SEOUL – South Korean President Yoon Suk-yeol urged additional tax breaks for the domestic semiconductor industry as the nation’s flagship export sector reels from a perfect storm – one that continues to rise in intensity.
The semiconductor super-cycle, which buoyed the Korean economy through the Covid-19 pandemic, turned south this summer as chip shortages turned to gluts and prices plunged. Even more ominously, the future geography of the sector looks set for a seismic shift as the US applies increasing pressure on its allies’ chip businesses with China.
In addition to global factors such as the war in Ukraine, related commodity inflation and rising interest rates, this combination of economic pressures and unprecedented uncertainty hanging over the flagship national export is mirrored in the hideous performance of Korean stocks in 2022.
The benchmark KOSPI index opened to a bullish 2,999.75 points on December 30, 2021.. This Friday, 2022’s last trading day, it closed at 2,236.4 points.
Yet despite its massive implications, there is still no clear answer to the huge question posed by US policy toward China and semiconductors as Seoul grapples with its impossible positioning: It balances between top trade partner Beijing and leading strategic ally Washington.
But even as chip executives fret over future strategies for investment in, and sales to, China, if politicians decide to press ahead with decoupling from Chinese tech, they may be pushing on an open door.
A September global public opinion poll of 56 nations delivered the surprise news that South Koreans harbor stronger anti-China sentiment than any people on Earth.
Washington is clearly piling heavy-handed trade pressure upon Seoul, and huge anti-American riots shook South Korea in 2002 after the death of two schoolgirls in a road accident with GIs. Yet in the September survey, the United States emerged as the most popular nation among South Koreans.
All for chips
Yoon, speaking to officials on Friday morning, reinforced the centrality of the semiconductor industry to the Korean economy.
“Strategic technologies, such as semiconductors, are a national-security asset and our industries’ core technology, so I would like the finance ministry to actively consider ways to additionally expand tax breaks for national strategic industries, including the semiconductor industry, in consultation with relevant ministries,” he said.
Corporations can currently bag an 8% break on semiconductor investments thanks to a recent revision to the previous tax code, which previously offered a 6% break. However, that 2-percentage-point rise falls far short of the whopping 20% tax break that Yoon’s conservative People Power Party had called for.
The National Assembly is controlled by the progressive Democratic Party.
South Korea is home to the world’s two leading memory chip manufacturers – respectively, Samsung Electronics and SK hynix. Facing the cyclical downturn, they are taking different approaches to their capital expenditures in 2023.
Sector leader Samsung, damning the torpedoes, is ramping up production at its new fab in the Yellow Sea port of Pyeongtaek – the world’s largest chipmaking facility – by 10%. SK hynix, on the other hand, is following other industry players in cutting back its capex for the year – by a whopping 50%.
Yet while the peaks and troughs of the chip cycle are known challenges that related businesses are experienced in managing, a darker shadow looms: the rising demands from the US that its allies, from Western Europe to East Asia, cease commercial cooperation with China on cutting-edge chips.
Backing up this demand, the weapon the US could deploy is its multiplicity of patents in high-end chip design suites and manufacturing equipment.
Exiting Chinese investments would be agonizing for South Korea. According to local media, Samsung makes some 40% of its total NAND memory in Xian, while SK hynix makes 50% of its DRAM memory in Wuxi.
So too would cutting trade. In 2021, according to data collated by bank Santander, China was South Korea’s leading trade partner: 27% of Korea’s total exports went to the mainland, with another 6.2% going to Hong Kong. The United States was in distant second place, taking some 15% of Korea’s overseas shipments.
It’s the same story in terms of supplying imports: China accounts for 24%, with Hong Kong adding 6.2%; the US, again in second place, supplies just 13%.
In Korea’s overall export portfolio, chips and chip parts accounted for 16.2% of the total, making them the leading item, Santander found. The next-largest export item, autos, took up just 7.0%.
Leading academic Moon Chung-in, who has advised three different South Korean administrations on international relations, laid out the massive reliance Korea’s chip sector has on China.
Historically, Korean chipmakers “export about 60% of their products to China (40% to the Chinese mainland, 20% to Hong Kong) while importing almost 60% of chip-related critical materials from China,” Moon wrote on these pages.
In 2021, the last year for which total data are available, mainland China was the destination for 39.7% of Korea’s semiconductor exports, a higher ratio than China’s share of Korea’s total exports, which is 25.3%.
There is some breathing space. In October, South Korean chipmakers won a one-year waiver from US authorities. But given the size of their commerce with China, a huge cloud of opacity hangs over what will happen to their China businesses, post-waiver. Absent a surprise turnaround in US policy, Korean companies look trapped.
“Requests from the US, the world’s most powerful country and Korea’s closest ally, must not be disregarded,” the left-leaning Hankyoreh Daily newspaper editorialized in July. “It is clear that anxiety is high in industrial circles.”
In October, the right-leaning Dong-A daily headlined a piece “US aims to thwart Chinese semiconductor industry on all fronts.”
Given this angst, why is more public noise noise not being aired on the conundrum? Perhaps because silence is golden.
“The Americans are saying, ‘Why don’t you sacrifice your business for our politics?’ and the Koreans don’t want to do it,” said Scott Foster, a Tokyo-based tech analyst with Lightstream Research. “But they are caught between a rock and a hard place due to the US defense alliance, so they want to avoid the question.”
Leaning West
Signs are emerging that Korean companies have already made their choice.
Samsung has been cutting back on its China investments for years. SK hynix remains heavily invested but admitted to investors in a conference call in October that it is committed to diversifying manufacturing and could, if necessary, divest its Chinese fabs.
Meanwhile, both are hedging their bets, spending massively on new plants in the US, where Washington is not only applying political and trade pressure, it is also dangling the carrot of investment incentives.
In a July videoconference with US President Joe Biden, SK Group chairman Chey Tae-won announced $22 billion in investment plans in the USA, including $15 billion in chipmaking.
In 2021, Samsung announced $17 billion in additional investments in its Texas semiconductor manufacturing operations. In July this year, documents filed with Texas authorities showed the company was mulling building 11 more plans, with a value of $200 billion, in the US state over the next two decades.
And the Koreans are not alone. Their regional competitors are hurtling stateside too.
“The amount of investment going into the States from Japan, South Korea and Taiwan is absolutely enormous,” Foster said. “The China thing has given these companies a huge opportunity to grab a big chunk of the US market, from the inside, without the protectionism. Americans are not going to build those factories.”
This could signal one answer to the problem that South Korean – and other Asia chipmakers – face. With free trade now a dead duck, and multiple nations and blocs seeking sovereign chip-production facilities, there is a possibility of mirror sectors rising in different geographies.
“It is getting that everybody wants to build their own industry,” said Foster – a factor that presents its own downside. “There will not be a shortage of semiconductors – there will be permanent overcapacity!” he added.
The question of how much influence soft – and arguably fickle – factors like public opinion wield over hard factors like real-world economics may be debated. Nevertheless, signals indicate that South Korean CEOs have chosen a side – the US – that is in line with public sentiment.
The economic importance of densely populated, prosperous and proximate China is a fact well known to the South Korean public. It is likewise known that, increasingly, the United States is leveraging its strategic alliance with South Korea to pressure China.
Yet a range of public opinion polls in the last two years have shown that South Korean sentiments toward China are plummeting.
‘No thanks’ China; ‘yes please’ America
The Sinophone Borderlands project is a series of online public opinion surveys taken between 2020 and 2022, investigating global attitudes toward China and vice versa. The body comprises academics across the world, including in China itself.
The project’s September online survey of 1,363 Koreans, conducted by the Central European Institute of Asia Studies, found that 81% of South Koreans have negative or very negative views of China – more than any other of the 56 states surveyed.
The figure puts Korea well ahead of the No 2 ranked nation, Switzerland, where 72% of persons hold negative/very negative views, and No 3 ranked Japan, with 69%.
In a detailed analysis, two of the report’s authors noted that South Koreans, if asked to choose between China and the US, held very, very clear views. Some 4% of Koreans were undecided, 5% chose “China” – and a whopping 91% said they would side with the US.
Japan, customarily the most despised country among South Koreans, dropped to fourth place, behind China, Russia and North Korea.
And while there are certainly leftist and even anti-American sentiments simmering within the Korean body politic, the survey found less than 20% of Koreans held negative or very negative views of the US.
There is more. In economic terms, more than 40% of Koreans considered the US “very strong,” while the same figure for China was less than 10%.
What is behind this massive dislike of, and disrespect for, China?
The two countries had a serious spat in 2017. When Seoul agreed to the deployment of a US-manned THAAD (terminal high altitude area defense) anti-missile battery on South Korean soil as a defense against North Korean projectiles, Beijing, insisting that the system’s radars could spy on China, went ballistic.
In retaliation, protests impacted the businesses of South Korean conglomerates in China, leading to dwindling sales by Hyundai Motor, and Lotte withdrawing its retail operations from the market. Chinese tour groups ceased visiting South Korea, dealing a heavy blow to the tourism-focused island of Jeju. Even imports of “K-culture” – pop music, TV dramas, films and computer games – were halted.
Nothing so dramatic has happened since, but the reputation of China, in Korean eyes, has continued to deteriorate.
The study authors found Koreans were angry with China over matters as diverse as transnational air pollution and environmental destruction; Covid-19’s origin; dictatorial communism; and cultural appropriation. The last one is highly visible in wars of words between netizens over aspects of traditional heritage.
Citing past business trips to South Korea, Foster expressed surprise at the apparent shift in public opinions.
“In the past, it was older Koreans who used to be worried about China and North Korea, and the younger ones, worried about their jobs, and it was, ‘US get lost,’” he said. “If that has changed, that is big deal.”
Follow this writer on Twitter @ASalmonSeoul.