[US Semiconductor Subsidies]② Strengthened China Containment Brings Sudden Blow to Korean Equipment Industry

As the United States has introduced strict conditions for subsidy payments as a card to counter China's semiconductor industry, the Korean semiconductor equipment sector is also facing an export emergency. In the current situation where the U.S. has already begun its semiconductor crackdown on China, if major semiconductor companies such as Samsung Electronics and SK Hynix, which operate factories locally in China, withdraw from the Chinese market or reduce investments further to receive U.S. subsidies, the Korean equipment industry will be directly impacted.

According to export-import statistics from the Korea International Trade Association on the 28th, Korea's semiconductor equipment (MTI code 732) exports to China amounted to $140.734 million in January this year, a 39.7% decrease compared to the same period last year. Semiconductor equipment exports to China increased by 28.8% to $4.645 billion in 2021 but fell by 25.3% to $3.469 billion last year. Since the U.S. began its semiconductor crackdown on China, Korea's semiconductor equipment industry's January exports have decreased by about $100 million each year over the past two years. From $331.77 million in 2021, it shrank to $233.40 million in 2022 and $140.73 million in 2023.

Korea's semiconductor equipment exports to China are declining across all sectors, including front-end processes such as foundry (contract manufacturing), and back-end processes including packaging (assembly) and testing (inspection). Front-end equipment (HSK code 848620) exports to China in January this year were $32.92 million, down 66.6% from the same period last year. On an annual basis, front-end equipment exports peaked at $2.258 billion in 2021 but halved to $1.370 billion in 2022 and have continued to decline since.

Back-end equipment (HSK code 848640) exports also dropped 38% year-on-year to $23.11 million in January this year. Annually, exports were $944.1 million in 2021 and $663.05 million in 2022, continuing a double-digit decline. China accounts for more than 50% of exports in both front-end and back-end equipment. The decline in exports to China is a direct blow to our equipment industry.

The sharp drop in Korea's semiconductor equipment exports to China is largely influenced by the U.S.'s semiconductor crackdown on China, which bans semiconductor equipment exports to Chinese companies producing D-RAM below 18nm, NAND flash with 128 layers or more, and logic chips below 14nm. The main supply destinations for Korea's semiconductor equipment industry are overseas factories of domestic semiconductor manufacturers. The operational atmosphere of Samsung Electronics and SK Hynix's factories in China inevitably affects semiconductor equipment companies, which are mostly small and medium-sized enterprises.

In a report titled "Analysis of the Impact of Semiconductor Market Environment Changes on the Domestic Semiconductor Equipment Industry," KB Management Research Institute stated, "If it becomes difficult to import core equipment due to U.S. export regulations, fab (factory) operations will become challenging, and new fab construction will decrease, increasing uncertainty for Korean company fabs in China."

When domestic companies' factories in China perform well, equipment demand surges alongside expansions, but if the atmosphere becomes unfavorable for further expansions, equipment demand inevitably decreases. Regarding this, KB Management Research Institute Research Fellow Shim Kyung-seok diagnosed, "Samsung Electronics and SK Hynix's local factories in China, which are major export destinations for domestic equipment companies, have received a one-year grace period for U.S. export regulations, but once this period ends, demand may decrease further depending on the manufacturers' actions."

China's efforts to increase semiconductor equipment self-sufficiency in response to the U.S.'s strengthened semiconductor crackdown policy also pose a burden on the Korean equipment industry. Due to China's push for semiconductor equipment localization, the proportion of Chinese companies purchasing domestically produced equipment rose from 21% in 2021 to 32% in the first half of 2022. Although China has not secured advanced equipment technology below 14nm and is localizing mainly non-advanced mature process equipment, competition between Korean and Chinese companies has increased in front-end equipment sectors with lower technological entry barriers, such as cleaning, etching, polishing, deposition, and heat treatment, where Korean companies have been strong.

Research Fellow Shim said, "The domestic semiconductor equipment industry has a structure vulnerable to external environmental variables due to its low market share," expressing concern that "there is a high risk of performance deterioration due to changes in international dynamics and rapid shifts in the investment environment."