[Chip Talk] Post-Processing Emphasized as 'Preemptive Investment' by Lee Jae-yong... The Achilles' Heel of K-Semiconductors

Evaluated as 10 Years Behind Taiwan
Samsung, SK, and Government All Actively Foster Growth
Risk of Chinese Equipment Sanctions Poses Burden

A report by the Korea International Trade Association released in December last year stated that Taiwan has surpassed South Korea in semiconductor exports to the United States. According to the investigation, Taiwan's share of semiconductor exports to the U.S. grew nearly twofold from 9.7% in 2018 to 17.4% in 2021, while South Korea's share increased by only 2 percentage points from 11.2% to 13.2%. It was pointed out that South Korea's dependence on memory semiconductors and exports to China is excessively higher than Taiwan's. The weakness of the system semiconductor supply chain competitiveness was also highlighted. The back-end process is evaluated to be about 10 years behind Taiwan.

The back-end process has been a relatively less noticed area within the system semiconductor supply chain. It is the process of making semiconductors attachable to electronic devices. There has been a strong perception that the front-end process, where semiconductor design (fabless) companies create designs and foundries carry out contract manufacturing upon orders from global big tech companies like Apple, is the "money-making" part. The back-end process was regarded as a finishing task that inspects the nearly completed fine semiconductor products from the front-end process.

Samsung Electronics Chairman Lee Jae-yong visited the Cheonan plant on the 17th to check the production status. [Photo by Samsung Electronics]

Recently, the importance of the back-end process has begun to grow. Customers such as Apple and Google have started to develop semiconductors independently. Only semiconductors that are difficult to develop are outsourced to component suppliers. For component suppliers, if they cannot produce semiconductors that perfectly fit the customer's finished products (sets), they face immediate risk of being ousted. How densely semiconductors are packed onto a single substrate has become crucial. Competition in front-end technology occurs at the nanometer (nm; 1 nm is one billionth of a meter) scale. The technological barriers are high and costs are substantial. Enhancing advanced back-end process capabilities to pack more semiconductors onto substrates and maximize product performance has become important. According to market research firm Gartner's forecast, the semiconductor back-end process market is expected to grow from $48.8 billion (about 63.62 trillion KRW) in 2020 to $64.9 billion (about 84.6 trillion KRW) in 2025.

The problem is that South Korea is significantly behind Taiwan, its foundry competitor, even in the back-end process. According to market research firm Yole D?veloppement, Taiwan holds 52% of the back-end process market share by country, while South Korea holds 6%. Experts from the Electronics and Telecommunications Research Institute (ETRI) and other government-funded research institutes recently diagnosed that "South Korea's back-end process technology level is about 10 years behind Taiwan."

Feeling the sense of crisis, Samsung Electronics, SK Hynix, and the Ministry of Trade, Industry and Energy are accelerating the development of the back-end process industry. Samsung Electronics Chairman Lee Jae-yong personally visited the Cheonan and Onyang plants on the 17th to encourage employees. Despite the sluggish business conditions, he vowed not to reduce facility investments and visited the back-end process site just three days after borrowing 20 trillion KRW from Samsung Display. At this event, Chairman Lee said, "There must be no wavering in investment in future technologies."

At the end of last year, Samsung Electronics established the AVP (Advanced Package) team within the DS (Device Solutions) division. They are operating technologies such as 'iCube,' which implements logic chips (general-purpose non-memory semiconductors) and HBM chips (high-bandwidth memory) in a single package, and 'XCube,' a 3D package technology that stacks multiple chips vertically. Thanks to this, Samsung became the production partner for the 5-nanometer autonomous vehicle semiconductor process of the U.S. semiconductor design company Ambarella. Back-end process technology is also applied to the 5-nanometer process. Applying this technology can increase AI performance by 20 times compared to before.

SK Hynix announced in July last year that Group Chairman Chey Tae-won would directly invest $15 billion (about 19 trillion KRW) in back-end process manufacturing and semiconductor research and development (R&D) in the U.S. They have also steadily invested in back-end process facilities in China. The Chongqing plant in China, completed in 2014, was expanded in 2017. The second plant was completed in 2019. Back-end process work necessary for producing embedded multi-chip packages that combine DRAM and NAND flash, large-capacity storage devices (SSD), and others has been carried out in China.

On the 3rd, the Ministry of Trade, Industry and Energy announced that it would promote a preliminary feasibility study worth 1.5 trillion KRW to support securing three major system semiconductor technologies, including the back-end process.

Although the public and private sectors are working together to grow the back-end process industry, the situation is not easy. This is because the U.S. has very strict semiconductor regulations on China. Samsung Electronics' Suzhou and SK Hynix's Chongqing back-end process facilities are also subject to regulation. Early next month (local time), the U.S. Department of Commerce is expected to announce guardrail provisions that prohibit companies receiving U.S. subsidies from investing in China and other countries for the next 10 years.

There is also a possibility that the U.S. will restrict production at Samsung and SK's Chinese plants in October. In October last year, the U.S. granted a one-year grace period for production restrictions at the two companies' Chinese plants. This year, some level of control is expected. On the 23rd (local time), Alan Estevez, U.S. Department of Commerce Under Secretary for Industry and Security, said at the Korea Foundation (KF) and Center for Strategic and International Studies (CSIS) Korea-U.S. Economic Security Forum held in Washington D.C., "There is a high possibility of setting limits on the level of semiconductors companies can produce." This means that high-quality semiconductors above a certain level will not be allowed to be made or sold in China.