As the U.S. attempts to shut China out of the race to develop advanced semiconductors, leading South Korean chipmakers with large production bases in China have found themselves caught in the crossfire.

With the fate of their businesses in China — their biggest market — becoming hazier, South Korean makers such are Samsung Electronics and SK Hynix are expected to beef up cooperation with Japan to maintain a competitive edge and get through the tough times ahead.

During a meeting with Prime Minister Fumio Kishida last month, Kyung Kye-hyun, the head of Samsung's device solutions division, shared the company's intention to build a research and development facility for semiconductors in Japan, with the firm reportedly planning to make a ¥30 billion ($215.9 million) investment.

The meeting garnered much attention, since it was also attended by other top officials from major semiconductor firms, including Taiwan Semiconductor Manufacturing Company, Intel and Micron, that also told Kishida their plan to boost cooperation with Japan.

On the political level, Japan and South Korea — which are working to mend ties that have been strained by the issue of wartime labor — agreed to reinforce cooperation on chip supply chains during a meeting between Kishida and South Korean President Yoon Suk-yeol in May.

“What’s important is that it benefits both sides, so investments need to be made in two directions,” industry minister Yasutoshi Nishimura said during a news conference last month.

Even though diplomatic relations between South Korea and Japan have been improving, Samsung's move to establish a chip research and development center in Japan is primarily driven by the changing business environment, rather than politics, some industry observers said.

“For South Korean chipmakers, the outlook for their businesses in China is increasingly becoming clouded,” said Hidehiko Mukoyama, a part-time lecturer at Chuo University well-versed in the South Korean economy.

Samsung has semiconductor manufacturing facilities in Xi'an, China's Shaanxi province, that account for about 40% of its total NAND flash memory production. But the U.S. CHIPS Act is complicating its business plans, as the law stipulates that recipients of subsidies for the building of chip production bases in the U.S. must restrict investments in China.

Samsung is planning to launch a new production base in Texas with the help of grants from the U.S. government. However, that will restrict Samsung from investing in China, making it difficult for the firm to continue business there, as chip manufacturing entails massive investments.

Moreover, the U.S. has introduced export control measures to prevent chipmakers in China from obtaining items necessary for advanced semiconductor production. Even though Samsung and SK Hynix have apparently been granted a one-year waiver, the export curbs are expected to have a significant effect on their business plans.

Washington has been expanding its efforts to contain China’s ambitions on developing advanced chips that can be used for military applications and key technologies, such as supercomputers and artificial intelligence.

“Various recent developments are based on the U.S.’s attempt to restructure supply chains that won’t depend on China,” Mukoyama said.

If the business restrictions in China go on for some time, Samsung may seriously consider pulling the plug on its Chinese business, although that would diminish Samsung’s global presence and competitiveness, Mukoyama said.

Samsung has witnessed the rapid rise of domestic competitors in the Chinese market, which have made advances in areas ranging from semiconductors to displays and smartphones. And Beijing has been pouring money into domestic chipmaking in an attempt to boost advanced production.

As such, Samsung and the South Korean government are looking to deepen ties with Japan so they can collaborate more closely on developing products and shore up supply chains, experts said.

When it comes to state-of-art chip production technology, Japan lags far behind the world's leading semiconductor-makers. Japanese chipmakers dominated the global market in the 1980s, but their prominence and capabilities have declined over the past few decades in line with the rise of South Korean and Taiwanese companies.

For example, Japanese firms do not have the ability to produce cutting-edge semiconductors, such as those that are 5 nanometers in size or smaller. Chips are more advanced — but also more technologically challenging — as the nanometer size gets smaller.

Nonetheless, Japanese suppliers produce equipment and chemicals that are essential to chip manufacturing, enjoying a dominant share of the global market.

“I think this is more about Samsung thinking that reinforcing technological collaboration with Japanese suppliers is key, rather than as a result of an improvement in South Korea-Japan relations,” said Tatsuro Saito, a researcher specializing in chip technology at Mitsubishi Research Institute.

On top of that, the Japanese government, which wants to draw leading chip producers to the country in order to turn it into a semiconductor development and production hub, is offering subsidies for them, so there is a dual benefit, Saito added.

For Japanese suppliers, Samsung’s new research and development facility would provide them with more opportunities to work with a company possessing some of the most advanced chip technology.

“That would enable Japanese chip material- and chemical-makers as well as equipment manufacturers to know what it takes (to develop cutting-edge semiconductors) and what they should focus on,” Saito said.

Although Japan aims to reinvigorate the domestic chip industry and boost its competitive edge, it will be challenging to do so alone.

This is why “(the Japanese government) seems to have shifted its strategy to team up with leading foreign chipmakers, as they must be thinking that reviving Japan’s chip sector cannot be done without their help,” said Akihiro Morishige, another researcher at Mitsubishi Research Institute.

To further underline South Korea's strength in the sector, Seoul aims to create the world’s biggest semiconductor cluster near the capital. In March, Samsung announced that it will be investing about 300 trillion won (¥31.9 trillion; $230 billion) over about 20 years to boost its production capacity in the country, with foreign suppliers also unveiling plans to build research and development facilities nearby.

With Japan and South Korea seeking further collaboration on chips, Japanese firms will likely invest more in South Korea.

“I think Japanese suppliers will also be increasing production in South Korea,” Mukoyama said.

By: DocMemory
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