Scaling up semiconductor production while divesting from Chinese supply chains could present a serious procurement challenge for Japan’s AI sector.

Increasingly Japan is committing public and private sector resources to secure both the resurgence of the country’s semiconductor manufacturing sector and a significant portion of the burgeoning generative artificial intelligence (AI) market. 

On 19th April, Sakura Internet secured around 10,000 next-generation NVIDIA B200 GPUs for roughly 20 billion yen ($130 million). Sakura is one of five Japanese companies receiving government subsidies as it expands its cloud services to support AI workloads. 

Japan invests in domestic AI capabilities 

This investment marks a significant move by the nation to strengthen their position in the field of AI. Sakura, in partnership with the Japanese government, is spearheading this latest initiative to bring the country to the forefront of the rapidly developing market. 

Sakura’s Operating Officer, Yohei Ueno, referenced the difficulties of procuring such a significant number of semiconductors, whilst underpinning its necessity: “We feel a sense of urgency that not many generative AI [products] have materialised in Japan despite the global trend.” 

Beyond Japan’s domestic market

However, the procurement of the highly sought-after chips could likely echo beyond Japan’s domestic market. Not only did Jensen Huang (NVIDIA’s CEO) pledge in December 2023 to “prioritise Japan’s GPU requirements” in talks with Japan’s Prime Minister Fumio Kishida, but also, earlier this month, Kishida engaged in talks with US President Joe Biden to outline ongoing international relationships in light of the investment. 

“We welcome cooperation between US and Japanese companies toward the development of foundation models for generative AI, including contribution of NVIDIA’s GPUs to Japanese computational resources companies such as Sakura Internet,” a White House spokesperson said in an official statement. The statement also referenced contributions of “other computational resources from Google and Microsoft to Japanese AI foundation models development companies.”

Kishida’s state visit coincided with the announcement that Microsoft would invest $2.9 billion over the next two years in efforts to develop its AI and cloud infrastructure in Japan. As it stands, the investment would be the US tech giant’s largest injection of capital into the Japanese market to date. 

In its statement, the Biden administration also stressed the importance of building strategic partnerships between US and Japanese universities and corporations. “The United States and Japan welcome a new $110 million joint Artificial Intelligence partnership with the University of Washington and University of Tsukuba as well as Carnegie Mellon University and Keio University through funding from NVIDIA, Arm, and Amazon, Microsoft, and a consortium of Japanese companies.” Collaboration within the education sector heralds promising developments for both countries’ expanding influence within AI. 

Tension ahead

That said, the journey ahead does not appear smooth as trade relationships between Japan, China and North America remain tense. These geopolitical tensions could potentially jeopardise Japan’s efforts to both scale up semiconductor manufacturing and leverage its close relationship to the US to catalyse the development of its AI sector. 

From August 2023, China began to impose export controls upon rare minerals inextricably connected with the global production of semiconductors. Restrictions deepened as of December 2023 as the country announced further export controls on high-grade graphite. 

Subsequent trade statistics released by Chinese customs authorities showed a 40% quantitative decrease in China’s exports of graphite and related materials to Japan. Historically, Japan has relied upon China for 90% of its graphite imports. The country’s need to diversify is more pressing than ever in light of China’s growing export restrictions.

Furthermore, future US trade agreements will likely hinge on Japan’s ability to divest from Chinese supply chains. Whilst the US is an enthusiastic advocate for Japan expanding its AI capabilities, Japanese overdependence on China in order to procure the necessary materials for AI development could be a critical source of friction in the future. 

The US has already been taking steps to destabilise China’s influence in the chipmaking industry. This is echoed in Japan’s recent trade agreements for the supply of graphite in the EV sector. 

Over the last two months, Panasonic Energy Co., Ltd. announced agreements with NOVONIX Limited (Queensland, Australia) and Nouveau Monde Graphite Inc. (Quebec, Canada) for the supply of synthetic and natural graphite respectively. Previously, it has been noted by Kishida and Canada’s Prime Minister Justin Trudeau during a state visit that China is a “central challenge” for both countries. 

An uncertain future

It is unclear whether Panasonic’s recent trade agreements will relate to the field of semiconductors but it is evident that Japan intends to make its mark upon generative AI. Political and corporate sentiments, within Japan and beyond, show vested interest in reducing Japan’s involvement with China.

It remains unclear whether Japan will be able to circumvent China whilst strengthening its position in artificial intelligence and cutting-edge computing. What is certain is that, regardless of government subsidies, international support or investments in education, without the ability to procure the necessary products and materials, Japan’s efforts will be rendered ineffective. 

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