Tech war: China-Korea semiconductor trade ties start to fray under US pressure
- Samsung and SK Hynix are finding it difficult to expand in China because Washington has cut China’s access to advanced chip making equipment
- Early signs of decoupling could become more prominent in 2023 as Seoul has little choice but to align its policies with Washington, a major ally
The strong semiconductor trade flows between China and South Korea are coming under pressure as Washington seeks to isolate Beijing from global tech supply chains, but the US policy will inflict pain on Korea’s chip giants, according to analysts.
Although Seoul has yet to join the Washington-led Chip 4 alliance, an initiative with Tokyo and Taipei to undermine China’s role in chip supply chains, and Korea has not followed Japan and the Netherlands in restricting exports of chip making technology to China, the once-robust memory chip trade between the two Asian neighbours is showing signs of cracking.
“If the US imposes sanctions on Korean companies [for doing business in China] … it will be difficult to go against them,” said Kim Yang-paeng, a senior researcher with the Korea Institute for Industrial Economics and Trade. That is because US core technology is used by all chip makers, including those in South Korea.
China’s drive for chip self-sufficiency has reduced imports for some Korean products, contributing to Korea’s trade deficit. In 2022, China’s imports of integrated circuits declined for the first time in 18 years, with the 15.3 per cent slump marking a sharp contrast to double digit growth in previous years, according to China customs data.
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While Korea’s total exports rose 6.1 per cent in 2022 to reach an all-time high, exports to China – its largest trading partner – fell 4.4 per cent, according to Korean customs data.
However, Korean chip makers like Samsung Electronics and SK Hynix are finding it difficult to expand production in China because Washington has cut China’s access to advanced chip manufacturing equipment.
These early signs of decoupling could become more prominent in 2023 as Seoul has little choice but to align its chip trade and investment policies with Washington, given that the US is Korea’s main military ally. After the Biden administration tightened export controls on advanced chip design and manufacturing technologies to China last October, Korean chip makers had to apply for a one-year grace period to keep importing the necessary equipment for their existing facilities in mainland China.
Kang Jun-young, a professor of Chinese studies at Hankuk University of Foreign Studies, said Washington’s semiconductor export controls will damage the China businesses of South Korean chip makers like Samsung and SK Hynix by reducing output at their China plants.
Kang said up to 50 per cent of production at these China plants are for mainland-based customers, so the Korean companies will have no choice but to cut output if they cannot import certain materials, parts and equipment into China.
“If the US keeps laying down obstacles to the semiconductor business in China, the only solution for South Korean companies is to invest and produce chips in America,” said Kang, adding that a suitable diversification strategy will be needed.
SK Hynix declined to comment on the US-Japan-Dutch agreement, the details of which have not been disclosed. Samsung Electronics did not respond to emailed requests for comment.
Samsung Electronics has two chip plants in China, a wafer fab in Xian, capital of central Shaanxi province, and a chip packaging plant in Suzhou near Shanghai.
The Xian factory began operations in 2014 as the company’s first overseas memory chip fab, employing about 3,000 workers. It accounts for up to 40 per cent of Samsung’s total NAND flash production, and is estimated to have produced around 100 billion yuan (US$14.8 billion) worth of chips, according to China’s official Xinhua news agency.
Samsung’s Suzhou factory is responsible for assembly and packaging of the die cut from silicon wafers, so the separate chips can be attached to electronic circuit boards.
SK Hynix has three factories in China, two wafer fabs for DRAM and NAND flash chips, and a packaging plant in the southwestern city of Chongqing.
The wafer fab in Wuxi, Jiangsu province, accounts for about half of the company’s total DRAM production, while a fab in Dalian, Liaoning province – which was acquired from Intel in 2020 – manufactures a quarter of its NAND flash production.
The local government in Wuxi was so keen to court SK Hynix that it even built Korean schools and supermarkets, according to local media reports.
“There is no choice for South Korea but to join the chip controls,” said Choo Jae-woo, a professor of Chinese studies at Kyung Hee University in Seoul. “The South Korean semiconductor industry would have difficulty surviving otherwise.”
