A year had passed since I last ventured into Akihabara, the bustling hub of electronics and gadgets in TokyoAs I wandered through the colorful aisles of one of the storied mass retailers, I found myself in search of a USB drive or an SSDHowever, the selection was disappointingly sparse, dominated by one brand that stood out in stark red – KIOXIAThe absence of familiar brands was striking and spoke volumes about Japan's dwindling presence in the semiconductor industryIt was clear that this decline was reflected not only on the shelves but also mirrored the struggles facing the local manufacturers as demand evaporated, leaving producers in precarious positions.

KIOXIA, originally the semiconductor division of Toshiba, found itself in a precarious situation in the wake of significant financial losses tied to its investments in nuclear energy

In a bid to recuperate its debts, Toshiba decided to divest from its most profitable sector, allowing KIOXIA to emerge as an independent entity on June 16, 2017. There had been multiple attempts at going public since its separation, but they failed to materialize.

Looking ahead, KIOXIA's upcoming IPO slated for December 18, 2024, seems promising, provided there aren't significant setbacksUnfortunately, it appears the amount they can raise through this venture will be far from substantial.

The Japanese government has historically provided considerable support to the semiconductor industry, and KIOXIA has certainly benefited from various policy and financial backingNonetheless, even an enterprise of KIOXIA's standing struggles to attract the necessary funds from the stock market.

After two to three decades of decline, the challenge for the semiconductor industry in Japan is further compounded by attempts at economic security that aim to sever ties with the Chinese market in a bid to revive the sector

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Such policies, however, have little chance of success.

Many investors believe that KIOXIA's forthcoming IPO is unlikely to solve the longstanding issues facing Japan's semiconductor sectorThe more the government emphasizes economic security and distancing from China, the more the Japanese semiconductor industry seems to lose its relevance, resulting in a dim future ahead.

In recent years, KIOXIA set an ambitious target of generating ¥2 trillion ($15 billion) in revenue, a goal that feels increasingly unrealistic under the current conditions.

The Tokyo Stock Exchange underwent a reorganization in April 2022, now comprising three markets: the Prime Market, the Standard Market, and the Growth MarketKIOXIA plans to list in the Prime Market, a designation that implies readiness and capability of achieving profitability, yet it remains uncertain whether such promises can translate into actual gains amid the prevailing risks.

KIOXIA faces a considerable challenge, having recorded substantial losses in recent years while profitability has remained elusive

The absence of large-scale mobile and electric vehicle sectors in Japan, paired with a lack of influential IT companies in the realms of artificial intelligence (AI) and advanced technology, further limits the domestic semiconductor market's growth.

Over the past decade, many companies have downsized their research operations, leading to a reduced focus on R&DThe ongoing reduction of educational investments and funding for scientific research in Japan only compounds these issues, constraining future opportunities for semiconductor applications.

These factors form a concerning backdrop for KIOXIA as it strives to carve out a market within Japan's tech landscape.

From 2019 to 2023, KIOXIA's sales illustrate a troubling trajectoryAfter reaching a peak of ¥1.5265 trillion ($7.23 billion) in 2021, revenues have fallen back to approximately ¥1.0776 trillion ($510 million) in 2023, aligning closely with figures from 2019. This downturn is alarming, marked by significant operating losses totaling ¥246.4 billion ($117 million) and a net loss of ¥237.4 billion ($113 million) this year alone

Over the five-year period, cumulative operating profits netted only ¥54.8 billion, with net losses reaching an astounding ¥110.3 billion ($52 million).

Such dismal financial results are bound to affect KIOXIA's post-IPO stock performanceCurrently, KIOXIA sets its share price at ¥1,455, equating to a total market valuation of ¥780 billion ($3.7 billion) upon launchThis figure starkly contrasts with the previously envisioned ¥2 trillion valuation, leaving stakeholders wary even of approaching a ¥1 trillion target.

It's critical to note that upon KIOXIA's spinoff from Toshiba in 2017, Toshiba entered into a contract valued at ¥2 trillion with Bain Capital to divest KIOXIAFollowing this agreement, Toshiba reinvested ¥350.5 billion into KIOXIA, making it a company indirectly funded by a consortium of investors, including Bain Capital, Hoya, SK Hynix, Apple, Kingston Technology, Seagate Technology, and Dell.

Of the ¥2 trillion deal, half was contributed as buyer equity, while the remaining amount was facilitated through loans and corporate preferred shares

For the acquirers, KIOXIA's successful listing would need to generate at least ¥1 trillion to avoid loss or gain on their part.

The preferred shares are essentially a placeholder in terms of valuation, while loans primarily impact the banking sector, not the acquirers directlyIf KIOXIA's stock market total upon its listing is a mere ¥780 billion, the buyers are already looking at losses exceeding ¥220 billion.

An analysis of KIOXIA's financials indicates current liabilities of ¥1.1113 trillion ($540 million) and preferred shares totaling ¥322.7 billion ($157 million), with equity comprising only 15.7%. The strict scrutiny from the Tokyo Stock Exchange on whether such a company can list is being compromised due to mounting urgency.

In the wake of the nuclear power crisis, Toshiba was compelled to dismantle its most lucrative semiconductor division to patch its financial wounds

However, KIOXIA’s persistent failures have undermined Toshiba's conditions for resurgence.

From 2022 to 2023, KIOXIA's business conditions worsened further; while there is a slight recovery projected for April to September 2024, it is unlikely to bridge the deficits accumulated over the past five years, presenting a long road ahead to profitability.

As KIOXIA endures these hardships, the future of another upcoming endeavor, Rapidus, becomes increasingly pressingCurrently, the prospects for Japan's semiconductor industry appear dim.

The government is slated to inject over ¥10 trillion ($47.4 billion) in subsidies over the next few years for AI and semiconductor advancements.

Under Prime Minister Fumio Kishida’s administration, there had been a staunch emphasis on creating a stark divide between Japan and China across military, diplomatic, and economic fronts

However, following the transition to Shigeru Ishiba's cabinet in October, some shifts in economic relations between the two nations have emerged, albeit with continued confrontation in economic security.

Even before the U.Sinitiated its decoupling policy with China, Japanese policymakers were adamant about severing economic ties, particularly in semiconductor sectors, to cultivate Japan's technological edge over ChinaA notable figure in this push was Akira Amari, the former Secretary-General of the Liberal Democratic Party and Minister of Economy, Trade and Industry.

In November, the Ishiba administration laid out a draft of its economic measuresThe proposed financial support for AI and semiconductor sectors will exceed ¥10 trillion, a monumental allocation given that the defense budget is poised to increase by 1.5 times, thus highlighting the substantial commitment to bolstering Japan's semiconductor industry.

Nevertheless, despite these planned investments, Japan's semiconductor outlay still falls short of sufficient levels

The government intends to fund this ambitious semiconductor project through the issuance of government bonds, underscoring its commitment to bolster enterprises like Rapidus.

Recent reports from November 28 indicate that the government has already allocated ¥920 billion ($448 million) to RapidusTo reach full-scale production by 2027, an additional ¥4 trillion ($19.49 billion) will be necessaryIn contrast to KIOXIA, Rapidus currently has no plans for an IPO or external borrowing from banks, instead relying entirely on state financing to realize its ambitious restructuring of Japan's semiconductor landscape.

One former Liberal Democratic Party lawmaker with experience in economic affairs noted to me, “Japan has engaged in various public-private enterprises before, but the scale and approach to semiconductor funding seem unprecedented and diverge significantly from the principles of a capitalist society, exposing them to considerable risk.”

KIOXIA, while providing everyday consumers with affordable storage solutions like USBs and SSDs, faces tumultuous operational hurdles, making progress across various facets from regular functioning to R&D and the IPO process incredibly challenging.

The economic contraction has made even the sale of commonplace items like USB drives difficult, and the complexity of pushing advanced chips into the market has become even more daunting