Chip materials maker goes into debt rather than raise prices

One of the chipmaking industry’s small but indispensable suppliers is sinking deeper in debt because it’s refusing to raise prices to cover mounting capex costs.

Osaka-based Fuso Chemical Co. is bearing the cost to help churn out bigger volumes of sophisticated chips without asking customers for more. That’s despite holding a more than 90% share of the world’s silica used to polish silicon wafers and counting deep-pocketed heavyweights Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co. and Intel Corp. as customers.

At issue is a deep-seated fear among suppliers about risking years-long relationships with big clients and creating openings for new technological workarounds. In addition to that power dynamic, Japanese suppliers also contend with decades of deflation that’s weighed down domestic customers’ end-prices.

Fuso Chemical, which has a market value of roughly $1 billion, would need to double its prices to keep pace with capex plans, but such a move would be seen as a betrayal by customers, President Shinichi Sugita said in an interview. “We would be called a traitor,” the 68-year-old said.

Shares slid as much as 3.4% in Tokyo on Monday, their biggest intraday drop in a month.

The company’s cash flow is deteriorating as it spends record sums on new factory lines to meet demand. Wider adoption of smart products and artificial intelligence is accelerating the need for ever-more powerful semiconductors, while US-China tensions are prompting chipmakers to build new production lines for geopolitical contingencies.

With prices rising only enough to pay for higher materials costs, the company borrowed ¥20 billion ($136 million) from banks in April, the first time in years that it didn’t have enough cash on hand to pay for a silica capacity ramp up.

“We used to make capital investments every four years or so, but now we need to spend every year to keep up,” Sugita said. “No matter how much we earn, it all goes to pay off debt.”

Founded in 1957, Fuso Chemical is one of a handful of Japanese companies controlling niche links in the global chipmaking supply chain but are unwilling to offend customers by asking for price increases. In an industry where relationships are built over decades, executives often cite the discomfort such negotiations cause. But they’re hitting the limits of cost cuts and their struggles to make capex targets are morphing into an unlikely risk for global chip production.

“After 10 years, 20 years of stagnant pricing, you lose the ability to raise prices,” Toyo Securities analyst Hideki Yasuda said. Even bigger companies like Murata Manufacturing Co., the world’s biggest supplier of ceramic capacitors, and Shin-Etsu Chemical Co., the world’s largest supplier of silicon wafers, are struggling to raise prices, a stark contrast to overseas components and materials makers, he said.

Best known for malic acid used in soft drinks and snacks, Fuso Chemical’s real specialty is ultra-high purity colloidal silica, an ingredient in the slurry that chipmakers use to buff silicon wafers. For decades, the company has provided tailor-made silica for each customer’s unique blend of slurry, made up of nanoscale particles of specific textures, shapes and densities.

In a business where the margin of error allowed is less than one nanometer, Fuso Chemical can make the delicate tweaks necessary to adjust to the day’s temperature and humidity, a knowhow that’s difficult for competitors to replicate, Ichiyoshi Research Institute analyst Mitsuhiro Osawa said.

“Fuso Chemical’s complete control of silica particles and its ability to make the chemical in mass quantities is unbeatable,” he said.

To meet demand, Fuso Chemical plans to beef up capacity by 50% in July 2025, compared with March 2023. That’s expected to cost ¥50 billion, about 2.5 times its annual operating profit.

“This business is growing unsustainable,” Sugita said. “We are living hand-to-mouth.”

Some respite is coming from Prime Minister Fumio Kishida’s administration, which has pledged billions of dollars to bolster Japan’s chip sector. The country’s economy ministry has promised to pay for as much as half the cost of big domestic capex plans, and Fuso Chemical may be able to secure government support for roughly 30% of the ¥10 billion cost to expand its Kyoto facilities, a company spokesperson said.

In another effort to address Japanese chemicals firms’ lack of price-negotiating clout, state-backed fund Japan Investment Corp. said in June it would buy out photoresist maker JSR Corp. That move may catalyze more consolidation among suppliers, Chief Executive Officer Eric Johnson said.

But while acknowledging that government subsidies are not a long-term solution, Sugita said Fuso Chemical is not interested in selling itself or its silica business. “We want to keep doing the silica business by ourselves,” he said. Instead, the company wants to find new sources of revenue to help it keep pace with silica capital expenditures, although lower cash levels are hampering its ability to do so via an acquisition, he said.

The recent post-pandemic slump in chip demand was “a blessing,” giving the company more time to accumulate revenue to finance its next phase of factory expansion, Sugita said.

“If our factory stops operating, no one would be able to make chips,” he said. Bloomberg