Dragoman Digest

Japan is investing billions to revitalise semiconductor manufacturing

Japanese semiconductor manufacturer Rapidus has wildly ambitious plans to mass-produce cutting-edge chips

Japan’s Rapidus – established in 2022 with government backing – marks Japan’s most ambitious attempt to revive its once world-leading semiconductor manufacturing industry. Rapidus, which began constructing its first chip fabrication facility in Hokkaido in 2023, aims to start mass production of 2nm chips in the latter half of fiscal 2027. Higher performance is generally associated with smaller nanoscale dimensions – the fewer nanometres, the more sophisticated the chip. Even before reaching full-scale production on 2nm chips, Rapidus plans to advance quickly with a second, more advanced “fab” that may produce 1nm chips alongside 1.4nm products. The construction of Rapidus’ first fab will cost around US$32 billion and will be financed by a consortium including the Japanese government, several large banks, and private companies. Rapidus’ goal is nothing short of an attempt to turn back the clock to the late 1980s, when Japan produced more than half of the world’s semiconductors. Though Japan remains a leading supplier of niche semiconductor materials and equipment, its current semiconductor fabrication capacity remains generations away from the cutting edge, having been surpassed by the US, and later Taiwan and South Korea.

For Japan’s government, which has invested US$12 billion in Rapidus, the venture represents a high-stakes gamble that could fail. Producing high-end chips is both extremely costly and technically demanding. TSMC, the world’s most advanced semiconductor company by some margin, is only just in the process of ramping up production for 2nm chips. Chinese players, with the full backing of Beijing (albeit facing export controls) have struggled to move beyond the 7nm level. Rapidus remains confident in its ability to produce 2nm chips by 2027, confirming in July that a 2nm device was functioning on a prototype wafer. However, advancing through the “valley of death” and producing high-yield products at scale is a very different proposition to lab-based testing. TSMC’s main competitors, Samsung and Intel, are finding it challenging to improve yield rates for their cutting-edge products. Questions also remain about financing and Rapidus’ ability to poach customers from TSMC and other established competitors.

Canada strikes Alberta oil pipeline deal to reduce US dependence

Canada’s Prime Minister Mark Carney is seeking new markets and reducing internal barriers to growth

Last week, Canadian Prime Minister Mark Carney signed a major energy accord with Alberta Premier Danielle Smith, approving the development of a westward oil pipeline to the Pacific coast. The proposed 1,100km bitumen pipeline would transport over one million barrels per day to a new deep-water port on Canada’s west coast (likely British Columbia), unlocking direct access to Asian markets. Dates for construction and completion have yet to be specified. Under the terms of the deal, the pipeline will be exempt from major federal regulatory restrictions on oil transportation and emissions. In exchange, Alberta will expand its carbon pricing scheme and establish the world’s largest carbon capture program.

Carney is a somewhat unlikely advocate of the Alberta oil pipeline. Once known for championing renewable financing and green investment, he has framed the project as a necessary act of economic realism given the imperative to diversify Canada’s economy. The US remains Canada’s largest trade partner, purchasing over 90 percent of its crude and three-quarters of its total exports. Other initiatives to find new sources of growth include Canada’s boost to defence spending and a major push to remove internal barriers to trade.

Whilst the initiative to reach distant Asian markets is perfectly understandable from an economic diversification perspective, questions remain around the proposed pipeline’s commercial viability. Alberta produces ultra-heavy and sour crude which requires specialised and costly refining equipment. The US already provides a network of refineries configured to refine Alberta crude. This, combined with factors like demographic decline in East Asia and China’s rapid electrification, means that finding customers for the Alberta pipeline could prove challenging. These factors have led some analysts to conclude that the pipeline is more politics than business.

Guinea hopes for a new era with first production at Simandou

Simandou is a pillar in China’s efforts to exercise greater control over commodity markets

On December 3rd, after nearly three decades of stagnant growth and political instability, the first shipment of iron ore left Guinea’s Simandou mine for China. Located in a remote part of the highlands in the west African country, Simandou is one of the world’s largest untapped sources of iron ore, with reserves estimated at three billion tonnes and worth roughly US$315 billion at current market prices. At full capacity, Simandou could produce 120 million tonnes a year – around six percent of internationally traded iron ore. Guinea, which is now projected to become the world’s third-largest iron ore producer by 2030, sees Simandou as the cornerstone of its Simandou 2040 plan. This plan is a US$200 billion national development initiative which envisages the development of large-scale infrastructure, education investment, and industrial expansion, including 3,000km of new highways and future domestic steel production.

The launch of production at Simandou also marks a significant victory for China, whose companies have helped bring the mine to fruition. Iron ore remains one of the world’s most traded commodities, yet China – despite consuming roughly three-quarters of seaborne supply – has long been a “price taker”. Simandou’s sheer scale threatens to upend long-standing supply dynamics dominated by Australia and Brazil, offering China an alternative source of high-grade ore and greater leverage over pricing. Global iron ore prices are expected to ease from US$100 to between US$70 and US$80 per tonne over the next two years, reflecting lower demand as well as increased supply. Lower prices will cut costs for China’s steelmakers and infrastructure sectors, which account for the bulk of global demand. The China Mineral Resources Group (CMRG), established in 2022 to centralise the country’s imported mineral procurement is another tool in China’s commodities arsenal. The CMRG will play a pivotal role in coordinating offtake and is already pushing aggressively for greater usage of RMB in iron ore trading.

China’s drone industry tightens linkages with Moscow

Chinese suppliers of dual-use goods are also driving a hard bargain

The owner of a major Chinese drone parts supplier has taken a stake in one of Russia’s leading drone companies, underscoring the deepening ties between Moscow and Beijing’s military-industrial complexes. In September, Chinese businessman Wang Dinghua, owner of drone-parts firm Minghuaxin, was listed as the new owner of a five percent share in Rustakt, producer of the VT-40 first-person-view (FPV) drone widely used by Russia against Ukrainian forces. This shareholding represents an unprecedented level of direct cooperation between a Chinese entity and a Russian military supplier. Since its debut on the battlefield in 2023, the VT-40 drone has undergone several upgrades to improve electronic-warfare resilience and control systems. Though unremarkable in any single attribute, its mass production, affordability, and ready availability have made it a reliable workhorse for Russian forces.

In other respects, Russia is not getting its own way. Chinese exporters of dual-use goods have aggressively leveraged Russia’s dependence on their supplies, raising prices for military-industrial buyers as Western sanctions constrain Moscow’s import options. Between 2021 and 2024, prices of export-controlled products shipped from China to Russia rose by an average of 87 percent, compared with a nine percent increase for similar goods exported elsewhere. In some instances, the rising value of Chinese exports to Russia has not led to an increase in actual volumes. For example, by 2024, Russia’s imports of Chinese ball bearings were 76 percent higher in dollar terms than in 2021, even though shipment volumes had fallen by 13 percent over the same period. European officials would undoubtedly prefer that China stopped supplying Russia. However, in the words of one Western diplomat, Chinese companies “ripping off” Russia is overall a “pretty good outcome” which will limit Russia’s military production capabilities.