‘Sense of crisis’ has gripped South Korean chip industry, warns minister

South Korea’s science minister has said a “sense of crisis” is gripping the country’s semiconductor industry, as the east Asian nation braces for greater challenges from the US and China in an intensifying global chip war.

There is growing fear among Korean officials and industry executives that the country will shed production facilities as domestic chipmakers, lured by subsidies and tax incentives, rush to build semiconductor plants in the US. China is also catching up fast in the memory chip sector on the back of generous state funding.

Lee Jong-ho, minister of science and information communications technology, and a renowned semiconductor expert, told the Financial Times that legislation passed last month had “laid the legal groundwork to support the semiconductor industry against severe competition from countries like the US, China, Japan [and in] Europe and Taiwan”.

“It reflects a sense of crisis about our competitiveness on the global stage and the act is designed to strengthen our competitiveness in supply chain and security,” said Lee.

“Korean companies have received relatively smaller tax benefits from the government and suffered from a lack of talent compared with China, the US and Taiwan, so we addressed the problems with the legislation.”

Washington is using $52bn in grants outlined in the Chips and Science Act to entice global chipmakers to expand their manufacturing in the US. But the legislation also includes “guardrails” that prohibit recipients of US federal funding from expanding or upgrading their advanced chip capacity in China for 10 years.

Last week, South Korea’s trade minister Ahn Duk-geun told the Financial Times that “our semiconductor industry has a lot of concerns about what the US government is doing these days”. He acknowledged disagreements between Seoul and Washington over the restrictions on the transfer of cutting-edge manufacturing capabilities to facilities in China.

South Korea remains the world’s biggest memory chip producer, with Samsung and SK Hynix together controlling about 70 per cent of the global Dram market and more than half of the Nand flash market.

Dram chips enable short-term storage for graphic, mobile and server chips, while Nand chips allow for files and data to be stored without power.

But the Korean chipmakers’ technological edge over US rival Micron in the Dram business appears to be narrowing, while Chinese chipmakers such as YMTC are expanding their market share in the Nand flash market. Apple said this month that it was “evaluating sourcing from YMTC for Nand chips to be used in some iPhones sold in China”.

“The sense of crisis and anxiety over our industry’s competitiveness is greater than ever,” said Kim Yang-paeng, senior researcher at the Korea Institute for Industrial Economics and Trade. “There is a concern that the country’s role in the global supply chain could be threatened as Korean chipmakers flock to the US.”

James Lim, an analyst at US hedge fund Dalton Investments, said: “The volume that YMTC supplies to Apple will be small but it shows that China is catching up fast in terms of technology and could be a threat to South Korean chipmakers.”

Industry officials want the South Korean government to provide more support for domestic chipmakers as the US, China and Europe boost investment in the sector.

President Yoon Suk-yeol, who said semiconductors “determine the fate of the South Korean economy”, has promised greater backing for the industry. But two important bills aimed at bolstering it, known as the K-Chips Acts, are still pending in parliament.

The Yoon administration, which assumed office in May, has expanded tax breaks and reduced red tape. It also intends to provide funding for essential infrastructure for chip production facilities such as electricity and water supply.

It wants to develop large “chip clusters” that will gather production and research and development and attract foreign chipmakers to Korea.

“The domestic chip market is not big, so companies need to set their sights on the global market to generate profits,” said Lee.

Addressing the “lack of talent” referred to by Lee, the government plans to train 150,000 people over 10 years to boost the semiconductor workforce.

But the chip clusters have been held up by environmental issues and problems securing permits. They are also unlikely to satisfy US officials, who worry that too many of the world’s chips are already produced in geopolitical hotspots across east Asia.

Analysts also noted that much of the R&D being conducted by Korean companies on next-generation semiconductor technologies was taking place in the US.

“The South Korean semiconductor industry is worried that they could be overtaken by promising new competitors, just as they overtook others in the past,” said Burm Jin-wook, professor of electronic engineering at Sogang University in Seoul.