YONGIN, South Korea – In the rural township of Wonsam in Yongin, a county 40 kilometers south of Seoul, local residents are awaiting seismic changes after a groundbreaking ceremony for a semiconductor, or chip, cluster set to be held this month.
“This area has been farmland for as long as I can remember,” remarked one elderly resident. “Why they chose to build something like that here is beyond me. Now, everything will change.”
Change is, indeed, coming. The land area of the cluster, which was first announced in 2019, will makes it the single biggest project in semiconductor history, according to South Korean media.
Undertaken by SK hynix – which, along with Samsung Electronics is one of South Korea’s two coveted chip-making champions – the project entails around US$100 billion in investment. The cluster will be capable of churning out a whopping 800,000 wafers per month and will stretch over 4 million square meters.
Some 50 suppliers of materials, parts and equipment will move in. The Yongin fab, once completed, will focus on dynamic random-access memory (DRAM) chips and on other, next-generation memory chips. SK Group, the conglomerate of which SK hynix is a core constituent, plans to invest around $110 billion over the next five years.
It is yet another addition to one of the most impressive industrial belts in the world: a semiconductor super-corridor that stretches from southern Seoul to the Yellow Sea port city of Pyeongtaek, 65 kilometers south.
Korea, in its zero-to-hero industrialization process, came from nowhere to challenge – and overtake – mighty Japan in multiple sectors. Now is it facing another challenger that is using the same tactics to climb the value chain, but which boasts a far bigger domestic market and is equally determined to win the chip war: China.
As in other industries – shipbuilding, electric car batteries, electronics devices – the question is how long, or even whether, Korea can maintain its lead.
Boomtowns on tap
Yongin is one of the cities and counties that make up Gyeonggi province, which surrounds the capital Seoul. As recently as the 1980s, this area was primarily agricultural. But after Korea’s quantum leap into high tech, the area has become a beneficiary of the global chip boom.
Land around the capital comes at a premium price, but it’s worth every won as South Korea’s two chip titans compete for top spots and scout for human resources.
The country’s top tech talent prefers to work in or near Seoul, thanks to the unbeatable educational, cultural, recreational and health infrastructure of the metropolis. With the national tech industry’s flagships headquartered in the posh Gangnam districts of southern Seoul, the half of Gyeonggi province bordering Gangnam has been transformed into the world’s premier chip-making cluster – rivaled only by Taiwan.
In the boomtowns of the region, business has never been better. While provinces outside of the Seoul Metropolitan area struggle with low birthrates, closing schools and the flight of youth, the situation could not be more different in Gyeonggi.
In the cities of Pyeongtaek, Hwaseong and Suwon, and the counties of Yongin and Icheon, new schools, apartments and restaurants are popping up. Entire new cities such as Dongtan have sprung into existence on what was, in recent memory, manure-scented farmland.
Gyeonggi’s population surpassed Seoul’s 10 million in 2003 and has never looked back. Youth fleeing Seoul because of its sky-high apartment prices have found the surrounding province, with its booming tech economy, shiny new infrastructure and close proximity to the capital, a welcoming alternative.
South Korea’s chip corridor takes in Cheongju in neighboring Chungbuk province in the south to Icheon in the east and Pyeongtaek in the southwest. It has a nearly unparalleled ecosystem encompassing research and development centers, fabs, equipment suppliers and fabless designers, built up over three decades. Universities in nearby Seoul and Daejeon educate the talent that runs these businesses.
This cluster had humble beginnings. In 1984, Samsung began churning out 256-kilobit DRAMs in its first chip fab in Giheung, Yongin. In only a few years, Samsung and Hyundai Electronics – the predecessor to SK hynix – seized the memory crown from their Japanese counterparts.
Today, South Korea is the world’s leading supplier of memory chips.
Not satisfied with their memory dominance, Korean firms are now turning their attention to non-memory chips – a high-value-added sector that is currently dominated by Taiwan Semiconductor Manufacturing Company (TSMC).
In a challenge to its Taiwanese rival, Samsung is slated to invest hundreds of billions of dollars in foundry services for non-memory seminconductors – through 2030.
“Although it is true that memory takes up the larger portion of Korea’s chip industry, Korea’s entry into the [non memory] semiconductor sector is not new at all,” said Cho Kyeong-soon, a professor of Electronic Engineering at Hankuk University of Foreign Studies.
“Korea has been in the [non-memory] semiconductor business for decades, it’s only that Korea’s efforts in this area have not been as successful as they have been in memory.”
There are two national competitors, though just one in manufacturing.
“America’s lead in design, and Taiwan’s lead in manufacturing, have long been difficult to overcome,” Cho continued. “For Korea to maintain its edge in the chip sector, it is not a matter of choice, but a must” to strengthen its high-end, non-memory sector.
When it comes to corporate rankings in the market for chip foundry – ie, the contracted manufacturing of non-memory chips – there are some positive signs for Korea.
According to data on the global market share for foundry by revenue in the first quarter of 2022 as collated by research firm TrendForce, the leading player is TSMC with a 53.6% global market share. The number two is national champ Samsung, with 16.6%.
The even more distant number three is UMC, another Taiwanese firm, with 5.9%, followed by New York-headquartered Global Foundries with 5.9%. Chinese firm SMIC rounds out the top five, with a 5.6% market share. All told, Chinese firms held a combined 10.2% of world market share.
While the data may, on first sight, make Korea’s lead over Chinese players clear, it has been interpreted negatively by some in Korea, for Samsung’s market position dropped from 18.3% in the last quarter of 2021 to 16.3% in Q1 2022.
Chips to the fore
The global chip industry has always been fluid, with the semiconductor crown being exchanged among different countries and companies several times throughout the industry’s seven-decade history.
South Korea and Taiwan have dominated wafer production for more than a decade. Western companies lost their leadership in the chip manufacturing space, choosing instead to focus on design.
But even the sector’s kings have little breathing room to sit back and enjoy their position at the top. In the capital-intensive chip game, they must continue to invest massively in R&D and leading-edge new fabs to maintain market share.
With the specter of decoupling descending over the global economy in a fast-digitizing world, semiconductors have become highly strategic.
Because of this, worried national governments around the world have vowed to create their own domestic chip supply chains by offering tens of billions of dollars in subsidies to potential collaborating chipmakers to build out new fabs within their borders.
However, there is no guarantee that these ambitions will come to fruition.
A multibillion-dollar fab cannot stand alone. To operate effectively, it must be accompanied by a network of equipment and materials suppliers, efficient transportation nodes and reliable water and electricity supplies.
Moreover, its location must include the kind of high-end housing and educational and recreational facilities that can meet the lifestyle demands of the workforce. And, of course, that skilled and knowledgeable workforce must also be in situ.
If these multiple conditions are not in place, a brand-new, sparkling fab can end up as a rusty cog in an inefficient, uncompetitive supply chain – propped up only by endless government subsidies.
Current champs, rising challenger
The world’s top two chipmaking clusters are south of Seoul and along the western coastline of Taiwan. Each was built up over decades through careful, sustained cooperation among government, industry and academia. This kind of farsighted, multi-stakeholder industrial policy explains the industry dominance of their respective clusters.
Very few democratic governments outside of South Korea and Taiwan have the political insight, will and capability to make such a decades-long commitment. In fact, there is a real chance that – once post-pandemic supply chains are re-normalized, assuming they are – public attention to chips in North America and Europe will fizzle out and politicians will naturally move their discussion to newly urgent matters.
There is perhaps only one government other than Seoul and Taipei that is potentially capable of politically and economically creating and sustaining leading chip clusters: Beijing.
Despite US-led sanctions on high-tech chip-making equipment and software, China’s authoritarian government, armed with seemingly limitless resources and a national will to free itself from foreign reliance, is determined to make its dream of semiconductor dominance come true.
The pressure of this rise is already being felt in Taiwan and South Korea. Each has seen thousands of its chip engineers poached by emerging Chinese players.
The game that is now afoot is a big one. The rise of China’s semiconductor industry could potentially affect not only the technological leadership of South Korea and Taiwan but also their mutual hold on economic prosperity.
The risk is that the current winners’ own playbooks could be used against them.
The tactics of fostering chip supremacy include achieving economies of scale by building massive fabs, maximizing generous government support and poaching foreign talent. These tactics were employed by Japan to seize the semiconductor crown from the United States, and later by South Korea and Taiwan to seize it from Japan.
Now, China is deploying these very tactics – a trend that is worrying for some South Korean experts.
“In the case of China, they have heavily invested in their own semiconductor sector, [and are in many ways] already ahead of Korea,” Cho, the electronic engineering professor, said. “For example, in terms of training and procuring the required labor force, [China] is very strong.”
Moreover, Chinese media Guancha, in a recent piece on the competition between China and South Korea, noted that in the first quarter of 2022, a Chinese firm entered the list of the world’s top ten semiconductor design companies for the first time, “while Korean companies did not even have a name [in that sub-sector].”
In chips, size matters. The size is not simply the ever-decreasing nanometerage of the wafers – where Korea and Taiwan are manufacturing kings – but also the size of the market in which they can be incubated.
Guancha added, “although the industry generally believes that China’s competitiveness is not as good as that of South Korea in terms of quality, some analysts pointed out that China’s semiconductor industry will develop rapidly under the strong support of its own government and the full fault-tolerant opportunities provided by the huge domestic market.”
Given how South Korea carefully incubated its own industrial exports in a closed, home market from the 1960s to the ’80s, those words no doubt send a shudder down the spine of Korean semiconductor executives.
And there are yet more forces at work – albeit in the West, not the East.
The US, the European Union and Japan are also eager to regain their own chipmaking bases by throwing tens of billions at the sector. This vast pool of new capital may dilute the investments made by the likes of TSMC and Samsung.
A war worth fighting
South Korea is a global leader in industries including shipbuilding and electric-vehicle batteries and is winning global kudos for its popular culture. But none of these sectors are nearly as lucrative or geopolitically significant as the semiconductor industry.
For South Korea’s economy to continue to grow and prosper in the face of a shrinking population and geopolitical uncertainties, all-out efforts to foster its chip industry are imperative.
South Korea no longer feels assured by being the dominant player only in memory. It now looks to become the dominant force across chip manufacturing, from contract manufacturing to image sensors to automotive chips. If achieved, this would mean economic prosperity for decades to come.
In May of 2021, South Korea announced a whopping $450 billion chip investment plan dubbed the “K-Semiconductor Belt Strategy” to take the nation’s chip industry to the next level. Of course, much of that capital expenditure had already been announced by industry players. Even so, the scope remains massive.
Then-president Moon Jae-in said at the time that South Korea “will solidify its position as the world’s top memory semiconductor producer and take the lead globally in [non-memory] semiconductors as well, thereby achieving the goal of becoming a comprehensive semiconductor powerhouse in 2030.”
And this kind of massive spend will have to continue. Of the three strategic industries that South Korea has chosen as its future breadwinners – non-memory semiconductors, future mobility (vehicles of all kinds) and bio-pharmaceuticals – it appears the first will soak up much of the country’s investment capital and talent.
There are, however, several stumbling blocks.
The biggest hindrance may be South Korea’s regulators. Bureaucracy on both the local and national levels, increasing environmental regulation and local residents’ pushback and real-estate opportunism all make doing business in Korea difficult – even for companies that are global champions.
Case in point? After the announcement of Samsung’s new chip-making complex in Pyeongtaek, the largest in the world, it took the company nearly five years to begin construction.
Compare this with rival countries in the industry, where the time gap between announcement and construction may be only a matter of months.
The pro-business Yoon Suk-yeol administration, which came into office in May, is determined to expedite processes and encourage investment by cutting red tape. South Korea’s battery, display and bio industries are anticipating similar benefits.
But there are business people who will say roll their eyes and say they have heard the “slashing red tape” mantra many times before.
It is impossible to say how long South Korea can maintain its position at the pinnacle of the chip industry. But with national economic prosperity and prestige on the line, it will compete like never before – and Gyeonggi province will be at the heart of it.