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Samsung's ups and downs (6): Caught in an awkward position with the risk of being isolated

Colley Hwang, DIGITIMES Asia, Taipei 0

Credit: DIGITIMES

Japan and the EU are actively seeking cooperation with Taiwan, and the US has even proposed the Chip 4 semiconductor industry alliance trying to secure its strategic partners in the Asia-Pacific region. But South Korea has its concerns about such an alliance.

South Korea's had a high trade deficit of nearly US$10 billion monthly in July and August, mainly due to decreases in semiconductor exports. The surging prices of imported energy and raw materials, and the devaluation of the Korean currency have been fueling the pressure. The incumbent South Korean president Yun Seok-yeol's popularity ratings have dropped to low levels comparable to those for his predecessor, Lee Myung-bak, during the 2008 financial tsunami. Hard times are lying ahead for South Koreans, many of whom can still recall the difficult days during the 1997 financial crisis.

In 2021, 60% of South Korea's and Taiwan's semiconductor exports went to China. Samsung's Xi'an plant and SK Hynix's Wuxi plant - both in China - contributed more than 40% of NAND flash and DRAM output, respectively, and we can see why Samsung and SK Hynix are finding themselves in an awkward position as far as Chip 4 is concerned.

But Taiwan and Japan are unquestionably on the US side due to industrial structures and political reasons, and Japan's move to impose control on the exports of three semiconductor materials to South Korea in July 2019 said it all about the industrial relationships between the two countries.

On the contrary, Taiwan and Japan are highly complementary to each other in terms of the diverse needs of the Internet of Things (IoT) and electric vehicle (EV) sectors. Taiwan is good at manufacturing but its foundation in equipment and material industries is weak. Japan not only has a strong foundation in material and equipment industries, with Kioxia remaining a major player in the memory sector, and Rohm Semiconductor a potential partner of Taiwan in cooperation for high-power, third-generation semiconductors.

It may be fair to even say that South Korea is probably the most isolated among the top-4 semiconductor-producing countries. It depends heavily on memory, a sector where customers will automatically adjust memory capacity in their devices according to price changes, which is very different from the "indispensable" logic chips.

Fully aware of the importance of the semiconductor industry, the South Korean government released the "K-Semiconductor" plan in May 2021, announcing that it will invest KRW510 trillion (about US$38 billion) by 2030 to enhance the scale and competitiveness of the country's semiconductor industry. The plan provides 40-50% tax incentives for R&D expenditures, 10-20% tax incentives for equipment investments, and KRW2.5 trillion for third-gen semiconductors.

Basically, the future strategy of South Korea's semiconductor industry will be built around memory-based "in-memory computing," strengthening the non-memory and material/equipment sectors, and reducing the risk of memory market volatility.

Due to the components shortages, equipment suppliers saw lead times extended to 12 months in 2021 and further to 18 months by mid-2022. The recent economic downturn is easing the shortages a bit, but equipment delivery remains slow, affecting big players, including TSMC. It is natural that their expansion projects have to be slowed down.

Although South Korea's material and equipment makers have made progress, they are not top players and can hardly withstand severe competition. The current US measures to restrict semiconductor exports to China and Russia undoubtedly are reminding South Korea that a complete semiconductor ecosystem is crucial to competitiveness.

In addition, DUV/EUV equipment and ESG will be the weaknesses of South Korea's future industry competition if there are no proper solutions. When the manufacturing processes come to 7nm for non-memory and 1z/1 alpha for memory, EUV equipment is an essential element for competition, and South Korea cannot afford to be restricted in terms of semiconductor equipment.

South Korea, which has been historically manipulated by hegemonic powers, is keen to have autonomy. But without political support, medium-sized countries may find themselves facing big risks if they want to compete for global leadership.

(Editor's note: This is part of a series of 10 articles by DIGITIMES Asia president Colley Hwang about Samsung's outlook.)

Colley Hwang, president of DIGITIMES Asia, is a tech industry analyst with more than three decades of experience under his belt. He has written several books about the trends and developments of the tech industry, including Asian Edge: On the Frontline of the ICT World published in 2019, and Disconnected ICT Supply Chain: New Power Plays Unfolding published in 2020.
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