[US Midterm Elections] Domestic Companies "Concerned About Impact Due to Strengthened China Containment" (Comprehensive)

No Change Expected in IRA's 'Domestic EV Preference' Clause
Battery Industry Faces Inevitable Acceleration in Supply Chain Changes Due to IRA
Careful Watch Amid Concerns Over Worsening Korean Semiconductor Business in China

President Joe Biden of the United States

[Asia Economy reporters Choi Dae-yeol, Jung Dong-hoon, Kim Pyeong-hwa] As the results of the U.S. midterm elections enter the final stages, the domestic industrial sector is also on high alert for changes in the future landscape. The U.S. is approaching fields considered future advanced industries such as semiconductors, electric vehicles, and batteries from a security perspective, and these are intertwined with domestic political and governmental currents. Despite the conflicts between the ruling and opposition parties, the prevailing view is that the trend of putting the country first will only intensify rather than change, so Korean companies are actively calculating their strategies.

The Inflation Reduction Act (IRA), which significantly affects domestic automobile companies, is expected to remain largely unchanged. Although there are considerable differences in opinions regarding some aspects such as tax increases, there is little opposition even from the opposition party concerning discriminatory provisions against foreign electric vehicles directly related to Korea. U.S. President Joe Biden has rather emphasized as a major achievement that foreign companies have invested in the U.S. under the IRA, leading to job creation.

Lee Hang-gu, a research fellow at the Korea Automotive Research Institute, said on the 10th, "Regardless of the election results, there is no reason to revise the provisions that benefit domestically produced electric vehicles," adding, "Since trade issues with the U.S. are linked not only to economic logic but also to political and security issues, given recent trends, the possibility of a grace period for Korean companies cannot be ruled out."

Song Seon-jae, a researcher at Hana Securities, said, "It is difficult to make a clear forecast at this point," but added, "Since local manufacturers also express concerns about some provisions such as the proportion of battery raw materials, we need to watch whether the detailed contents, including the enforcement decree to be prepared by next month, will change."

U.S. President Joe Biden is attending and touring the Detroit Auto Show held last September.

In the battery sector, where domestic companies are actively investing, the ongoing supply chain restructuring process is expected to accelerate. This is because the Biden administration, the Democratic Party, and even the Republican Party harbor strong sentiments to check China. Although the timetable set by the law may be somewhat delayed, there is likely to be a consensus on reducing dependence on China in the battery raw material and primary processing sectors. Similar to electric vehicles, some companies that still lack diverse material supply sources are requesting a grace period for the application of the law.

A battery industry official said, "Regardless of how congressional power changes, the supply chain reorganization led by the U.S. is an unstoppable trend," and added, "While some details and regulations need to be clarified, it is clear that companies must fully commit to diversifying their supply chains." Another official explained, "Although investment centered on North America is burdensome in some respects, the electric vehicle market is growing rapidly, and the scale of tax credits for advanced manufacturing is large, making North American investment attractive."

In May, U.S. President Joe Biden visited South Korea and toured the Samsung Electronics semiconductor plant in Pyeongtaek, Gyeonggi Province, with President Yoon Suk-yeol.

In the domestic semiconductor industry, which has business sites in China such as Samsung Electronics and SK Hynix, a sense of unease is detected. This is because the Republican Party may strengthen measures to check China. Given that Chinese President Xi Jinping is taking a confrontational stance against U.S. semiconductor sanctions, if the U.S. and China compete fiercely in the semiconductor industry with a hardline approach, it is expected that the domestic industry will inevitably be affected.

Last month, the U.S. tightened export controls on advanced semiconductor equipment targeting China but decided to grant a one-year grace period for domestic companies. However, there are evaluations that it is now difficult to expect an additional grace period. In this case, the industry anticipates that long-term considerations may include equipment sales and even withdrawal from the Chinese market. Currently, Samsung Electronics and SK Hynix produce about 40% and 50% of their NAND flash and DRAM in China, respectively.

SK Hynix CEO Noh Jong-won said during a conference call after the third-quarter earnings announcement on the 26th of last month, "If a one-year grace period is not granted and licenses must be obtained for each piece of equipment, the memory situation could become difficult," adding, "If fab operations become difficult, we can consider various scenarios such as selling fabs and equipment or bringing equipment into Korea."