Chinese chip industry set to benefit from Tokyo export controls
The latest front line in the trade dispute between Japan and South Korea is a toxic one. “If you sniff it, you die,” said one tech expert of the hydrogen fluoride used for cleaning and etching the tiny silicon wafers used in computer chips.
The material is at the centre of an escalating stand-off over compensation for wartime forced labour that has seen Japan impose increasing export controls on its neighbour. Tokyo insists that all claims of forced labour during Japan’s colonial rule over Korea were settled in a 1965 treaty, but last year South Korean courts ruled that the treaty did not apply to individual cases, returning the highly sensitive issue back to the fore.
This month Tokyo, which has a dominant global market position in the electronics manufacturing industry, moved to restrict exports of hydrogen fluoride, as well as fluorinated polyamide and photoresists — which are among the scores of materials and components critical to South Korean electronics manufacturing.
Cutting or delaying supplies of the chemicals threatens to choke production in South Korea and cause chaos in its highest-value export industry. But it also opens up a new trading frontier, forcing the country’s tech giants to turn to China in an urgent search for replacement sources.
The change has the potential to breathe fresh life into Beijing’s decades-long attempt to secure self-dependency in computer chips — an effort that has picked up pace under Xi Jinping, the Chinese president who has described foreign reliance on technology as his country’s “greatest hidden danger”, and also in light of the ongoing US-China trade war.
“For risk-management purposes, these big [Korean] companies need to be looking somewhere else . . . It does open a door [to Chinese suppliers], that is for sure,” said Sanjeev Rana, a Seoul-based analyst with the consultancy CLSA.
The turn to China
Samsung Electronics, the world’s biggest producer of memory chips, is among the companies to have started testing China-made substitutes for the Japanese etching gas since the spat with Japan broke out, according to a person familiar with matter.
But Chinese chipmaking is not without its problems. While the size and technical prowess of its industry continues to develop rapidly, the country’s top manufacturers remain years behind rivals from the US, Taiwan and South Korea in making the most leading-edge chips.
“Despite 40 years of investment and espionage, [China] is unable to make advanced semiconductors . . . only 16 per cent of the semiconductors used in China are produced in-country, and only half of these are made by Chinese firms,” according to James Lewis, director of the technology policy programme at the Center for Strategic and International Studies, a US think-tank.
Chip sector specialists in Seoul also noted that the Chinese companies might not currently be able to produce products like etching gas at the same quality as Japanese groups, the world’s top manufacturers of such chemicals.
“For semiconductor companies, production yield is everything. That is why they are very conservative, or reluctant, to switch their process chemical vendors [from Japan]. A slight change in the material composition, or recipe, might affect the output,” said Macquarie analyst Daniel Kim.
Meanwhile, there also is a perceived security risk for countries that are reliant on China’s supply chain, given the country’s record of problems with intellectual property protection and forced technology transfers. These are concerns not only for the chipmakers who supply US companies such as Amazon, Apple and Microsoft, but also for governments in Seoul and Washington.
“Helping Korea or Japan or Taiwan protect that technology is really a national security interest of the United States,” said one senior western diplomat.
Strategically and longer term, however, the shift towards China has the potential to “put Korea more in China’s camp, versus Japan, which is more clearly in the US camp”, said Mark Newman, a Bernstein analyst.
“It can only benefit China because they are developing their entire semiconductor supply chain. This would help them in that endeavour.”
The export restrictions on chip materials may be just the beginning. If Tokyo makes good on its threat to remove South Korea from its “white list” of trusted trade partners, South Korea’s supply-chain woes could quickly extend into a host of other sectors.
Japan’s economy ministry is collating a huge number of public comments on the white list proposal, thought to number in the tens of thousands. According to officials familiar with the process, the earliest date for a cabinet decision is likely to be August 2.
If Tokyo forges ahead with the proposal, South Korean companies will be obliged to seek individual approvals for 857 of the 1,120 strategic materials they import from Japan, according to a research note from Korea Investment & Securities.
While Japan has not said it would completely cut off supplies, there are fears that the import process could take months, disrupting production across the tech supply chain.
Beyond semiconductors, Japanese suppliers have significant market shares of components and materials used in high-end smartphones as well as high-end display and consumer electronics, according to CLSA research.
Concern is particularly high in the electronics sector, but Park Chong-hoon, head of South Korea research at Standard Chartered, said other major export industries such as petrochemicals, refineries, hydrogen carmakers and machinery makers also “will be hit hard by the Japanese move”.
Goldman Sachs estimates that as much as 97 per cent of Korea’s imports from Japan — $52.2bn in imports last year — could experience temporary disruptions.
Additional reporting by Robin Harding in Tokyo, Lucy Hornby in Beijing and Song Jung-a in Seoul