Japan's World-Leading Chip Materials Makers Risk being Acquired

Their relatively small scale makes them ideal targets for foreign competitors

· Tokyo-listed JSR, a major chipmaking materials producer, in June announced it would accept a takeover bid (TOB) from the government-backed Japan Investment Corp. (JIC).

· JSR has about a 20% share of the global market for photoresists, a material used in the front-end process of chipmaking. In this process, integrated circuits are created on a silicon wafer, whereas in the back-end process, wafers are cut into chips.

· Japanese companies such as NEC and Hitachi dominated the global semiconductor industry in the 1980s. They had a combined market share of 50% in the peak year of 1988 but then began to be overtaken by South Korean and other rivals. By last year, their combined share of the global chip market was 9%, according to Omdia.

Japanese makers of semiconductor materials, owners of a combined 50% share of the global market, are nevertheless cowering while staring up at an encroaching wave of industrial consolidation.

Many Japanese players occupying this crucial link of the chip supply chain are relatively small, juicy targets for foreign companies. But Japan Inc. covets them for their outsized potential to bolster the rebuilding of the nation's semiconductor industry.

To steal a march on the coming wave and in a bid to remain competitive, Tokyo-listed JSR, a major chipmaking materials producer, in June announced it would accept a takeover bid (TOB) from the government-backed Japan Investment Corp. (JIC).

"Japanese chip materials makers are so deconcentrated that their investment is inefficient as an industry," said Shogo Ikeuchi, CEO of JIC Capital, explaining the bid. Due to their relatively small size, Japanese makers spend less on research and development (R&D) than their American and European peers.

JSR has about a 20% share of the global market for photoresists, a material used in the front-end process of chipmaking. In this process, integrated circuits are created on a silicon wafer, whereas in the back-end process, wafers are cut into chips.

The company had a market cap of 850 billion yen ($5.75 billion) as of the end of August, a fifth of that of DuPont of the U.S., which has a 10% share of the global photoresist market. Tokyo Ohka Kogyo, the world's largest photoresist maker, was valued much lower, at 420 billion yen.

Likewise, Kanto Denka Kogyo and Resonac Holdings together command over 50% of the global market for etching gas, which is used to wash out foreign substances from silicon wafers. But their combined market cap was one-20th that of Germany's Merck, which controls about 20% of the market.

Many Japanese chip materials producers have price-to-book ratios below 1. As of June 30, Sumitomo Chemical had a PBR of 0.6, Resonac's was at 0.8 and Kanto Denka's at 0.9. These low ratios can make it easier for big investors to swoop in and take over companies.

There is a reason why small Japanese manufacturers own big slices of their markets: It takes a long time to study materials and discover optimal combinations. "Japanese companies have been good at [adopting and sticking to] time-consuming R&D programs, and so have maintained competitive edges over foreign firms," said Akira Minamikawa at U.K.-based research company Omdia.

There is also a reason why their competitiveness has weakened: They lack the economy of scale so often demanded by the investment-intensive semiconductor industry.

Japanese companies such as NEC and Hitachi dominated the global semiconductor industry in the 1980s. They had a combined market share of 50% in the peak year of 1988 but then began to be overtaken by South Korean and other rivals. By last year, their combined share of the global chip market was 9%, according to Omdia.

The markets for chipmaking materials and equipment are another matter. There, Japanese companies have shares ranging from 30% to 60%, according to the Center for Security and Emerging Technology at Georgetown University of the U.S. Materials for chip production are becoming increasingly important amid the U.S.-China conflict.

Data from Omdia also shows that Japan has a 48% share of the market for semiconductor materials, followed by Taiwan at 17% and South Korea at 13%.

As market competition points toward consolidation, Japan's chip materials makers must move beyond their comfort zone if they aspire to stay in the game, experts say.

Three years ago, GlobalWafers of Taiwan, the world's third-biggest maker of silicon wafers, launched a TOB for fourth-ranked Siltronic of Germany. The German government saved Siltronic by failing to approve the deal.

The key for the small Japanese players, Minamikawa said, might be how well they can stand shoulder to shoulder.

"It is important for Japan to secure a share as a whole," he said, "rather than individually by companies."