Korea’s dilemma: US-led chip alliance or Chinese market?

Some see Korea’s participation in the so-called “Chip 4” alliance as a foregone conclusion

President Yoon Suk-yeol gives a speech after a tour of Samsung Electronics’ semiconductor plant in Pyeongtaek on May 20, with US President Joe Biden. (Yonhap News)

The South Korean government is reportedly considering whether to join a US-led semiconductor alliance, leading to more anxiety at local chipmakers such as Samsung Electronics and SK Hynix.

Considering that the so-called “Chip 4” alliance would be aimed at excluding China, which has become the biggest export market for Korean semiconductors, as well as a major production base for Korean chipmakers, there are concerns that joining the alliance could shake up the ecosystem of the Korean semiconductor industry.

A keen debate is underway among both experts and government officials about whether joining the alliance is an inevitable choice or something that should be weighed carefully.

South Korea’s presidential office said on Wednesday that it’s working on its position in regard to the Chip 4 alliance.

“We’re coming up with a design of our own. The current discussion is approaching the issue from several angles, such as what would serve our interests and what aspects would be helpful, and whether this should be left to the private sector or whether the government should be involved,” a senior official in the presidential office told the Hankyoreh.

“Our decision will be made to serve the national interest, while giving due consideration to China’s concerns,” another senior official said, suggesting that the government will meet the US’ deadline of late August for deciding whether or not to join.

“The discussion has just begun at this stage. This isn’t a decision that can be made by a single government ministry,” said an official from the Ministry of Trade, Industry and Energy.

The US proposed the Chip 4 alliance to Korea, Japan and Taiwan back in March, with the goal of curbing China’s growing capabilities as a chipmaker. The US would like to build a cooperative platform for the semiconductor supply chain that will combine the US’ technological prowess, Japan’s materials and parts, and Korea and Taiwan’s manufacturing capabilities.

The US recently asked Korea to confirm by the end of August whether it will attend the first working-level meeting to discuss the Chip 4 alliance.

Korea’s chipmakers seem disturbed by the growing likelihood that the Chip 4 alliance will become a reality. While they support the idea of cooperating with the US and other big players in the semiconductor market, the problem is how to calibrate relations with China.

China accounts for 40 percent of imports and exports in Korea’s semiconductor industry — which rises to 60 percent if Hong Kong is included. Korea’s semiconductor trade with China was worth US$76 billion last year, more than triple what it was a decade ago.

Exports to China account for 30 percent of total sales for both Samsung Electronics and SK Hynix, the world’s No. 1 and No. 2 manufacturers of memory chips, respectively.

Recently, Korean chipmakers have been growing more dependent on China not only for demand but also for production. Samsung Electronics has plants in Xi’an and Suzhou, while SK Hynix has plants in Wuxi, Chongqing and Dalian.

Strained relations with China would certainly have an impact not only on exports but also on production.

“The domestic semiconductor industry’s trade with ASEAN, Taiwan, the US and Japan is structurally centered around China. After Japan imposed export controls on Korea, Korean companies have increased imports of Chinese materials, which is one example of Korea’s growing reliance on China,” the Hyundai Research Institute said in a recent report.

Indeed, China has been toughening its stance while revealing its irritation about the Chip 4 alliance. Foreign Ministry spokesperson Zhao Lijian criticized the US on Tuesday for politicizing business issues and expressed China’s hope that “relevant parties will stay objective and fair [and] approach issues in light of their own long-term interests.”

Considering that Japan and Taiwan are enthusiastic about taking part in the Chip 4 alliance while Korea remains ambivalent, Zhao’s remarks seem aimed at pressuring Korea to stay out of the alliance.

A senior official in the South Korean government responded to the Chinese government’s attitude, saying: “Even the US has explicitly said that [the Chip 4 alliance] isn’t supposed to exclude China. China is overreacting in its state-run media. We need to cooperate on semiconductors not only with the US but with China as well.”

Experts argue that joining the Chip 4 alliance is a foregone conclusion.

“Since the US possesses a large amount of basic semiconductor technology, it could use technology controls to affect semiconductor production in other countries. In the worst-case scenario, countries that don’t join a US-led semiconductor alliance might find themselves unable to manufacture semiconductors,” said Kim Yang-paeng, a senior researcher at the Korea Institute for Industrial Economics and Trade.

“Unless we join the Chip 4 alliance, we won’t be able to receive semiconductor equipment, parts or materials from the US or Japan. Without that equipment, Samsung and SK won’t even be able to make chips at their Chinese factories,” said Park Jae-geun, head of the Korean Society of Semiconductor and Display Technology and a professor of electronic engineering at Hanyang University.

Since last year, SK Hynix has been struggling to upgrade processes at its memory semiconductor plant in China because US’ export controls prevent it from importing the extreme ultraviolet lithography equipment needed for its ultrafine processes.

“If you aren’t able to upgrade your processes in time, you end up falling behind in the competition with other memory chip companies,” a source in the semiconductor industry said.

Concerns are also being raised that Korea is being swept along by a US-led drive to decouple from China without adequate preparation or thoughtful consideration of key industries’ ecosystems.

“Semiconductor companies may find themselves forced to radically revise their strategy for China as conflict between the US and China intensifies over the Chip 4 alliance and other factors. The first thing the government should do is carefully review how this will impact the global division of labor in the semiconductor industry, in which Korean companies have played an instrumental role,” said a senior executive at one semiconductor producer.

“Like it or not, China is a massive market, and abandoning it isn’t an option. We need to keep cooperating economically [with China] where possible and making progress on that,” SK Group Chairman Chey Tae-won said in a recent press conference.

Some voices inside the government are calling for caution, including Lee Jong-ho, minister of science and ICT.

The question of whether Korea will join the Chip 4 alliance “will be decided in a manner that accords to our national interest,” said Lee. “While the discussion is currently limited to semiconductors, we need to be prudent because other industries could be impacted if a problem arises. We need to make a cool-headed appraisal of how this will benefit us.”

By Kim Hoe-seung, senior staff writer; Kim Mi-na, staff reporter; Chung In-seon; Kim Young-bae, senior staff writer; Choi Hyun-june, Beijing correspondent

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