South Korean Chipmakers Seek to Reduce Reliance on China Amid Tech War Uncertainties

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Subheading: Despite indefinite waivers, South Korea’s major chip manufacturers, Samsung Electronics and SK Hynix, are exploring options to diversify their manufacturing locations in the face of unpredictable Sino-American tech war dynamics.

In a year filled with anxiety, South Korea’s leading chipmakers, Samsung Electronics and SK Hynix, navigated the uncertain waters of the Sino-American tech war with a watchful eye. The pivotal moment came last October when the United States imposed restrictions on the export of advanced chipmaking equipment to China, a strategic move aimed at weakening China’s access to critical chip components for military applications. South Korean firms, deeply entwined with China both as a manufacturing hub and a crucial market, were initially granted a year-long exemption from these restrictions. However, as the exemption’s expiration loomed, concerns about the future began to mount.

On October 9th, some relief washed over the minds of these chipmakers as South Korea’s government announced that, thanks to “close cooperation” with the United States, the exemptions would become indefinite. Yet, while this was a significant development, the unpredictable nature of the Sino-American tech war and China’s steadfast commitment to bolstering its domestic chip manufacturing capabilities mean that South Korea’s most vital industry must consider a more diversified approach.

Chips constituted approximately 19% of South Korea’s total exports in 2022, surpassing any other product category. Among these, memory chips, crucial for data storage, represented nearly 60% of the total chip exports. Notably, South Korean companies command a similar share of the global memory chip market. To maintain this dominance, factories in China play a pivotal role. Samsung, for instance, manufactures 40% of its NAND chips within the country, while SK Hynix produces 20% of its NAND chips and 40% of its DRAM chips there. Furthermore, China serves as a significant market for both companies, accounting for 16% and 44% of their respective sales in 2021. This extended exemption has significant value as it allows these firms to continue sending spare parts to their Chinese manufacturing facilities.

Chey Tae-won, the head of SK Group, affirmed that it is “not possible to give up the Chinese market.” Nevertheless, even with the exemption in place, the environment for chip manufacturing in China may become more challenging. While the specific details of the extended exemption remain undisclosed, any restrictions on the use of particular types of equipment could limit South Korean companies’ ability to upgrade their Chinese factories effectively. Importantly, export restrictions imposed by Japan and the Netherlands on semiconductor technology used by Samsung and SK Hynix have not been lifted. Additionally, to qualify for the tax incentives provided by America’s CHIPS Act – legislation designed to encourage semiconductor manufacturers to establish operations in the United States – these companies may encounter constraints related to the expansion of production in China.

Adding to the uncertainty is the demand for South Korean chips in China. China’s relatively sluggish economic recovery from the pandemic, coupled with chip stockpiles created by semiconductor firms during the crisis, has resulted in reduced South Korean semiconductor exports to China this year. China, cognizant of the strategic importance of self-reliance in the chip sector, has been heavily investing in its domestic semiconductor industry. As a result, China’s memory-making champion, YMTC, has demonstrated resilience despite being cut off from global chipmaking tool supply chains due to American export controls. YMTC is on track to complete a new factory this year, relying on Chinese machine tools instead of foreign ones. Alarmingly, almost 56% of South Korean semiconductor firms surveyed by the Bank of Korea in June expressed scepticism about the prospects of a recovery in export levels due to unfavourable market conditions, China’s industrial policy, and its rapidly advancing chip industry.

The volatile nature of the Sino-American tech war further exacerbates the risks faced by South Korean chip manufacturers. While South Korean officials underscore the closeness of the United States-South Korea relationship, it also highlights America’s inclination to formulate industrial policy without prior consultation with its allies. Notably, the surprise rollout of the Inflation Reduction Act by the United States in August, aimed at incentivizing EV and battery manufacturers to shift supply chains away from China and toward the United States, was particularly unnerving for South Korea. If America were to implement similar measures to impede China’s semiconductor development, Samsung and SK Hynix might once again find themselves unintentionally affected.

For these reasons, both companies are likely to seek ways to diminish their reliance on China as a primary manufacturing location. They are already exploring options to establish additional facilities in the United States and South Korea. Despite the higher manufacturing costs in these countries compared to China, the incentives offered by both nations to attract chipmakers have made this shift an emerging reality. This evolving landscape will increasingly influence chipmakers and, ultimately, their customers, requiring them to adapt to new realities.