AI wave. Unlike other companies that go to great lengths to decorate themselves with AI, the big winners seemed to sit at home and wait for the money to come to their door, making people feel envious.

Behind these giants, support from the semiconductor equipment and materials industry is essential, especially the wafer foundry responsible for production. At a time when TSMC's performance is rising steadily, the upstream manufacturers that have cooperated with it have also blossomed with joy, and the ones that have benefited the most are Japanese manufacturers that have always been famous for their equipment and materials.

In 2022, four Japanese companies ranked among the top ten semiconductor equipment manufacturers by sales. These four companies are: The fourth largest$Tokyo Electron (8035.JP)$, the one that ranked sixth$Advantest (6857.JP)$, the one that ranked 7th$Screen Holdings (7735.JP)$ and the ninth-ranked $Kokusai Electric (6525.JP)$，$Hitachi (6501.JP)$,$Nikon (7731.JP)$,$Canon (7751.JP)$The company followed suit. It is because of these equipment manufacturers that the Japanese media and government are emboldened to say “without semiconductor equipment made in Japan, we cannot manufacture semiconductors.”

In terms of semiconductor materials, Japan also has a very large share. According to Omdia data, in 2022, Japanese semiconductor materials account for 48% of the global share, and some key materials account for a larger share. For example, EUV photoresists are key materials used to manufacture chips below 7nm, and Japan accounts for almost 100% of this field; ARF photoresists are used in chip manufacturing in 130nm to 7nm processes, and Japan also accounts for 87% of the share.

At a time when the semiconductor industry is moving forward due to the AI boom, some well-known Japanese manufacturers are making huge profits, while those smaller Japanese manufacturers have also received an opportunity of their own, and are beginning to make a fortune.

The winner of semiconductor devices

Established in 1979 in the suburbs of Kyoto, Japan$Towa (6315.JP)$It has a history of more than 40 years, and its stock price has nearly quadrupled in the past year, thanks to its development of a landmark chip sealant technology that is widely used today. As the cost of inserting more transistors into silicon wafers continues to rise, Towa's technology for manufacturing vacuum seals for fine wires without generating bubbles has become an important technology at present.

According to data from research firm TechInsights, Towa accounts for two-thirds of the global chip molding (chip molding) equipment market. This is a critical step to wrap chip chips and wires in resin to protect them from dust, moisture, and shock so they can be stacked safely, helping Nvidia GPUs to better train artificial intelligence.

Currently, the largest memory manufacturer on the market - SK Hynix,$Samsung Electronics Co., Ltd. (SSNLF.US)$und$Micron Technology (MU.US)$They are all buying Towa's chip molding equipment. According to statistics, since last summer, SK Hynix and Samsung have ordered a total of 22 Towa machines, each at a cost of about 300 million yen (2 million US dollars), and some have a gross margin of more than 50%.

Hirokazu Okada, president of Towa, stated in an interview, “Our customers say they can't produce high-end chips, especially for generative artificial intelligence, without our technology.” He also revealed that the company has almost 100% of the market share in high-end chip forming machines.

Okada claimed in an interview that the company is currently preparing the next product, which aims to halve the molding cost and double the processing speed. He said that the development of the new machine has almost been completed, customers will soon be able to test its capabilities, and large-scale production of this equipment will begin in 2028.

“We're not interested in a market where we have to cut prices to compete,” Okada said. “We wanted the results of the technology to be delivered enough to offset our prices.”

According to reports, Towa has a patent for a technology that dips chip molds into resin. This technology uses fewer materials, thinner chip packaging, and fewer defects.

The company's competitors include the one headquartered in Nagano, Japan $Yamada (6392.JP)$And Singapore's ASMP, but Towa is unique in the field of chip molding. Mitsuhiro Osawa of the Ichiyoshi Research Institute said other companies had tried to develop competing technologies, but Towa has key patents and deep relationships with major customers, “it seems like there's no way to imitate them.” he said.

In fact, Towa began manufacturing packaging equipment a long time ago, but usually only sells one to two specific machines related to HBM every year, but with the advent of the AI boom, demand for HBM has rapidly expanded. By the end of this fiscal year alone, Towa had received orders for more than 20 machines. As long as Nvidia and other manufacturers continue to produce GPUs such as the H100 and B200, then demand for HBM will only increase. Especially after HBM introduces new standards in the future, Towa's packaging equipment will become even more popular.

Also due to the popularity of semiconductor equipment is the one headquartered in Yokohama, Japan $Lasertec (6920.JP)$ The company was founded in 1960 as Tokyo ITV Labs at the time. The company initially designed and developed X-ray television cameras for medical applications and expanded in the mid-70s to provide inspection systems for the semiconductor industry. The company changed its name to Lasertec in the mid-80s.

As a little-known company, Lasertec produces inspection systems that are an indispensable part of today's semiconductor industry. This system for verifying chip designs manufactured using EUV technology quickly became the choice of foundries such as TSMC after it was first launched in 2017.

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

Lucy Chen, co-founder of JL Advisory Group, a Taiwanese semiconductor research company, said, “Lasertec has established a foothold in the field of EUV inspection systems and has established partnerships with cutting-edge foundries such as TSMC.” In her experience, Lasertec's system is superior to the competition.

Lasertec began focusing on extreme UV about 20 years ago, and officially set an operational focus about 10 years ago. The company lost money during the Lehman crisis. In order to revive performance, President Oka Hayashi Ri, who took office in July 2009, decided that “semiconductor circuits will continue to be miniaturized, and we will use this to drive future growth,” and began developing test equipment for “photomasks (design drawings when using extreme ultraviolet light to burn circuits on wafers)” and “mask blanks (substrates for drawing circuits).”

Although Lasertec has only about 400 employees and is a small-scale semiconductor equipment company, its business model strives to develop the largest share of products in niche (niche) fields that are difficult for large companies to get involved in. Therefore, Lasertec focuses on design and development, entrusts most of the production to outside, uses a “fab-lite” (fab-lite) model. In the context of semiconductor manufacturers purchasing more extreme UV test equipment, Lasertec continues to receive new orders by improving detection sensitivity and shortening inspection time.

Despite some weakness in the semiconductor industry over the past few years, Lasertec's sales and profits have grown substantially. In the six months ending December 31, 2023, the company's net sales were 95 billion yen (US$628 million), up 72.4% year over year. Net profit was 22.2 billion yen ($147 million), up 63.4% year over year.

In a February statement, Lasertec attributed its forecast for the 2024 market recovery to strong investment in artificial intelligence and signs of a recovery in consumer demand.

As the king of the niche market, Lasertec is also exploring the next source of profit. According to Nikkei's report, Lasertec is interested in silicon carbide (SiC) wafer testing equipment that can efficiently manage electricity. It believes that with the full spread of pure electric vehicles, demand for this device is expected to increase, and Lasertec will strengthen research and development of this device in the future.

The products of the two equipment manufacturers mentioned above play a direct role in chip production, and some companies also produce devices that play an important role in semiconductors in seemingly unrelated fields, indirectly expanding the influence of Japanese devices.

Established in 1985$RORZE (6323.JP)$This is one such Japanese company. Although it is not well known domestically, it has world-class technology in wafer handling systems.

Wafers are the foundation of semiconductors. They go through hundreds of processes in many different devices. In these repetitive processes, dust adhering to wafers is a major enemy, and Rorze's main products are devices and robots that transfer wafers and masks, including automated systems that generate low particles, to minimize pollution generated during transmission.

Rorze is designed, developed, and sold in Japan, and manufacturing until 2021 was mainly carried out at a factory in Vietnam. In September 2022, Rorze announced that its new plant in Shanghai had been completed and that it had also established a new subsidiary engaged in manufacturing business in China. Rorze has previously benefited from the continuous construction of fabs, and as AI continues to be popular, the unknown Japanese company has received new orders.

In April of this year, Rorze announced the financial results summary for the fiscal year ending February 2024 (FY2023). According to the report, consolidated sales decreased 1.3% year over year to 93.25 billion yen (up 5.9% from the company's plan), operating income fell 8.6% year over year to 24.14 billion yen (up 11.7% compared to the company plan), and net profit decreased 10.8 billion yen to 19.58 billion yen (up 24.5% from the plan).

Rorze's earnings report shows that despite declining sales and profits due to weak capital investment in the semiconductor industry, Rorze still surpassed plans. Furthermore, the sales trend has been recovering since it bottomed out in the first quarter (March 2023 to May 2023), and reached a record quarterly high in the fourth quarter (December 2023 to February 2024).

In terms of country/region sales ratio, the US (including TSMC's Arizona plant) had the highest share at 30%, followed by China at 28%. China, in particular, recovered rapidly after bottoming out in the first quarter, and topped the list with 34% in the fourth quarter. Under US export restrictions to China, active capital investment continues. Rorze's orders in the Chinese market mainly come from Chinese semiconductor companies. Interestingly, Rorze said that it received many inquiries from Chinese equipment manufacturers at SEMICON China 2024 to be held in Shanghai in March 2024, and it is expected that sales in the Chinese market will continue to grow.

For the fiscal year ending February 2025 (fiscal year 2024), Rorze expects sales to increase 30% year over year to reach a record high of 120.7 billion yen, and operating profit is also expected to increase 31% year over year to reach 316 billion yen, mainly due to increased sales of semiconductor-related equipment. It said that in the future, it will strengthen its response to increased demand by setting up additional equipment assembly plants and securing large-scale production systems in Vietnam and China.

Well-known Japanese semiconductor equipment manufacturers have taken the limelight, while some unknown equipment manufacturers are secretly working hard to make a fortune in a corner that no one can see.

A winner in semiconductor materials

After talking about Japanese equipment, let's talk about niche Japanese semiconductor material manufacturers.

First, let's talk about sealing materials used in semiconductor containers. In fact, this field is also the sole domain of Japanese manufacturers, including the help of large steel storage tanks used by TSMC, all from a lesser-known Japanese company --$Valqua (7995.JP)$Officially, this company was founded in 1927, and now about half of its sales come from the semiconductor industry, and it accounts for about 30% of the global market for fixed-liner storage tanks.

Mitsuhiro Osawa, an analyst at Ichiyoshi Research Institute, said that it is the world's largest supplier of such tanks to date, dwarfing some of its smaller competitors and supplying almost all of the tanks to TSMC, the world's largest OEM chip maker.

Yoshihiro Hombo, president of Valqua, said in an interview: “Molecular-level impurities can render the entire chemical solution tank useless because it can greatly reduce the yield of cutting-edge chip manufacturing. We and chemical manufacturers support the entire supply chain by manufacturing, transporting, and storing these solutions in ultra-clean conditions, which are difficult to replicate.”

Various chemicals and acids used in semiconductor manufacturing processes must be free of contaminants. The purity requirements of the chemicals used to clean the wafers are equivalent to orbiting the Earth, and no dust that is one-tenth as wide as a hair strand can be found. Hombo said these stringent requirements make it difficult for small companies to enter the industry and are unappealing to larger companies. Semiconductor manufacturers chose Valqua because of Valqua's custom-built and hard-to-replace tanks (which could last ten years or more).

Since there is no standardized container shape or size, every chip factory's container (usually hundreds of containers per factory) must be made to order. These containers can be up to 4 meters in diameter and 9 meters high, and Valqua has placed fluoropolymer plates inside the containers. Perfectly attaching this inelastic, non-sticky sheet to a curved surface requires the hands of skilled workers. The piping connecting the tank to the machine must also be lined, and the entire tank production process is carried out in a clean environment.

For TSMC, the main wafer foundry at present, Valqua's sealing materials and supporting storage tanks are an indispensable part of production, and it is difficult to find rivals in the short term.

There is no shortage of new companies in the materials field. In the field of advanced semiconductor materials, first-mover companies with excellent technical strength are in a monopoly state, but latecomers that have improved material durability etc. are also striving to gain market share.

In the field of Pellicle protective films, previously mainly from Japan$Mitsui Chemicals (4183.JP)$As a monopoly, Mitsui Chemicals, which had been involved in this business as early as 1984, ranked first in the global share due to rivals in 2022$Asahi Kasei (3407.JP)$The business was acquired, and the company basically monopolized the market for cutting-edge semiconductor products.

Meanwhile, in the past two years, a large Japanese tape special paper manufacturer$LINTEC (7966.JP)$We have developed thin film products for protecting the electrodes on chips in the back-end process of semiconductor manufacturing. Compared to when this product is not used, the strength (durability) resistant to temperature changes can be increased 2.5 to 3 times, which is expected to extend the life of semiconductor products.

According to reports, LINTEC has developed a new material used in the “Pellicle (protective film)” to protect the bottom plate (photomask) of semiconductor circuits. Pellicle's role is to prevent scratches and dust from adhering to the bottom plate when drawing a circuit on a semiconductor wafer. It is an essential component for improving the production efficiency of this process.

Extreme ultraviolet (EUV) exposure equipment is used to manufacture semiconductors with wide and fine electrical lines. To improve production efficiency and achieve refinement, it is necessary to increase the output power of light and generate higher heat, so the heat resistance of Pellicle needs to be improved. By using carbon nanotubes (CNTs), which are less likely to chemically change at high temperatures and are less likely to lose strength, LINTEC has increased heat resistance to more than double that of conventional products using polysilicon. We will invest approximately 5 billion yen to establish a mass production system by 2025, and aim to achieve sales of 30 billion yen within a few years, when calculated together with peripheral materials.

Coincidentally, in$Ajinomoto (2802.JP)$There are also challengers in the field of ABF insulating films, which are monopolized. Ajinomoto discovered in the 1990s that a chemical by-product produced during the production of monosodium glutamate can be used to manufacture insulating films, and insulating films are essential for high-performance chips. The company controlled ABF supply for the next 30 years.

A Japanese materials company called AGC has developed a film that does not use traditional epoxy materials. An insulating film is a material required for detailed energization in multi-layered semiconductor substrates. Allegedly, products developed by AGC improve transmission performance, are easy to apply electricity, and can reduce transmission losses for high-performance semiconductors such as the communication standard “5G”. The company is in discussions with client companies and aims to commercialize around 2026-2027.

Major US chemical company DOW (DOW) and large German daily necessities company Henkel (Henkel) have achieved a monopoly in the field of protective materials for semiconductor components. They focus on liquid protective materials, while the Japanese company Toyo Ink SC Holdings has launched protective materials made into thin films to challenge material giants.

According to reports, Toyo Ink draws on technology accumulated in the past. This technology was previously used to fold the film on the hinge part of a mobile phone to prevent electromagnetic waves from leaking out. When processing with liquid protective materials, it is necessary to coat the entire substrate, and if it is a film, each component can be protected. It is expected to be adopted by US semiconductor manufacturers in 2024, and the goal is to achieve sales of 2 billion yen in 2026.

As for Japanese semiconductor materials, photoresists are often mentioned, and in fields not mentioned, niche companies are also rising.

Write it at the end

The manufacturers mentioned above are just the tip of the iceberg in the field of semiconductor equipment materials in Japan. Although their revenue is not very high, and the largest company only hovers around 100 billion yen in annual revenue, they have launched very competitive products in their respective fields, and some have even achieved the effect of monopoly

Size and scale have not been a stumbling block for these Japanese companies; in turn, they have used this to excel in their fields of expertise. Perhaps this is one of the secrets to their niche and success.

Editor/Somer