TSMC's container maker is the hidden jewel of Japan's chip industry

by Sylvia Quarles — March 20, 2023

(Bloomberg) — The world's most advanced and delicately precise semiconductors wouldn't be possible without the aid of giant steel storage tanks built by a little-known Tokyo company founded in 1927.

Valqua Ltd., which manufactures special, super-clean containers for storing essential chipmaking chemicals, is expected to clock its highest sales this fiscal year. It is by far the world's largest supplier of such tanks, dwarfing a clutch of smaller competitors in places like Taiwan, and the world's largest contract chip maker, Taiwan Semiconductor Manufacturing, according to analyst Mitsuhiro Osawa of the Ichiyoshi Research Institute. Provides almost every tank used by the company.

Valqua is part of a loose network of Japanese manufacturers dominating a specific but inevitable global chip supply chain segment. Disco Corporation, for example, is the industry's well-known supplier of silicon wafer cutters, while JSR Corporation provides high-purity chemicals that Valqua stores in chip plants.

"A single molecular-level impurity would render the entire chemical solution in a tank useless, as it would significantly reduce the production yield of state-of-the-art chipmaking," Valka president Yoshihiro Hombo said in an interview. "We and the chemical manufacturers support the entire supply chain by making, transporting and storing these solutions under ultra-clean conditions, and this cannot be easily replicated."

Valqua gets more than half of its sales from semiconductor manufacturers, and its close ties to the chip sector help it stand out among industry peers. At $470 million, it is Japan's most valuable supplier of mechanical rubber products after doubling its share price in the past three years just before the pandemic. Valqua shares soared in January after a 41% jump in operating profit, and its chairman is confident that revenue will grow at least 30% over the next four years.

Hombo said chip-maker customers show no signs of slowing spending, even though demand has fallen dramatically. Samsung Electronics Co., the second chipmaking giant after TSMC, makes its containers. Valka shares climbed 2.1% on Monday, outperforming a weak market.

"Indeed, the sentiment remains intact as the industry's top players accelerate their investments to distance themselves from rivals," said the 66-year-old executive.

The various chemicals and acids used in semiconductor manufacturing processes must be free of contaminants. The precision required for those employed in cleaning wafers is equivalent to taking a trip around the Earth without finding a dust particle smaller than one-tenth of a human hair. According to Hombo, those extreme specialities have made it an unattractive business for smaller companies to enter and for the more prominent players.

There is no standardized tank shape or size, so each chip plant's containers—typically number in the hundreds per facility—must be ordered. These tanks can be as large as 4 meters in diameter and 9 meters in height, and Valqua lines its interior with fluoro resin sheets. Applying the inflexible, non-adhesive sheets to curved surfaces required the hands of highly skilled workers. The pipes connecting the tanks to the machinery must also be lined, and the entire tank production process must be carried out in a clean environment.

Customers return to Valqua because of the bespoke construction and difficulty of replacing tanks, which can last a decade or more.

Valqua can afford to accelerate its development as it approaches its hundredth birthday. "Our balance sheet is healthy now, and we may be eyeing some acquisitions and expansion," said the company's president.

A step on that path is a new factory for storage tanks in Aichi, Japan, which Valqua announced last month. It is the company's first new plant in Japan since 2008, underscoring its growing value in patching potential weak points in the chip supply chain. The move was made due to requests from customers wary of geopolitical risks surrounding Taiwan.

"The cost of making tanks in Japan is high, but some top chip makers still favour Japan as the best place for supplies," Hombo said. The country is rich in good providers of materials and machinery and is seen as a haven for a region that "has become a hotbed of various geopolitical risks." Valqua's new factory, expected to begin operations in January 2025, will be partially funded by the Japanese government.

According to Ichiyoshi's Osawa, Valqua shares are up 27% this year, but the supplier is undervalued.

"The company has products that are hard to match, and it is launching many maintenance-and-check services that should add to the top line," Osawa said. "What it needs is more recognition by investors."

©2023 Bloomberg L.P.

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The paradox is that semiconductor materials companies with high market share become 'easy prey' for acquisition

17/09/2023

The widespread wave of industrial consolidation pushes Japanese semiconductor materials manufacturers, which collectively own 50% of the global market share, to be cautious.

Many Japanese companies occupy important links in the chip supply chain, becoming "easy prey" for foreign companies. Faced with the existing risk, the state-owned enterprise JIC (Japan Investment Corporation), is seeking to "bring" everything under one umbrella to promote the rebuilding of the national semiconductor industry.

To gain an edge in the coming wave and stay competitive, JSR, a major Tokyo-listed chipmaking materials maker, announced in June that it would accept a takeover bid (TOB) from JIC.
[/JUSTIFY]
Market share of global contrast agent manufacturing companies.

Japanese companies have an important position in the global supply chain, for both semiconductor manufacturing tools and materials.

Interesting stuff. Kind of makes me wish I had a trading account here, so I could make some small bets on these companies.

Four Japanese Companies Leading Robotics and Automation

In the first half of 2023, the excitement over generative AI and a strong rally in Japanese equities drew attention towards Japanese robot makers. Looking beyond 2023, automation is likely to stay. With the large market shares of various segments of the global robotics supply chain held by Fanuc, Keyence, Omron and SMC, understanding the leading Japanese robot makers is crucial to understanding the bigger picture of automation. Below we take a deep dive into these names and find out how they're shaping the future of robotics.

Fanuc: Self-Automated Factories Leave Room for R&D Advantage

Fanuc's history goes back to 1955, when it was founded by Dr. Seiuemon Inaba, a pioneer in the field of numerical control (NC). Computerised Numeric Control (CNC), which is used to create movement patterns that robots follow to manufacture objects, continues to be a major source of revenue for Fanuc, with 30.9% of its Fiscal Year 2022 revenue coming from the FA segment, that primarily revolves around CNCs.1 ​However, Fanuc's most iconic product is its yellow industrial robot arms, which can be found in factories around the world. In total, Fanuc generated US$6.5 billion of revenue in FY2022.2​
As a master of automation, it naturally follows that Fanuc can automate its own factories. Fanuc's production is concentrated in highly automated factories all of which are based in Japan. This opens room for Fanuc's R&D unit, which makes up around one third of the company's staff, enabling it to maintain a technological edge over competitors.


Going forward, Fanuc is working to stay in touch with the needs of EV makers.3​ Japan's robotics industry has a historical connection to the automobile industry and that is true for Fanuc as well, making the shift to EVs top of mind for Fanuc. Fanuc is also making a push into industries traditionally underserved by automation and robotics, namely the three "hin" industries of food (shokuhin), medicine (yiyakuhin), and cosmetics (keshouhin).

Keyence: Proactively Identifying Customer Needs While Outsourcing Production

Keyence is a veritable giant, with a market cap of US$100 billion, ranking number three in terms of market cap among Japanese companies listed both domestically and abroad.4 ​Keyence's product line-up includes sensors, measurement systems, microscopes, vision units, marking units, and more recently a data analysis platform.
Keyence's key point of difference is its efforts to attract top talent for sales and strategy, while outsourcing its production to third parties. As a testament to those efforts, Keyence frequently tops rankings for average salary in Japan, with a March 2023 ranking by Toyou Keizai putting it at number two in the country.5​
Underpinning this success is Keyence's proactive strategy, in which its engineers and sales team attempt to identify potential needs instead of waiting to be approached, while also conducting on-site demonstrations.

Omron: Providing the Nervous System for Robot and FA Systems

Put simply, much of what Omron does is making the "brain" or "nervous" system for robots and factory automation (FA) sensors. This includes logic controllers, human machine interfaces, safety systems, machine vision, and software. In FY 2022, the Industrial Automation Business (IAB) segment comprised 57% of Omron's revenue.6​
In addition to FA, Omron derives a portion of its revenue, roughly 17% in FY2022, from healthcare products which focus on monitoring the human body. Furthermore, Omron's social services unit, while far from being its main revenue stream at only 14% of revenue in FY2022, brings automation out of factories and into spaces that are very close to consumers.7​ A lot of this business segment involves making automatic gates for subway or train stations, a market that Omron grasps a large share of.
With Omron's presence in FA, it is likely in a good position to benefit from capital expenditure (CapEx), namely funds used to acquire, maintain, or upgrade physical assets, and the burgeoning demand for automated factories. An important caveat is that this will depend more on CapEx trends happening in Asia rather than Europe and the Americas, as 74% of Omron's sales are concentrated in Japan, Greater China, and Southeast Asia as of FY2022.8​

SMC: A Strong Position in the Global Pneumatics Market

Electricity is not the only way to move robots and automated systems. Pneumatics is the use of pressurised air to move physical components. This is the area of the market that SMC occupies, with an estimated 64% market share in Japan and 39% worldwide for pneumatic instruments in 2022.9​
A simplified example of what a pneumatics workflow may look like is as follows: 1) air is compressed, cooled down and moved to an air tank, 2) the air is sent down a network of tubes leading to the factory line where valves and switches dictate the direction of air flows, 3) the air is pushed into air cylinders, which push a robot arm outwards, or make it grip or turn an object.10​ Full pneumatics systems are complex and are often used in concert with hydraulic systems, which manipulate liquid pressure.


A highly relevant topic of late for SMC is the current state of the semiconductor industry, which has experienced a downturn due to falling demand for consumer electronics in 2022 but is also closely linked to the AI boom. In 2023, SMC foresees the downturn in semiconductor demand keeping revenue roughly below 2022's level.11 ​However, as it aims for 1tn JPY (US$7.1 billion) in sales in the year 2026, SMC sees demand for chillers, gate valves and vacuum products as a beneficiary of the secular rise of semiconductor needs, providing 2% out of the 8% CAGR (compound annual growth rate) needed for SMC to hit its target. 12​

FOOTNOTES

1. Fanuc, "Integrated Report 2022," Mar 31, 2023.
2. Bloomberg
3. Fanuc, "Integrated Report 2022," as of Mar 31, 2023.
4. Companies Market Cap. (Accessed: August 23, 2023). Largest Japanese companies by market capitalization.
5. Omron, "Integrated Report 2022," as of Mar 31, 2022.
6. Omron, "Integrated Report 2022," as of Mar 31, 2022.
7. Omron, "Integrated Report 2022," as of Mar 31, 2022.
8. Omron, "Integrated Report 2022," as of Mar 31, 2022.
9. SMC, "Annual Report 2022," as of Sep 30, 2022.
10. SMC Corporation Australia New Zealand, "Factory Automation with SMC," as of Oct 4, 2022.
11. SMC, "March 2023 Earnings Call Materials," as of May 17, 2023.
12. SMC, "March 2023 Earnings Call Materials," as of May 17, 2023.