US chip battle with China catches South Korea in the crossfire

A memory chip plant located halfway between Seoul and Beijing illustrates the tough choices South Korean business leaders and policymakers face as they try to limit the damage from the US technology war with China.

South Korean chip maker SK Hynix bought its Dalian plant in northeast China from Intel in a US$9 billion deal in 2020 that was supposed to help the world’s No. 2 memory maker shore up capacity and expand into cutting-edge chips in the world’s largest chip market. Instead, the factory has ensnared SK Hynix in a complex web of US restrictions aimed at limiting China’s access to materials and equipment considered key to dominating the battlegrounds and industries of the future.

In the years since the deal closed, SK Hynix has remained in limbo, unable to commit to big capex plans at the factory. The company had quickly built a shell for a new fab at the back of site, but it remains unclear if it contains any equipment to produce chips at all, let alone the advanced semiconductors that might secure solid returns on its hefty investment. Intel’s logo still sits atop the gleaming marine-blue glass façade of the factory complex, with the final payment for the plant due in 2025.

The company appeared to find a solution to its predicament in the fall after the US gave SK Hynix and Samsung Electronics indefinite waivers to keep bringing some high-end equipment into China. South Korea’s government has attributed those concessions in part to President Yoon Suk Yeol’s charm offensive during his meeting with US President Joe Biden, aided by promises of investment and a surprise rendition of “American Pie.” The US side was also likely swayed by the need to keep major tech firms supplied with chips.

But there is no guarantee those waivers will stay in place, especially if Republican front runner Donald Trump wins November’s US presidential election and returns to the White House.

“The SK Hynix plant in Dalian captures the difficult position South Korea chip makers are in as a result of US restrictions,” said Masahiro Wakasugi at Bloomberg Intelligence. “Even with the latest US concessions it still probably doesn’t make sense for SK Hynix to expand capacity in Dalian given uncertainty over the US presidential election and US policy after that.”

South Korea’s economy is heavily reliant on the semiconductor sector to drive growth. That makes it especially vulnerable to Washington’s drive to cut supply chain dependence on China and constrain Beijing’s access to key chip technology. The International Monetary Fund has warned that South Korea would be the largest potential loser in the Asia-Pacific region if the two superpowers’ economies were to decouple.