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South Korea struggles to decouple from Japan in key chipmaking materials

  • June 28, 2022
  • , Nikkei Asia
  • English Press

KOTARO HOSOKAWA, Nikkei staff writer

 

SEOUL — Nearly three years since Japan imposed export controls on a trio of high-tech materials, South Korea has yet to create domestic supply chains fully independent of Japanese producers.

 

Outgoing South Korean President Moon Jae-in mentioned the trade frictions fairly early in his roughly 10-minute farewell address on May 9.

 

“I won’t forget how the entire nation united to overcome the crisis posed by Japan’s unfair export controls,” Moon said.

 

In July 2019, then-Japanese Prime Minister Shinzo Abe’s government decided to take South Korea off a whitelist of countries exempt from export controls for certain products with national security implications. The countries’ “relationship of trust including in the field of export control and regulation has been significantly undermined,” Japan’s Ministry of Economy, Trade and Industry said in its announcement.

 

The changes meant that Japanese businesses had to apply for individual export licenses for hydrogen fluoride, photoresist for extreme-ultraviolet lithography, and fluorinated polyimides.

METI said it was merely putting in place export procedures that would normally be required. But the South Korean government sharply denounced the measures. Seoul interpreted them as economic retaliation for an October 2018 Supreme Court decision ordering what is now Nippon Steel to pay reparations to former Korean wartime laborers.

 

South Koreans boycotted Japanese products in response to the export controls. Relations between Tokyo and Seoul were said to have hit a postwar low.

 

Moon visited South Korean manufacturers of chipmaking materials to drum up support for national self-sufficiency. His government earmarked about 2 trillion won ($1.55 billion at current rates) a year to fund research and development in a bid to “turn a crisis into an opportunity.”

 

But data from the Korea International Trade Association contradicts Moon’s rhetoric.

 

For hydrogen fluoride, imports from Japan dropped sharply in value terms after June 2019. They plunged 86% in 2020 compared with 2018, rebounding 34% on the year in 2021. For the January-April period of 2022, imports rose 30% on the year.

 

Photoresist imports logged double-digit year-on-year growth in 2020, and imports of fluorinated polyimides declined only slightly.

 

“Besides hydrogen fluoride, there hasn’t been any exceptional impact,” a source from a Japanese material manufacturer said.

 

Imports of semiconductor-manufacturing equipment — South Korea’s top import by value from Japan — jumped 44% on the year to $6.3 billion in 2021. The South Korean trade deficit with Japan has widened across the board.

 

“Existing semiconductor production lines need to be halted in order to use substitute materials, so chipmakers are reluctant to adopt additional homegrown products,” said Lee Geon-jae, an analyst specializing in the materials industry at IBK Securities.

 

The lack of progress in attaining self-sufficiency is reflected in the South Korean equities market. Soulbrain Holdings, which has built its brand producing homegrown hydrogen fluoride, saw its stock price soar from June 2019, touching 70,000 won at one point. It has fallen under 20,000 won more recently, plumbing lows not seen in six years.

 

At the same time, it is evident that the Japanese authorities’ actions stoked mistrust among South Korean corporations.

 

Chipmaking giants Samsung Electronics and SK Hynix were made painfully aware of the risk of shutting down plants. This has resulted in financial support and technology transfers to suppliers that can substitute Japanese-made materials.

 

Samsung reaps nearly $100 billion in annual revenue from semiconductors and displays — eight times the scale of Kioxia Holdings, Japan’s largest chipmaker. Samsung is a key client for Japanese suppliers. Homegrown South Korean materials supply chains would deliver a blow to the Japanese industry.

 

The focus now shifts to the next move of new South Korean President Yoon Suk-yeol’s administration. An economic agenda released June 16 did not include the words referring to Japan-free supply chains or localization.

 

Yoon might be looking to avoid provoking Japan in his bid to thaw bilateral relations. But there is no reason for Seoul to stop trying to shift to domestic production.

 

“From the perspective of economic security, a homegrown supply for materials is necessary,” said a person inside Yoon’s government.

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