South Korea Will Join The Chip 4 Alliance

According to the South China Morning Post, South Korea is facing a complicated balancing act as it finds itself in the middle of an intensifying technology war between the US and China, its largest trading partner in semiconductor chips.

An unnamed South Korean government insider recently told local media that the South Korean government had made an internal decision to join the US-led Chip 4 coalition and was coordinating the right time to announce the decision. Such a decision is in line with the consensus in South Korea that joining the alliance is inevitable for the country, even though it could strain relations with China.

In the long run, analysts say, South Korea must become more competitive in the rapidly changing semiconductor landscape, while in the short term it will be difficult to avoid closer ties with the United States and its dependent Allies.

Experts played down the likelihood that Washington would ask Seoul to impose semiconductor export restrictions on China any time soon, as it has demanded of Japan and the Netherlands. But tighter U.S. export controls on Chinese chipmakers are creating a degree of uncertainty for South Korean companies.

Samsung and SK Hynix, two South Korean semiconductor makers with factories in China, have been granted exemptions from US export restrictions for up to a year, but it is unclear what will happen after the end of the year.

On Tuesday, trade representatives from the two countries held their first working group meeting on export controls in Seoul, where the South Korean government expressed concern about what will happen a year from now. Thea Kendler, assistant secretary of Commerce for export administration, said there would be no sudden or unexpected announcements from South Korean companies next year.

In a report released earlier this month, the Korea International Trade Association (KITA) said South Korea's semiconductor industry was "fundamentally dependent" on the equipment needed by the US and its Allies to produce chips.

"There is a systemic imbalance in the country's semiconductor industry, contrary to its strong competitiveness in producing semiconductor memory, as it is very dependent on imported semiconductor equipment," the report said.

The report found that the localization rate of semiconductor equipment in Korea is around 20 percent. In 2021, 77 percent of South Korea's semiconductor equipment imports came from the United States, Japan and the Netherlands.

The global semiconductor industry is closely intertwined with different countries specialising in different stages of assembly, such as designing, packaging and manufacturing semiconductor chips, with only a few countries capable of making the highly advanced equipment needed for advanced semiconductors.

While the United States excels at designing and building software for semiconductor chips, South Korea is the world's second-largest contract manufacturing market, meaning its firms make chips designed by others. "Korean-made chips almost always require American tools and software," said Chris Miller, an associate professor of international history at Tufts University.

China, on the other hand, is South Korea's largest semiconductor trading partner. According to a KIEP report earlier this year, 43.2 percent of all South Korean semiconductor exports in 2020 went to mainland China and another 18.3 percent to Hong Kong, accounting for 61.5 percent of South Korea's total shipments.

South Korea's semiconductor exports to China increased nearly 13-fold between 2000 and 2021, according to the Korea Chamber of Commerce and Industry.

Yet the growth spurt appears to be over. China is using more domestic semiconductor chips as the industry benefits from government support to establish an independent semiconductor industry.

South Korea's chip exports to China fell 23.3 per cent year-on-year between October 1 and 25.

Kim Yang-paeng, a senior researcher at the Korea Institute of Industrial Economics and Trade, said in a recent interview that China's indigenous technology and mass production system are not mature enough to produce advanced chips, so it still relies on South Korean products and South Korean media Hankook Ilbo.

But once China gets its production system ready, it will further reduce the proportion of imports of South Korean-made semiconductors, hence the need to diversify exports, Kim said. "We need to further increase investment in semiconductor memory, where South Korea currently has the most competitive advantage in the world," Kim told the Hankuk Ilbo.

He also pointed out that Korea needs to strengthen research and development of semiconductor equipment.

"In the short term, we will maintain friendly relations with the three major semiconductor equipment exporting countries through Chip 4, and in the long term, we will increase the localization rate of core equipment by investing [in research and development] in the middle." KITA reported.

South Korean industry analysts, meanwhile, said the US was unlikely to ask Seoul to impose semiconductor export restrictions on China.

The Japanese government is discussing measures to restrict exports of advanced semiconductors and related technologies to China after Washington asked its Allies to implement measures similar to those introduced in early October, Japanese newspaper Nikkei reported.

"Japan mainly exports semiconductor materials, components and equipment, so it can share the same environment with the United States in terms of regulatory policies, but since South Korea's strength in the semiconductor industry lies in manufacturing, South Korea's participation in the U.S. restrictions on semiconductor technology exports to China will have little impact," said Kwon Suk-joon, a chemical engineering professor at Sungkyunkwan University in South Korea.

Mr Kim, from the Korea Institute of Industrial Economics and Trade, said memory, rather than advanced semiconductors, was the industry's main export.

"The United States has requested export restrictions from Japan and the Netherlands. This is because both countries have companies that can make semiconductor equipment without US technology, "Kim told the South China Morning Post, adding that South Korea does not have such technology and relies on imports of such equipment.