As Japan begins its new fiscal year, the country's leading IC manufacturers are expected to trim their capital budgets by an average of 1%. While that might not seem like much, the $5.2 billion that Japan's top 13 chipmakers expect to spend on new fabs and equipment follows a 63% reduction in 2001, according to Morgan Stanley Dean Witter & Co., New York.

The lack of a sustained capital infusion is threatening to drop Japan's semiconductor industry behind Taiwan's and make it harder to compete with up-and-coming production centers like China.

"History tells us that if you don't keep up with technology investments, you inevitably fall behind," said Susan Billat, an analyst at Robertson Stephens Inc., San Francisco, who tracks the semiconductor capital equipment market. "The outlook is that Japan will continue to lose market share in semi-conductors, which has already happened as a result of previous [capital] cutbacks."

An independent survey by EBN of Japan's top five IC makers-Fujitsu, Hitachi, Mitsubishi Electric, NEC, and Toshiba-found that final capex budgets hadn't been nailed down for the current fiscal year, which began April 1. Only Toshiba Corp. provided a definite target of $385 million, the same level as last fiscal year but down 94% from 2000.

A Fujitsu Ltd. spokesman said the company's spending will certainly be lower, but wouldn't comment on Morgan Stanley's estimate of $462 million, half of last year's $923 million. However, the spokesman said large new investments, such as the latest joint venture flash memory fab with Advanced Micro Devices Inc., have been completed. Fujitsu also has consolidated its major R&D centers into a single site in Akiruno, Japan, allowing a concentration of advanced equipment to be installed to fabricate prototypes of 0.09-micron chips.

The other companies also declined to provide specific capital spending levels. In a written statement provided to EBN, Mitsubishi Electric Corp. said: "We believe that we will be able to come through this fiscal year all right, even with tight capex. However, if capex declines next fiscal year, our competitiveness will be affected, so it is important that the economy recovers."

NEC Corp., meanwhile, said it will focus its investments by upgrading those fabs that produce the highest-value products, such as system-on-a-chip devices. Toshiba added that it will offset the capital spending cap by continuing to outsource production, which is now expected to reach 20% to 30% of all chips made in 2003.

Such tactics cast doubt over Japan's continued role as a semiconductor manufacturing superpower, according to analysts.

As chip production in Japan is increasingly pared, "we could be seeing the first move in a long trend to a Fabless Japan Inc.," said Risto Puhakka, an analyst at VLSI Research Inc., San Jose. "This would have been inconceivable even a few years ago."

Yoshihiro Shimada, a semiconductor analyst at ING Barings in Tokyo, said Japan's big, vertically integrated electronics companies "will lessen the impact from semiconductors through further de-emphasizing volatile commodity products, as well as seeking alliances and consolidation. The way they handle chip operations will be the biggest factor in stabilizing their earnings."

While the budgetary restraint shown by Japanese companies has caused concern for some, at least one supplier is planning to significantly increase spending this year. Elpida Memory Inc., the DRAM joint venture between Hitachi Ltd. and Mitsubishi, will pour an estimated $769 million into completing its first 300mm-wafer fab this year, in Hiroshima.

Jim Sogas, vice president of sales and marketing at the company's Santa Clara, Calif.-based U.S. subsidiary, said Elpida spent $300 million last year in part to complete the fab shell. Initial production is expected to start late this year or early in 2003.

Despite the concern it raises, Japan's tightening purse strings are not an aberration when compared with spending levels across other high-tech regions, particularly given the fact that 2000 represented a watershed year for capital outlays worldwide. Capital spending by North American chipmakers is expected to drop 32% in 2002 from a year ago, according to Morgan Stanley, while spending by European and Korean semiconductor vendors is estimated to fall 45% and 6%, respectively.

Taiwan's IC industry is projected to increase capex this year 7%, to $5.22 billion, about the same level as Japan. And it's that statistic that may prove to be the most poignant given Japan's longstanding reputation as the epicenter of chip manufacturing.

"[Japan is] consolidating operations," VLSI's Puhakka said. "They're continuing to outsource more chip production to Taiwan, China, and in some cases Korea, because they can't invest sufficiently in their own fab facilities."

But the cutbacks "will almost certainly hurt [Japan] when the global market upturn finally comes, because they won't be positioned to take advantage of the opportunity," he said.