Japan's semiconductor story is unique  in modern technology and business.

Coming out of World War II, the  country rapidly gained competence  

in an emerging technology  and became a global leader.

In this video, we look at  the 30-year rise and peak  

of the Japanese semiconductor industry  starting from the 1950s into the 1980s.

## Beginnings

How about we start at the beginning? Our story  begins in America with the transistor's invention  

at Bell Labs - a division of AT&T,  the American telephone monopoly.

The company kept the invention a secret  for six months while it finished its patent  

application. Then publicly announced  the breakthrough in the summer of 1948.

At this time, Japan was occupied  by the Allies after World War II.

A member of the Japanese Ministry of International  Trade and Industry or MITI - Watanabe - befriends  

a former Bell Labs engineer working at the  Allied Occupation General Headquarters or GHQ.

Shortly after the Bell Labs announcement, the  American engineer tells Watanabe that he has a  

report about a solid-state amplifier that had  just been invented back in the United States.

The engineer says to Watanabe that the  report is top secret and cannot be shared.

But then - right in front  of Watanabe - he puts the  

report down on his desk and walks out of the room.

Watanabe gets the unspoken message and  takes the report home to read and study.

He and the rest of his colleagues at MITI  recognize the importance of this discovery  

and directs the country’s industry to come  up with their own indigenous versions.

## Learning the Transistor

Japanese transistor learning  efforts were wide-ranging.  

The most important of which were coordinated by  MITI through its Electrotechnical Laboratory or  

ETL. ETL would later spin off as  Nippon Telephone and Telegraph or NTT.

Japan was still recovering from its ill-advised  participation in World War II. So researchers  

had a hard time not only finding equipment but  also enough food to eat. International travel  

was difficult and the country had little foreign  capital with which to buy foreign technologies.

ETL began with a simple transistor study group  led by Watanabe and other ETL researchers.  

The ETL director flew to the  United States and brought back  

transistor samples. The GHQ had set up libraries  in Japan and those libraries had subscriptions  

to Bell technical journals.  The researchers read them.

And Japan's Physics or Physical Society held  semiconductor symposiums where researchers  

presented their findings. The first  of which took place in April 1950.

By 1951, Japanese scientists at NTT  and Nippon Electric Company or NEC  

succeeded in creating  proto-versions of the transistor.  

However, this remains far behind what  the rest of the industry had to offer.

## Bell

In 1953, a company called Tokyo Tsushin  Kogyo sees in a news circular - obviously the  

Asianometry newsletter - that Western Electric -  the manufacturing arm of the AT&T Bell System - is  

openly licensing their transistor manufacturing  patents for a fee of $25,000 and a 2-3% royalty.

You might be wondering why AT&T would do  this. After all, wasn't the transistor a  

precious technical breakthrough and a foundation  of national security? Why didn't they protect it?

Yes, in the long run. But at the time,  to quote a famous computing figure,  

you cannot connect the dots looking  forward. Only when looking backwards.

The 1948 Bell Labs germanium transistor  was crude. And its technical benefits  

over existing vacuum tube technology were  not immediately apparent - especially prior  

to the shift to silicon. Germanium's finicky  nature was a real manufacturing issue.

Furthermore, when Bell invented the transistor,  concerns immediately sprouted about the American  

telephone monopoly having exclusive  control of such a valuable technology.  

They were already in the process of fending  off an anti-trust suit from the US government.

Licensing out transistor technology  to other firms was a way to circumvent  

those public concerns. 35 electronics companies  took up Ma Bell's license offer. This included  

several American manufacturers like  GE, Raytheon, and Texas Instruments.

Anyway, this small company in Japan - just  120 employees at the time - petitions MITI  

for the funds to do this transaction.  Without waiting for MITI's approval,  

they reach out to Western Electric  and strike an agreement. MITI was  

annoyed that this little startup moved  forward but gave approval nonetheless.

Ever heard of this company Tokyo  Tsushin Kogyo? No? Perhaps,  

you might be more familiar with its later name.

Sony.

## Sony and the Radios

America invented the transistor. But Japan made it  a must-have for any household consumer item with  

the popularization of transistor-based radios.  The radio was the first portable killer app.

In 1954 Texas Instruments released the first  commercial transistor radio: The Regency TR-1.

The TR-1 was smaller and more  portable than anything before it.  

But its product features - audio  quality and what not - lagged that  

of its vacuum tube competitors  due to cost cutting measures.

Despite the issues, anyone who looked at  this product knew that it was the future.  

A radio receiver in your pocket! Imagine that!  Analysts predicted sales of "20 million units  

in 3 years". Every Japanese company worth  their salt worked towards making their own.

Kobe Kogyo, an established  company producing electron tubes,  

struck a deal with American giant RCA  to receive their transistor technology.  

By 1954, they had announced  their first transistor radio.  

This radio worked but product and production  were not good enough to sell to the public.

It left the door open for  a company to go for broke.  

And Sony wanted in. After some convincing, the  small startup acquired the Bell Labs patent  

package - which consisted of a few sample  transistors, a piece of high-grade germanium  

crystal, and a pretty unhelpful textbook  - Bell Labs' "Transistor Technology".

More importantly, Sony engineers had a chance to  spend three months at a Western Electric plant.  

They sketched and sent back detailed  notes of what they learned there.

## The Radio

In order to produce a workable  radio, Sony needed to produce a  

new type of transistor - the grown junction  transistor - at an acceptably high yield.  

By 1955, Sony's yields were at 5%,  less than half of that in America.

Undeterred, the company started  producing and selling transistor  

radios, which was internally controversial.  

It was immensely risky to believe that their team  could raise yields high enough to turn a profit.  

With Sony borrowing to fund its expensive  R&D work, it was a bet-the-company decision.

That radio - the Sony TR-55 - was the first  transistor radio commercially available in Japan.  

Its audio quality was still not that good, but it  was small, portable, and had great battery life.

The Sony radio sold very well, especially  abroad. In 1955, less than 5% of the value  

of Japan's exports were electronics.  By 1960, that number had become 16%.  

That year, Japan exported 10 million  transistor radios to the United States alone.

Within a few years, old-guard  electron tube firms like NEC,  

Toshiba, and Hitachi released their own radios.  The aforementioned Kobe Kogyo managed to get  

their yields up and entered the market in 1957.  They eventually merged with Fujitsu in 1964.

The transistor radio market crashed as  products from eleven Japanese electronics firms  

hit the market. Sony survived the  crash by introducing other products  

like the FM transistor radio  and eventually the Television.

By 1960, Japanese transistor production  reached parity with that of the United States.  

But by then the next big  thing was already on the rise.

## Rise of the Integrated Circuit

In 1959, Robert Noyce of Fairchild  independently invented the first monolithic  

integrated circuit. This IC was  far more commercially viable  

than Jack Kilby's hybrid integrated circuit,  which had been invented the previous year.

This is because the monolithic integrated  circuit had all of its transistors on a  

single piece of silicon - making it  far easier to commercially produce.

After patenting this technology,  Fairchild licensed it to NEC.  

Just three years after its invention.

This time however Japanese IC  companies found it much more  

difficult to catch up with their American  competitors for largely two reasons.

First, the American IC  industry was moving very fast.  

The commercial market was taking over  from the government as the main market.  

The mainframe markets were exploding, fueling  demand for more sophisticated integrated circuits.

From 1963 to 1965, the average IC  selling price fell from $50 to under $9.  

Production grew twenty times over.

Second, much of the necessary IC fabrication  equipment - in areas like lithography,  

sputtering equipment, and ion implanters -  came from American companies. The Japanese  

companies had to scramble to import equipment  over from the US, and this was not easy.

## Shortcomings

Throughout the 1960s, MITI's policy focus  encouraged technology imports. The way they  

subsidized the licensing and acquisition of  early transistor technology, for instance.  

Or by blocking foreign-made electronics  from entering the lucrative Japanese market  

without a technology transfer agreement.

This technology import policy led to  some competency catch-up at the start  

and even a few commercial successes. For instance,  

the development of a small instrument  manufacturer cluster in the South Tokyo area.

It soon became clear however that the Japanese  integrated chip makers were not catching up to  

the Americans. This was especially the case  in the newest, hottest thing in the industry:  

Memory circuits. More specifically -  Dynamic Random Access Memory, or DRAM.

## DRAM

Roughly speaking, DRAM is used in computers  to store information while the power is on. It  

provides high capacity - measured in units called  kilobit, megabit, and gigabit - at a low cost.

DRAM - like other types of semiconductor memories  - is a commodity. Customers like desktop,  

notebook, and server makers can easily switch  suppliers depending on price or features.

From 1974 to 2000, the average DRAM product life  cycle was about 2-3 years. Price fluctuations  

are wild and brutal. For instance, 2007  saw 1Gb DRAM memory quoted at about $10.  

A year later, that collapsed to  under a dollar due to oversupply.

Because of this, product leadership in memory  is even more critical than it usually is in the  

semiconductor industry. You want to be first  into the market with a product so that you can  

price high and make back invested capital  before the rest of the market catches up.

This gets harder over time as the capital  costs of new fabs and chip-making equipment  

continue to rise. It means you have  to sell more memory units and so on.

## Falling Behind

At the start of the 1970s, the United States  took the early lead in the DRAM market.  

Intel and Advanced Memory Systems delivered a 1K  

product for the mainframe market. Intel took  the market lead due to its cost-effectiveness.

The Japanese attempted to catch up to the  Americans. But whenever they succeeded in  

replicating a memory product, the Americans  would jump ahead to the next generation. This  

happened as the industry transitioned  from 1K to 4K, and then again to 16K.

Without better chips, the Japanese mainframe  computer industry can never be competitive against  

the American giants. Namely, IBM. At the time they  were barely holding on against the juggernaut.

In 1971, MITI reorganized the Japanese  computer industry from six separate  

companies into three paired-groups.  But the pairs continued to compete  

so MITI directly sought to organize  and coordinate R&D across the entire  

Japanese semiconductor industry to enable  the next generation of Japanese computers.

This became the VLSI Project in 1975 - which  stands for Very Large Scale Integrated Circuits.

I saw an angry comment on my last video  screaming at me that VLSI actually stood for  

Very Large Scale Integration.  "The lack of research is why 99%  

of YouTube channels are trash".  Bro, chill. It means that too.

## VLSI Project

The VLSI Project gathered together five of  Japan’s biggest semiconductor companies - Fujitsu,  

Hitachi, Mitsubishi Electric, NEC,  and Toshiba - normally fierce rivals.  

Consumer electronics were excluded,  which is why Sony didn't make the cut.

The project assigned various parts of  the microfabrication process to each  

of the participants' research staff  - backed by ample government funds.

The project kicked off in 1976  and ran four years until 1980.  

It resulted in over a thousand patents on  all parts of the microfabrication process.

Critically, the project helped spur  Japanese leadership in two key industries:  

Lithography and silicon crystal technology.  Japan took technology leadership in these areas  

and its semiconductor industry shifted almost  entirely from American suppliers to domestic ones.

I also discussed the VLSI Project  in another video about the Japanese  

photolithography industry. For additional  detail, you might want to check that out.

## Leaping Ahead

The next step after 16K was 64K. At this  point they were behind by one generation

The Japanese DRAM industry decided that they  needed to develop the manufacturing processes  

for both 16K and 64K simultaneously. The learnings  from the VLSI project helped make it possible.

Thus, in April 1977 NTT announced  the successful development of 64K  

DRAM, first in the world to do so.

Two years later, NEC, Hitachi and  Fujitsu all brought 64K to the market,  

at the same time as the Americans.  Erasing the American lead.

Furthermore, the Japanese product was better.  Though the Americans invented and pioneered  

automation techniques on the semiconductor  production line, the Japanese mastered it.

Of key importance was investment  in computer-controlled bonding  

processes - an assembly step where  you attach finished ICs onto a board.

Americans opted to use cheaper offshore  labor to do this finishing step.

The Japanese on the other hand automated it  completely and ended up ahead on their investment.

## DRAM Dominance

A 1980 Hewlett-Packard study comparing the quality  of the Americans and the Japanese found that  

products from the best American firm still had 6  times more errors than the worst Japanese firm.

Japanese yields were hitting 70-80%,  while the Americans topped out at 50-60%.  

So not only were Japanese products  better, they cost less too.

The DRAM market cratered into a nuclear winter.  After 1985, just two American companies stayed  

in the business: Micron and Texas Instruments. The  rest were Japanese firms and one Korean, Samsung.

## Why It Worked

There was supposed to be a second VLSI Project.  But the US protested government funding for  

such R&D projects as an unfair trade practice.  Nevertheless, the project emphasized the policy  

importance of semiconductors and a frenzy  of VLSI research in Japan soon followed.

Researchers have studied why  the 1976 VLSI project succeeded.  

The concept came from the United Kingdom where  Research Associations would spring up in response  

to government grants. But similar public-private  partnerships abroad haven't been as fruitful.

The best answer would probably  be that the VLSI Project came  

at the right time. The semiconductor industry  back then wasn't as diverse or complicated  

as it is today. Personal  computing, the iPhone, the cloud,  

and AI. None of that existed then. All you  had were mainframes. This allowed for focus.

Furthermore, the 1970s were a time when the  cost of chip-making factories were starting to  

skyrocket into the billions of dollars. Yet it was  still possible to achieve large technical gains  

simply by driving process  manufacturing improvements.

## Conclusion

Looking back at it, the Japanese rise  

to the top of the semiconductor  mountain was an economic miracle.  

Like many other things in Japan, it made no sense  - full of close calls and paradoxical policies.

But every action has an equal reaction. Japan's  rise triggered intense reflection within the  

American semiconductor manufacturing  industry. How did America fall so  

badly? And unlike with other manufacturing  industries, they bounced back with ferocity.

Then a number of other countries  started copying the Japanese playbook.  

Most notably, an ambitious, fast-following  semiconductor giant over in South Korea.

To modify a Japanese saying: America  pounded the rice, Japan knead the dough,  

and South Korea ate the DRAM cake. Japan's  reign as king would not last for very long.