South Korea gets tough on tech leaks to China

For one Chinese semiconductor executive, the easiest way to recruit South Korean engineers is to hang around outside factory gates.

“I just go to foreign companies’ fabs and stand at the gate, asking them to come to our own production lines to do some temporary work and earn some extra money,” the executive, who did not wish to be named, told the Financial Times.

“The ones I visit more often are the fabs of TSMC, Samsung and SK Hynix, as well as the office buildings of foreign equipment suppliers,” the executive added. “Their commuting time is relatively fixed, and engineers have free time to help after they get off work.”

The executive’s willingness to engage in unorthodox hiring practices illustrates an intensifying campaign by Chinese companies to accumulate South Korean expertise in critical technologies ranging from semiconductors to electric-car batteries and industries including displays and shipbuilding.

Yeo Han-koo, who served as trade minister in Seoul until May 2021, said efforts to acquire South Korean technology have become more aggressive as Beijing seeks to mitigate the damage from Washington’s own moves to curtail Chinese access to American technology and expertise.

“The US tightening controls on China led Chinese companies to escalate their charm offensive towards Korean engineers and researchers, using both legal and illegal means,” said Yeo.

A headhunter for Chinese foundries told the FT: “Under the new sanctions imposed by the US, it has become very troublesome to recruit people who have been educated or employed in the US. So alternative sources of talent have become Europe, Japan and South Korea.”

Experts note that what is described in South Korea as “tech leakage” can include the perfectly legal hiring of foreign talent. South Korea itself spent many decades accumulating industrial knowhow from western and Japanese companies as it transformed from developing country to technological powerhouse.

But there are also illegal hiring practices, patent violations, espionage and theft. According to South Korea’s National Intelligence Service, the number of confirmed leaks of “national core technologies” has increased steadily from three cases in 2017 to five each in 2018 and 2019, to nine in 2020 and 10 in 2021.

Figures released this month by the NIS show there were three leaks of national core technologies in the first quarter of 2023, with one each from the semiconductor, display and carmaking sectors. All three came from within large companies.

Seoul takes the issue so seriously that it is creating a database of chip engineers working for South Korean companies in order to monitor their travel in and out of the country.

The government has also established several new investigatory bodies to combat the leaks, passed legislation to toughen punishments and made it easier to report suspected violations.

Those measures appear to be bearing fruit: there were twice as many arrests relating to tech leakage in the first quarter of 2023 as there were during the same period last year.

But Hong Seok-joon, a lawmaker from South Korea’s ruling conservative People Power party, said even tougher rules and penalties were still required.

“The number of tech leak cases is increasing, but punishment for perpetrators remains weak and we still lack measures to prevent them,” said Hong. “Only about 6 per cent of defendants accused of tech leakage [in South Korea] are convicted because it is so difficult to prove.”

Ben Forney, a researcher at Seoul National University specialising in industrial espionage issues, said the majority of cases involved South Korean engineers, especially retirees, being hired by Chinese companies on salaries three or four times higher than those they were on before.

In some cases, South Korean rules requiring engineers not to join a foreign rival within two years of leaving their employment were avoided by the creation of ostensibly unrelated “paper companies” in South Korea or Taiwan that would pay the engineers handsomely until they could be officially recruited.

“In the US, the most common way for China to acquire expertise is to lure or coerce Chinese engineers who have been based in the US,” said Forney. “But in Korea, the problem is of homegrown engineers going abroad. That is why it tends to be framed here as ‘leakage’ rather than espionage or theft.”

The pressure on South Korean companies is especially acute in the semiconductor industry.

In February, seven people including former employees of SEMES, a subsidiary of Samsung Electronics specialising in the production of wafer cleaning equipment, were given prison sentences for transferring stolen technologies to a Chinese company.

“Several employees quit the company to set up their own and leaked the technologies to China via a Chinese broker,” said Lee Dong-hwan, who served as a state investigator on the SEMES case and is now working as a patent attorney at WeFocus, a Seoul-based patent law firm.

“The wafer cleaning equipment parts were exported to the Chinese firm, which assembled the parts on the defendants’ advice and sold the wafer cleaning equipment to other Chinese chipmaking plants.”

Lim Hyeong-joo, a partner at law firm Yulchon in Seoul, said Chinese companies were also keen to acquire South Korean cathode technology for the production of high-density nickel-rich batteries.

Nor are the South Koreans worried exclusively about tech leakage to China.

“There is concern that the US can take our technology because their Chips Act allows the US to inspect our companies’ plants if it is necessary for their security,” said People Power’s Hong.

Authorities in Seoul have been giving “unofficial guidance” to South Korean battery companies with joint ventures in the US, asking them “to allow only Korean staff to deal with major technologies in the JV plants”, said Lee Seok-hee of law firm Kim & Chang.

“The Koreans are not just going to hand over their technologies to the US,” said Forney. “At the same time, the more that the two countries’ tech ecosystems become intertwined, the more that Korean vulnerabilities become American vulnerabilities, too.”