How much silicon is there in Silicon Valley? Not much, if we are talking super-pure monocrystalline silicon, which is the high-end material driving the digital revolution.
As with countless other advanced materials these days, most of the world’s semiconductor-grade silicon comes from Japan (yes, Japan Inc has kept on trucking even if this is rarely noted in the American press). By far the world’s largest producer is Tokyo-based Shin-Etsu Chemical. Meanwhile the only other significant source globally is SUMCO, also a Japanese company. These companies produce so-called silicon ingots, huge silvery carrot-shaped items that are then sliced into silicon wafers by countless lesser manufacturers around the world, not least various manufacturers in the United States.
Though you have probably never heard of Shin-Etsu, its silicon ingot division is a remarkable business – the ultimate survivor in a grueling winnowing-out process that has been going on for two generations. The industry was pioneered in the United States, and for a time such U.S. corporations as Raytheon and Monsanto played a leading role. But they could not keep up and eventually exited. For a time Munich-based Wacker Chemie was a significant player, but it too fell by the wayside. (Wacker remains in the silicon business but only as a producer of so-called polysilicon, a lower grade material that has various humbler applications in electronics.)
It is fair to say that if a bunch of Mutant Ninja Turtles wanted to get Planet Earth’s attention, they could usefully start by taking out Shin-Etsu. The resulting silicon shortage would make the notorious Arab oil embargo of the mid-1970s look like a picnic.
By any standards, Shin-Etsu’s monocrystalline silicon division is a classic instance of Warren Buffett’s precept that “a truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital.”
Shin-Etsu’s economics are based on Moore’s Law, the proposition that the number of transistors on a silicon wafer is destined to double every two years. Each succeeding generation of computer chip has required a higher grade of silicon purity and, as of 2015, this has meant that the purity of Shin-Etsu’s ingots has reached an almost unbelievable 99.999999999% – or no more than one extraneous atom in one hundred billion.
On all sorts of metrics Shin-Etsu is an impressive business. As of 2014, it generated fully 71 percent of its sales outside Japan. Meanwhile it boasted the highest credit rating among all the world’s chemical corporations.
Besides silicon, another key industry where Shin-Etsu is leading is rare-earth magnets. Although these are hardly a household word, they boast a unique combination of super-strong magnetism and light weight. This makes them vital components in several of the most exciting industries of the future, ranging from hybrid cars to mag-lev trains. Shin-Etsu’s rare-earth magnets are also a key technology in high-performance hard-disks. Meanwhile the company is also a leader in such other vital and fast-expanding tech businesses as photo-resists, ArFs resists, trilayer materials, LED packaging, and gallium-arsenide semiconductors – all seriously high-tech stuff.
All in all Shin-Etsu provides excellent jobs for nearly twice as many workers as Facebook and more than twice as many as LinkedIn. Perhaps more impressively, it employs nearly five times as many people as Twitter. So why is Shin-Etsu not better known? Why indeed. In part the answer is that Japanese capitalism diverges sharply from the American version in its objectives and modus operandi, with the result that it is chronically underestimated in the Anglophone world. Whereas American companies have long been run strictly to maximize ”shareholder value,” serious Japanese companies have no interest in boosting their share price but rather are run principally to provide well paid, secure jobs to their workers (unacclimatized Americans generally find this implausible but it is true — various hidden factors skew the incentive system for Japanese executives). One consequence is that whereas American investor relations executives routinely go to the ends of the earth to drum up interest in their corporations’ shares, Japanese companies feel no similar compulsion. On the contrary, they are inclined to regard foreign shareholders as unwelcome and uninformed meddlers. This applies in spades to American and British investors. Like the German system, the Japanese system is bank-based, and shareholders are treated as little more than an afterthought. If a Japanese corporation needs money, its knowledgeable and patient keiretsu bank will pony up the money. Although many Japanese corporations (not least Shin-Etsu) go through the motions of providing financial information in English, this reflects more a concern for general public relations than any focused investor relations strategy.
Another reason why Shin-Etsu doesn’t advertise its strengths is more controversial: it fears a backlash from the U.S. defense establishment. Traditionally the U.S. Defense Department has worked to ensure that the United States maintains self-sufficiency in all key materials, components, and machinery needed for its defense. If a hollowed-out America these days boasts any serious remaining capability in making monocrystalline silicon, I, for one, am not aware of it.
Let’s sum up on the contrast between the Japanese job-based enterprise system (which has been copied by Korea and, to a lesser extent, Taiwan and now increasingly China) and the American one. Surely the American one is better overall? Not necessarily. The fortunes the American system creates for a few — and most of them are more lucky than particularly inspired — often prove ephemeral. Think back to how many once-vaunted U.S. digital-revolution companies went on to bite the dust. Inktomi, Netscape, Worldcom, Pets.com, AoL — where are they now? The American system may be good at creating vast fortunes but at regular intervals such fortunes are swept away like so many sandcastles on the beach. Companies like Shin-Etsu don’t get swept away. Founded in the mid-1920 to make fertilizers, it has consistently built its business over the years and has probably never been stronger than it is today.