[News analysis] Why Korea’s worried about its seemingly strong semiconductor industry

Posted on : 2022-07-22 16:58 KST Modified on : 2022-07-22 16:58 KST
Deregulation, tax supports, and human resources development are all part of Korea’s plan to establish itself as a semiconductor powerhouse
Samsung Electronics’ Pyeongtaek facility (courtesy Samsung Electronics)
Samsung Electronics’ Pyeongtaek facility (courtesy Samsung Electronics)

Despite its conspicuous external accomplishments, the semiconductor industry — considered a core market making up the South Korean economy — is enveloped in talk of a crisis. This is because the ecosystem making up the foundation of the industry has general vulnerabilities when it comes to labor, technology, and the materials, components, and equipment sectors.

In turn, this has been the backdrop against which the South Korean government announced on Thursday various measures to nurture its domestic semiconductor industry, including strengthening tax support, relaxing regulations concerning factory floor area ratios, and ways to cultivate the labor force.

The Ministry of Trade, Industry and Energy believes the labor force is not meeting the demands of the semiconductor industry in terms of both quality and quantity. The ministry estimates that the industry will need approximately 150,000 additional workers in the next 10 years. These considerations formed the basis of the specific size of the labor force the government said it would aim to cultivate in its Thursday announcement.

An additional chronic problem considered was the lack of design experts in particular. The ministry stated, “The design labor force for Qualcomm, one [US] company, numbers over 20,000, but domestically, the reality is that roughly 200 fabless companies [companies that design and sell semiconductors without manufacturing them] compete for 10,000 design workers.”

Technological gaps are another cause for concern. South Korea’s position in the memory market has weakened due to fierce competition, while the country is still lagging behind leading countries in non-memory fields.

South Korea’s share in the system semiconductor market in fabless, foundry, and packaging was only 3.0% in 2021. The country is considered especially vulnerable in fabless manufacturing. One example that shows this is the fact that LX Semicon is the only South Korean company among the world’s top 50 fabless semiconductor companies.

This state of affairs was reflected in the government’s announcement as well, in which it stated that it will aim to raise South Korea’s share in the system semiconductor market to 10% by 2030 through extensive support for three next-generation system semiconductors in electricity, automotive, and artificial intelligence.

Another one of the domestic semiconductor industry’s vulnerabilities is the low competitiveness of its materials, components, and equipment sectors — the foundation of the semiconductor industry itself — and the fact that it relies heavily on certain countries for these foundational sectors. The domestic semiconductor industry estimates that the localization rates for equipment and materials are 20% and 50% each. Especially of note, the share of domestic companies in the world semiconductor equipment market is estimated to be only 4%.

Combined with this reality, the fact that Japan’s export regulations, which were instituted in July 2019, are still in place may raise the risks faced by the South Korean semiconductor industry.

Despite the justification that it aimed to support the backbone of the South Korean economy, the government’s announcement had several potentially controversial points as well. That the government would allow special overtime work of 64 hours a week maximum for the semiconductor research and development field was one. The measure itself can bring about disputes from the labor world and catalyze controversy in other fields.

“In 2019, when [the government] said special overtime work would only be considered valid in the semiconductor materials, components, and equipment sectors, we worried that the system would be expanded in the future, which ended up becoming reality,” said Lee Jeong-hun, the policy director of the Korean Confederation of Trade Unions. “The food industry also has a research and development field, so if what sectors can validly carry out special overtime work gets expanded like this, it will eventually be expanded to include research and development in other industries, and efforts to shorten working hours will be nullified.”

The easing of regulations concerning factory floor area ratios will probably not be limited to the semiconductor industry. A Ministry of Land, Infrastructure and Transportation official commented, “The factory floor ratio incentive will be applied to industries other than the semiconductor industry that have been designated national strategic industries.” They continued, “Other cutting-edge industries will be able to request the Trade Ministry for the designation.”

The government’s announcement also included measures that would relax regulations concerning standards for facilities dealing with chemical substances, which may stir yet another controversy.

There are questions about how realistic the announced measures are, as the goal of raising South Korea’s market share in the system semiconductor industry, including logic chips, has been touted time and time again before.

As the economy heads toward a recession, it’s unclear whether government support will indeed translate to corporate investment. According to the Ministry of Trade, Industry and Energy, the domestic semiconductor industry plans to make investments worth 340 trillion won (US$259 billion) over the next five years.

Hanyang University electrical engineering professor Park Jea-gun said, “When a semiconductor company is investing in facilities, government approval takes a long time, and constructing infrastructure takes a lot of money. I think it’s a positive development that the new measure stipulates government approval should legally take place quickly and the government should pay for infrastructure.”

The announcement had stated that the National High-Tech Strategic Industries Special Act would be revised so that “quick handling” of government approval would be mandated for the establishment of semiconductor industrial complexes unless there are “significant or clear reasons” such as serious infringement of public interest. The announcement had also included that government funding would be provided for the construction of essential infrastructure related to electricity or water for such semiconductor industrial complexes.

Still, Park mentioned that “raising the tax deduction benefit by 2 percentage points for large corporations only is insufficient,” adding, “it seems [the government] overlooked the fact that the materials, components, and equipment sectors need to be strong considering the characteristics of the semiconductor industry.”

Plus, regarding the government’s goal of strengthening the system semiconductor industry, Park said the announcement’s “lack of considerations for newly establishing foundry fabs for automotive semiconductors” left much to be desired and needed supplementation.

Those within the semiconductor industry welcomed the government’s proposed measures that would expand government funding, relax regulations, and help cultivate the labor force while remaining cautious in terms of whether those measures would actually be implemented.

A semiconductor industry insider said, “I welcome [the proposed measures], as [they] include comprehensive support measures regarding everything from investment support to workforce development.” They added, “Increasing the floor area ratio will especially help with increasing productivity.”

Regarding the expansion of overtime work in the research and development field, they said, “This is something the industry has always demanded, and it will help with focused research during certain time periods.”

Another industry insider said, “Regarding government funding for infrastructure, the real problem is not money but how time-consuming it is to transfer over electricity and compensate for land.”

Regarding the government’s proposed measures to cultivate the labor force, the insider said, “It’s progress, as the announcement from the Ministry of Education from earlier has been honed further.” Still, they commented, “The problem of high-quality human resources with master’s and doctorate degrees cannot be solved overnight, so [the measures] should be polished further with precision.”

By Kim Young-bae, senior staff writer; Shin Da-eun, staff reporter; Choi Jong-hoon, staff reporter; Kim Hoe-seung, senior staff writer

Please direct questions or comments to [english@hani.co.kr]

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