[Exclusive] Chinese Sellers' 'Semiconductor Hoarding'... Only SMEs Suffer

Profiteering on Open Markets During Shortages
SMEs Forced to Buy at 20 Times Higher Prices to Meet Product Deadlines

Hoarding and Excess Demand Create Vicious Cycle
MCUs Without Substitutes Command High Prices
Large Corporations Can Trade Directly, but SMEs Must Buy Through Dealers

[Asia Economy Reporter Kwak Min-jae] At a semiconductor distribution company in Guro-gu, Seoul, purchase requests from Chinese sellers are pouring in. "If you have semiconductor stock, sell it; we'll pay generously," emails come in at over 300 per week. Until last year, inquiries via email were at most about 100 per week. An employee of the distribution company said, "Chinese middlemen are hoarding semiconductors in bulk and then reselling them on open markets when supply shortages become severe, making huge profits." He added, "I even saw a small and medium-sized enterprise (SME) purchasing at more than 20 times the list price," and said, "They probably had no choice but to buy semiconductors reluctantly to meet production deadlines."

The semiconductor shortage, which began with a lack of automotive semiconductors, has continued for over a year. Now, the term 'shortage' hardly suffices to describe the situation. SMEs with weak 'buying power' are enduring days that feel more like a nightmare than mere hardship, yet the government has failed to come up with countermeasures.

According to Asia Economy's investigation on the 8th, signs of hoarding by Chinese middle distributors and sellers have been confirmed in various places. The price increase of semiconductors for railway control devices from Texas Instruments (TI), a Nasdaq-listed semiconductor manufacturer, was particularly steep. Another semiconductor distribution agency official said, "The price of microcontroller units (MCUs), which originally cost $6 each, recently rose to about $120, a 20-fold increase." The official added, "Since the COVID-19 pandemic, the semiconductor supply shortage has continued, and supply was not even available in the market; then, starting about six months ago, supply was abundant but suddenly disappeared again repeatedly," and said, "Even employees with over 20 years of experience at semiconductor agencies say this is the first time they've seen such a case." In this situation, SMEs, frightened by the circumstances, buy large quantities at once whenever they get a chance to secure stock, which has led to speculative demand and worsened the situation.

SMEs in the Middlemen's Hoarding... The War to Secure Semiconductors

The hoarding method of Chinese distributors and sellers is 'inventory interception.' They send emails to domestic distribution companies or agencies because once they secure stock, they can easily make money. The already scarce supply becomes even scarcer due to the vicious cycle of hoarding and speculative demand, and prices have soared, causing greater damage to SMEs.

Large corporations can trade directly with semiconductor manufacturers and thus avoid such damage. However, SMEs with small purchase volumes have no choice but to buy through agencies, making them particularly vulnerable to semiconductor hoarding, according to industry insiders. The domestic semiconductor distribution structure involves manufacturers selling to semiconductor agencies, which then sell to SMEs. This distribution structure is inherently vulnerable to hoarding.

Distribution Structure Vulnerable to Hoarding... Component Costs Also Inflated

An official from semiconductor monitoring equipment company A in Yongin, Gyeonggi Province, said, "Large companies can contact semiconductor manufacturers directly to secure semiconductors, but SMEs like us, purchasing in small quantities of a few hundred units, have no choice but to go through agencies."

Especially for microcontroller units (MCUs), for which substitutes cannot be found, the price is whatever the seller demands, according to related companies. MCUs are chips that act as the brain of IT devices and are mainly used in automotive semiconductors. After the automotive semiconductor shortage caused by inaccurate demand forecasts from major automakers, MCUs became prey for Chinese middlemen.

Large companies are somewhat better off. Daedong, the largest agricultural machinery manufacturer in Korea, is purchasing over 70% of its monthly production plan's MCU requirements even amid the MCU shortage. A company official said, "We have long-term contracts with semiconductor manufacturers and pay special attention to inventory management, so our situation is relatively better."

Reference photo

The semiconductor shortage also leads to profiteering on component prices. Industrial robot manufacturer B in the metropolitan area paid more than double the usual purchase price when buying control device parts, which include MCUs, from a Chinese company instead of the Japanese company they used to source from. The Japanese company had no such parts, and when B requested a quote from the Chinese company, an exorbitantly high price was offered.

The president of company B said, "Despite a 15-20% increase in production costs, we continue to produce products because if we don't ship equipment, we risk losing customers," and added, "As a second-tier supplier to large corporations like us, it is difficult to reflect increased component costs in prices, so we have no choice but to bear the losses entirely."

Need for Joint Purchasing and Expansion of Domestic Production Capacity

Despite the situation, the government only offers generic responses. A Ministry of Trade, Industry and Energy official explained, "To strengthen domestic industrial capacity for automotive semiconductors in the long term, we plan to establish a 'National Technology Roadmap for Automotive Semiconductors' within the first half of the year." The official added, "Overall, global automotive semiconductor-related parts companies and agencies are competing to secure more inventory than demand due to the ongoing supply shortage. We will consider support measures linked to the Materials, Parts, and Equipment Supply Response Support Center for small automotive parts companies vulnerable to the semiconductor supply shortage."

Experts suggest joint purchasing through representative associations, organizations, or institutions as an alternative. Professor Kim Tae-hwang of Myongji University's Department of International Trade explained, "To effectively respond to hoarding by Chinese middlemen, SMEs could increase their semiconductor purchasing power in the market through joint purchasing using organizations like the Korea Federation of SMEs." Professor Kim added, "Since semiconductors are important strategic goods, in the long term, it is necessary to enhance domestic production capacity by providing technology and financial support to companies with semiconductor design and manufacturing capabilities to build an automotive semiconductor ecosystem."