China Dependent on Korean Semiconductors... 'Shield' to Prevent Economic Retaliation [Korea-China Supply Chain Analysis]

Supply Chain Analysis Report ①Semiconductors
China Imports Half of Memory Semiconductors from Korea... US and Europe Are Technology Leaders, Minimal Impact Even if China Is Excluded from Supply Chain

[Asia Economy Sejong=Reporter Kwon Haeyoung] The Indo-Pacific Economic Framework (IPEF), a US-led 'anti-China' supply chain alliance, has been launched. Although it is superficially described as an economic security cooperation body sharing the values of liberal democracy and market economy, there is no disagreement that it is essentially a united front to contain China. Given that our trade structure depends on exports to China by 25%, joining the US-led anti-China supply chain restructuring could deal a significant blow to the Korean economy. Especially since all industries including semiconductors, batteries, and bio are intricately intertwined with China like a spider web, there are many concerns about the possibility of economic retaliation from China due to supply chain decoupling. Accordingly, this article analyzes the current supply chain status between Korea and China in major industries and examines the impacts and challenges following the launch of IPEF.

Semiconductors are an industry where China's influence on the global supply chain is relatively small. The US, which aims to curb China's 'semiconductor rise,' holds overwhelming core technologies in equipment and materials, so even if China is excluded from the supply chain, the industry is expected to suffer little damage, according to industry analysis. The dependence of China on Korean companies, which dominate the global memory semiconductor market, is also very high.

According to the Federation of Korean Industries on the 9th, semiconductors imported by Korea from China in 2020 amounted to $17.93 billion, accounting for 39.5% of total semiconductor imports.

Although Korea's dependence on semiconductor imports from China appears high, it is difficult to conclude so definitively. This is because a significant portion of the volume is produced locally by Korean companies. Samsung Electronics and SK Hynix produce a substantial amount of semiconductors up to the front-end process (wafer processing) stage at their factories in China, then bring them to Korea for back-end processing (wafer cutting and packaging), and this volume is recorded as imports.

It is necessary to look at exports to China. According to the Korea International Trade Association, Korea exported semiconductors worth $95.46 billion worldwide in 2020, of which $41.2 billion, or 43.2%, was exported to China. If China immediately reduces or stops importing Korean semiconductors, Korean companies would suffer significant damage, but this is somewhat unrealistic. This is because China depends on Korea for half of its total memory semiconductor imports. China imported $95.6 billion worth of memory semiconductors in 2020, of which $44.8 billion, or 46.9%, came from Korea. As the whole world experiences a 'semiconductor shortage,' China is in a situation where it needs cooperation with Korea for stable semiconductor supply and technological self-reliance.

However, China holds a large share in the supply chain for basic raw materials needed for semiconductor manufacturing, so experts advise that supply chain diversification is necessary in the mid to long term. Especially gallium (95.7%), tungsten (83.6%), and magnesium (82%), where China has a high production share, are items that require efforts to diversify supply chains to avoid damage from unilateral supply suspension by China. Kim Yangpaeng, a senior researcher at the Industrial Research Institute's New Industry Division, said, "Although we depend on China for some semiconductor materials, if China restricts exports, it would lead to semiconductor production disruptions and global price increases, making it difficult for China to limit material exports. However, in the mid to long term, diversification of core material supply chains is absolutely necessary."

Above all, in the semiconductor market, the US and Europe are technological powerhouses dominating the equipment and materials sectors, so China is not expected to pose a significant risk in the supply chain. Without semiconductor equipment, even if enormous costs are invested to develop ultra-fine process technology, mass production of semiconductors is impossible. Looking at the global semiconductor equipment market share, the top five companies?US-based Applied Materials (17.7%), Netherlands-based ASML (16.7%), US-based Lam Research (12.9%), Japan-based Tokyo Electron (12.3%), and US-based KLA (5.9%)?account for a total of 65.5%. In the semiconductor materials sector, Japan, the US, and Korea still hold 50% market share, while China accounts for about 1%.

The US raising its level of containment against China based on its advanced semiconductor technology superiority could be an opportunity for Korea to outpace China's pursuit. Previously, the US blocked the acquisition of Korea's MagnaChip by a Chinese private equity fund citing national security, and repeatedly opposed the introduction of advanced equipment to SK Hynix's Wuxi plant in China. Rather, it is suggested that Korea should leverage strengthened Korea-US semiconductor cooperation to reduce production costs in the US, enhance technological collaboration with the US, and secure technological superiority over competitors such as Taiwan and Japan.