[News analysis] In US-China semiconductor war, is Korea the odd man out?

Posted on : 2022-08-31 17:13 KST Modified on : 2022-08-31 17:13 KST
Korea is saddled with the challenge of maintaining its technological advantage over China while also using diplomacy to navigate the US-China semiconductor conflict
US President Joe Biden (left) President Yoon Suk-yeol (center), and Samsung Electronics Vice Chairman Lee Jae-yong (right) tour a Samsung semiconductor plant in Pyeongtaek on May 20, 2022. (Yonhap News)
US President Joe Biden (left) President Yoon Suk-yeol (center), and Samsung Electronics Vice Chairman Lee Jae-yong (right) tour a Samsung semiconductor plant in Pyeongtaek on May 20, 2022. (Yonhap News)

The first official step taken by Samsung Electronics Vice Chairman Lee Jae-yong following his pardon on Liberation Day was attending the groundbreaking ceremony of a next-generation semiconductor R&D complex at the company’s Giheung campus, in Yongin, Gyeonggi Province, on Aug. 19, 2022.

Samsung Electronics intends to build an R&D complex covering an area of 109,000 square meters at a cost of 20 trillion won (US$14 billion) by 2028. In the future, this R&D complex is meant to serve as a base for research in the key areas of system semiconductors (logic chips) and memory semiconductors.

The US is building a “digital Great Wall” around China

The Giheung campus has symbolic meaning as the place where Samsung’s semiconductor business began back in 1983.

“Here at the Giheung campus, where construction began on a semiconductor factory 40 years ago, we are undertaking a new initiative. If not for bold investment in R&D for next-generation products and products even more advanced than that, Samsung’s current semiconductors could never have come into being,” Lee said during the groundbreaking.

A large screen installed at the event site displayed remarks by Lee Byung-chul — founder of Samsung and grandfather of Lee Jae-yong — who stressed the need for developing semiconductor technology before his death in 1987.

The reason that Samsung Electronics is moving with such speed is that the Korean Peninsula has become the center of an intensifying struggle over semiconductor development as the US puts more pressure on China.

Since Joe Biden took office as president, the US has been focusing its efforts on reorganizing the semiconductor supply chain around itself and preventing China from developing cutting-edge semiconductor technology. The US is building what’s regarded as a “digital Great Wall.”

On Aug. 9, 2022, Biden signed the CHIPS and Science Act of 2022, which aims to foster the American semiconductor industry. The law provides a total of US$280 billion in funding, including subsidies for building or expanding semiconductor factories in the US and tax credits amounting to 25% of funds invested.

Samsung Electronics is currently building a semiconductor foundry — a factory that fabricates semiconductors on consignment — worth US$17 billion in Taylor, Texas. The SK Group plans to invest a total of US$22 billion in the US, including US$15 billion in the semiconductor sector. Both of those groups are expected to receive incentives from the US government.

That’s not the problem, though. The CHIPS Act prohibits companies that have received incentives from the US government from building facilities involving cutting-edge semiconductor technology in certain countries, including China. Samsung Electronics and SK Hynix both run factories in China that produce and package memory chips.

The US Commerce Department intends to draft the specifics of the rules in the future. Depending on how tough those rules turn out to be, Samsung Electronics and SK Hynix may not be able to equip their Chinese factories with the latest equipment.

Samsung factories in China are where 40% of the company’s NAND flash memory, or 15% of the global market, are made.

Dylan Patel, a chief analyst at US-based semiconductor trade publication SemiAnalysis, told the Financial Times on Aug. 21 that “US restrictions on exporting cutting-edge equipment to China would have an impact on Korean memory chipmakers.”

Patel was quoted as saying that China’s share of those chipmakers’ production “is likely to reduce substantially over time.”

Share of chip exports bound for China rose from 3.2% in 2000 to 39.7% in 2021

Samsung is the world’s No. 1 manufacturer of memory semiconductors, with SK Hynix coming in second. If production at these companies’ Chinese factories is disrupted, it could impact the assembly of products by major global companies such as Apple that are supplied with Korean-made memory chips.

Given the expected pushback from American companies, some don’t expect the US government regulations to be very strict.

“The critical question is how tough the US makes its regulations. Korea will need to devise countermeasures while watching how the enforcement regulations are made and how American companies respond,” said Kim Yang-paeng, a researcher at the Korea Institute for Industrial Economics and Trade.

The US is also stepping up talks with Korea, Japan and Taiwan with the goal of stabilizing the semiconductor supply chain. On Aug. 3, 2022, US House of Representatives Speaker Nancy Pelosi discussed semiconductor cooperation with Mark Liu, chairman of TSMC, the world’s largest semiconductor foundry, during her visit to Taiwan.

Each of these four countries has its respective strengths in the industry: the US in semiconductor design and equipment, Korea in memory semiconductors and fabrication on consignment, Taiwan in fabrication on consignment, and Japan in material and equipment for semiconductors.

Korean media have been referring to a consultative group on the semiconductor supply chain that the US is seeking to organize with Korea, Japan and Taiwan as “Chip 4” or “Fab 4,” but the US’ specific demands haven’t been made public yet.

Experts predict that this consultative group will be more focused, at least for now, on resolving issues of instability in the supply chain rather than exchanging cutting-edge technology considering that those four countries’ relationship is not only cooperative but also competitive.

“The semiconductor industry is in the process of moving from a global division of labor to a country-oriented system. Since it will take the US a long time to nationalize semiconductors, it’s setting up the so-called Chip 4 to stabilize supply chains in the medium term. Korea ultimately needs to nationalize [the industry] as well, but we also have to uphold the global division of labor given the difficulty of nationalizing the materials, parts, and equipment sector, which is our weak point,” said Ahn Ki-hyun, executive director of the Korea Semiconductor Industry Association.

China is both a big consumer of semiconductors on a global level and one of Korea’s major trading partners. In 2021, China was the destination of 39.7% of Korea’s semiconductor exports. That’s much higher than China’s share of Korea’s total exports (25.3%).

According to data provided by the Korea Chamber of Commerce and Industry, only 3.2% of Korea’s semiconductor exports went to China in 2000.

Along with semiconductors, China’s share of Korean exports has increased in other technology-intensive industries, including precision machinery and displays.

“The growing dependence on China in Korea’s high-value-added industries makes it more likely that Korea will be impacted when the technological gap with China narrows. The government and the corporate sector need to go all in on technological innovation and export diversification,” the Korean Chamber of Commerce and Industry said.

Given the close economic links between Korea and China, especially in the area of semiconductors, Korea must walk a tightrope in the US-China semiconductor conflict if it is to defend its key interests. China’s hackles have been raised by the US’ recent enactment of the CHIPS Act and its attempt to organize the Indo-Pacific Economic Framework to China’s exclusion.

China will seek to acquire more Korean semiconductor companies

“The Korea-China relationship is undergoing a number of difficulties, but I see this as a step toward an even more mature and healthier relationship. No matter how the international or regional situation may change, let us hold to the original spirit behind the establishment of diplomatic relations,” said Chinese Ambassador to Korea Xing Haiming during a ceremony on Aug. 24, 2022, celebrating the 30th anniversary of the establishment of diplomatic ties between the two countries.

Xing’s remarks are taken to mean that Korea and China should reinforce their economic relationship despite the US’ efforts to contain China.

Korea is saddled with the challenge of maintaining its technological advantage over China while also using diplomacy to navigate the US-China semiconductor conflict.

Given China’s shortage of proprietary semiconductor technology, it set up the “Made in China 2025” strategy in 2015 with the goal of producing 70% of its own semiconductors by 2025. That outlined China’s grand ambitions for its semiconductor industry, but it was still far short of that goal in 2020, when domestic semiconductor self-sufficiency was around 15.9%.

China once again selected semiconductors as a strategic growth industry in its mid- and long-term goals for 2035 and its 14th five-year plan, released in March 2021, and has been pouring large sums of money to foster the cutting-edge semiconductor industry. In 2019, China began to disburse money from a national semiconductor fund worth US$29 billion.

In 2021, Wise Road Capital, a Chinese private equity fund manager, attempted to acquire Magnachip Semiconductor, a Korean semiconductor company that’s listed on the NASDAQ.

But the Committee on Foreign Investment in the United States did not approve the acquisition, and it ended up falling through.

In 2021, Yeon Won-ho, economic security task force chair for the Korea Institute for International Economic Policy, published a report titled “The US-China Conflict and China’s Semiconductor Industry Development Strategy and Prospects.”

In it, he predicted that China would “make more merger and acquisition attempts with South Korean semiconductor companies, which involve a comparatively laxer foreign investment review system than the US or Japan.” He also stressed the need for the South Korean government to “work quickly to beef up related systems.”

Park Jea-gun, a professor of electronic engineering at Hanyang University who also chairs the Korean Society of Semiconductor & Display Technology, observed, “China has been catching up quickly because the government is spearheading the development of semiconductor technology.”

“We need to maintain our ‘super gap’ in technology to prevent China from catching up in the area of memory conductors, and we also need active investment so that we can compete with the global businesses in the areas of materials and equipment, where we are currently weaker,” he stressed.

By Lee Kyung-mi, staff reporter

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

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