S.Korean chips’ hefty reliance on China, US poses risk to national economy

[beijingwalker]

S.Korean chips’ hefty reliance on China, US poses risk to national economy​

May 29 2023

An employee at a Korean chipmaker inspects a wafer

South Korea’s semiconductor industry is more vulnerable to economic and industrial shifts in its key export markets than those of its rivals Taiwan and Japan due to its hefty reliance on China and the US, as well as smartphones and data centers, the country’s central bank said on Monday.

According to the Bank of Korea’s latest economic outlook report for May, Korea’s exports have been 1.9 times more volatile than Taiwan’s and 2.7 times more than Japan’s in the past decade in terms of value.

Such a high chip export volatility stems mainly from the Korean chip industry’s heavy dependence on only a few markets such as China and the US, as well as memory chips for smartphones and data centers, making the Korean chip industry more susceptible to economic and industrial changes in its key export markets, report found.

The key chip export markets’ economic slowdown and weakening dynamic random access memory chip demand has eventually led to a 40% fall in Korea’s chip exports this year, posing a big threat to the export-reliant economy.

To shore up the country’s main growth driver, Korea must diversify its chip export markets, the Bank of Korea recommended in the report.

A container port in Korea

HEAVY RELIANCE ON US, CHINA, MEMORY
By country, Korea shipped 55% of its entire semiconductor exports to China in 2022, followed by 12% to Vietnam, 9% to Taiwan and 7% to the US, according to the BOK report.

Korea exports its chips as intermediate goods to these countries, where finished chip products are produced for smartphones, PCs and data center servers for own consumption or sale to third countries.

More than 40% of Korea-made chips were used to produce mobile devices mainly smartphones, and 20.6% were used in data center servers mainly by US big tech companies.

This shows more than 60% of Korean chips were applied to smartphones and data center servers.

By chip type, 72.3% of non-memory chips, which accounted for 44% of Korea’s total chip exports as of 2021, were used in mobile devices, while 39% of memory chips, which took the rest 56%, were employed in servers.

SK Hynix's chip factory in Wuxi, China

Korea’s biggest rival Taiwan in chip export, however, ships a more balanced mix of chip products to more diverse countries, protecting the Asian chip powerhouse from volatile market conditions.

It exports not only memory chips for smartphones and servers but also non-memory chips for EV batteries and appliances.

SOFTENING US, CHINA'S DEMAND FOR KOREAN CHIPS

Korea’s heavy reliance on the US data center server market and China’s smartphones exposes Korea to a high economic risk.

Outbound shipments of Korean chips have been on a downward spiral since August last year after reversing from the on-year rising course. They shrunk 24.5% on-year in the fourth quarter of last year, 39.2% in the first quarter of this year and 40.5% in April.


The main culprit for the Korean chip export slump is declining Korean chip demand from China.

Korea delivered 55% of its total outbound chip shipments to China last year, 12 percentage points lower than 67% in 2018.

Bank of Korea Governor Rhee Chang-yong (File photo, courtesy of Yonhap)

As the world’s second-biggest economy is seeking to reduce its reliance on chip imports, Korea’s chip shipments to China are expected to continue falling even after Beijing’s full reopening of its economy early this year.

Bank of Korea Governor Rhee Chang-yong also noted China’s increasing capability of producing intermediate goods as one of the main causes for Korea’s falling exports to China, its biggest trading partner.

He said the more pressing matter is how to enhance the country’s export competitiveness so that it can maintain a healthy level of exports to China.


The softening memory chip demand from the US is also blamed for Korea’s export downturn.

Korea’s outbound shipments of chips to the US plunged 68% in April, more than those to China and Vietnam, due to a contraction in US Big Tech companies’ investments in data centers amid the lingering economic uncertainty.

The country's demand for mobile devices is also due to head to the south after peaking during the pandemic, boding ill for Korean memory chip sales.

EXPAND NON-MEMORY EXPORTS, EXPLORE NEW MARKETS

Korea must diversify its chip export markets to lower its export volatility, according to the central bank’s report.

Especially, Asia’s fourth-largest economy, home to the world’s No.1 memory chip maker Samsung Electronics Co., should expand exports of non-memory chips with less price fluctuation while producing more system chips for automotive and artificial intelligence uses.

The ongoing US-China chip war poses a threat to Korean chipmakers

New market exploration should also continue, the central bank said.

Vietnam has emerged as an alternative market and manufacturing base to China amid the intensifying US-China rivalry thanks to its still cheap labor cost and its proximity to Beijing.

India is also floated as another global chip manufacturing hub.

Amid the fierce US-China chip war, Korea should come up with various measures to cope with any fallouts that could have grave impacts on its chipmakers’ production and investment, the report said.

The US has introduced the Chips and Science Act as part of its efforts to keep China’s growing clout in the semiconductor industry in check and strengthen US companies’ competitiveness.

Under the guidelines of the $53 billion CHIPS Act, its beneficiaries including Samsung Electronics and SK Hynix Inc. cannot make new, high-tech investments in China, which is the Korean chip makers’ key market.

In retaliation for the US CHIPS Act, China recently banned its key infrastructure operators from buying chips from US chipmaker Micron Technology Inc., further complicating Korea’s position between its close trading and military allies.

S.Korean chips’ heavy reliance on China, US poses risk to national economy - KED Global

South Korea’s semiconductor industry is more vulnerable to economic and industrial shifts in its key export markets than those of its rivals Taiwan and J

www.kedglobal.com