Seoul placates Beijing with new supply chain agreement before joining US-led Chip 4 alliance that specifically excludes China
By SCOTT FOSTER
TOKYO – China and South Korea have agreed to establish a new Collaborative Supply Chain Council to address any disruptions of their extensive and interdependent economic relationship in a timely fashion.
In what could be taken as pointed irony, the Dong-A Ilbo reported that “With the supply chain reform beginning in earnest led by the US, it is a conclusion from an in-depth discussion between economic ministers of China and Korea…”
Ever since the Trump administration slapped sanctions on Chinese tech giant Huawei in 2019, the US has been stepping up efforts to exclude China from international high-tech supply chains.
The new supply chain agreement was reached at the 17th South Korea-China Meeting on Economic Cooperation held on August 27. The meeting also resulted in MOUs on other aspects of economic collaboration between the two sides, including joint projects in third countries.
China’s Global Times noted that “South Korea needs a stable Chinese market to export its key products and China also needs South Korea for industrial development.” It quoted
Da Zhigang, director of the Institute of Northeast Asian Studies at Heilongjiang Provincial Academy of Social Sciences, as saying, “Seoul showed it wanted to maintain mutual trust and steady cooperation with Beijing in industrial chains and supply chains in the face of pressure by the US from the ‘Chip 4’.”
Sounding a note of caution, he added, “Although the latest agreements are highly promising for solidifying bilateral cooperation in supply chains and seem to assure China that there are no misunderstandings regarding its possible participation in the US-led chip alliance, we still need to wait and see the real actions of South Korea.”
Chip 4 is a US government initiative aimed at forming a semiconductor industry alliance with Japan, South Korea and Taiwan to coordinate efforts in supply chain management, R&D, subsidies and other aspects of the business. Widely regarded as an attempt to exclude and contain China, it also raises questions regarding trade secrets and competitive advantage.
On the face of it, securing sufficient supplies of semiconductors should become steadily easier and cheaper as record capital spending translates into increased chip-making capacity while recession at the same time undercuts demand. The semiconductor shortage, which became a huge problem for industry (particularly the auto industry) and a world-changing political issue at the height of the Covid-19 pandemic, may even turn into a glut.
As can be seen from the chart below, the year-on-year change in semiconductor billings (sales) reported by WSTS (World Semiconductor Trade Statistics) turned negative in July, after two and a half years of growth. Sales of semiconductor production equipment continued to rise as record orders fed through to shipments and installations, but only at single-digit rates.
DRAM and NAND flash memory spot prices have been falling for most of this year. At the end of June, Micron, the largest American memory chip maker, announced, “immediate action to reduce our supply growth trajectory” due to a “significant reduction” in demand for consumer electronics, including PCs and smartphones.
Micron is the world’s third-largest DRAM maker after Samsung Electronics and SK hynix and the fourth-largest NAND flash memory maker after those two Korean companies and the joint venture between Japan’s Kioxia and America’s Western Digital.
But there is more to supply chain security than supply, demand and pricing. Korean memory makers Samsung Electronics and SK hynix also face another problem that runs head-on into the US government’s determination to hamstring China’s technological advance, namely their large presence in and high degree of dependence on China for their business and revenue.
In 2021, almost 40% of South Korea’s semiconductor exports went to China, according to the Korea Chamber of Commerce and Industry, up from only 3% in 2000. Moreover, Samsung makes about 40% of its NAND flash memory in the Chinese city of Xian at the world’s largest NAND flash memory factory. SK hynix makes DRAM in Wuxi and has bought Intel’s NAND flash operations in Dalian.
At the same time, South Korea depends on Chinese components for its exports to other markets, notably the US. As can be seen in the chart below, there is a close relationship between China’s exports to South Korea and South Korea’s exports to the US.
America’s own electronics supply chain depends both directly and indirectly on China. It is unclear whether or not the US Commerce Department has thought through all the implications of restrictions on China.
US government sanctions on the export of advanced semiconductor production equipment to China could make life difficult for Samsung, which faces rising competition from Chinese NAND flash maker Yangtze Memory Technologies.
The US has already blocked the shipment of advanced extreme ultraviolet (EUV) lithography equipment from the Netherlands’ ASML to Wuxi, where about half of the DRAM sold by SK hynix is made. If those factories cannot be upgraded, they will eventually lose competitiveness.
Which raises the critical question: Is US policy aimed at controlling China, South Korea, or both? The answer is that the US government would like all three of its proposed Chip 4 Alliance partners – South Korea, Japan and Taiwan – to turn their attention away from China and back to the US, no matter what losses they might incur. To some degree, through subsidies provided under the CHIPS Act, it is willing to bribe them to do so.
R&D is a different issue. Protecting intellectual property is a common interest and defense against China’s light-fingered approach to trade secrets and practice of hiring away experienced engineers could benefit from consultation and coordination. But the Koreans, Japanese and Taiwanese might also have issues with technology-sharing and joint R&D projects directed from Washington, DC.
Korean, Japanese and American companies compete in memory chips and Samsung competes with the Taiwanese and Intel in the foundry (contract manufacturing) market. So why would they want to share their R&D with market competitors? Fears have been expressed, notably in Korea, that Chip 4 might funnel East Asian technology to Intel and Micron.
On the other hand, the four also collaborate and depend on each other. Intel is both a competitor and a customer of Taiwan Semiconductor Manufacturing Company (TSMC), which recently became a joint venture partner of Sony. Without Japanese equipment and materials (e.g., photoresists), none of them would be making much of anything.
That leaves the inconvenient fact that China is the world’s largest market for semiconductors and, at least recently, the largest market for semiconductor production equipment. All players thus have a lot to lose from cutting off the Chinese, including American fabless IC design companies (e.g., Nvidia), integrated device manufacturing companies (e.g., Intel), and makers of semiconductor production equipment (e.g., Applied Materials).
Caught between a rock and hard place, the Koreans appear to be reassuring the Chinese before negotiating a non-threatening membership in America’s Chip 4 initiative. Japan is likely to take a similar but lower-profile approach.
Taiwan has reportedly already agreed to join but is unlikely to put its enormous electronics trade with China at risk. American tech companies will defend their own interests in consultations with the US Commerce Department.
Chip 4 could therefore turn out to be more political rhetoric than substance. Or, in combination with sanctions already imposed (and probably more to come), it could place obstacles in the path of China’s semiconductor industry that could take years to overcome. This would be a major setback for China’s data processing, artificial intelligence and defense industries – exactly what the US government hopes to achieve.
How might the Chinese respond? Direct or asymmetric economic retaliation – such as boycotts of Korean or Japanese products, which has been implemented in the past – is one possibility. Redoubling efforts to develop their own technology, with even less concern for foreign IP than they have demonstrated so far, is almost guaranteed.
Or the issue could be conflated with the larger geopolitical struggle between the US and China. In August, US House Speaker Nancy Pelosi’s visit to Taipei triggered massive Chinese military exercises that simulated a blockade of Taiwan. Seeing its window of opportunity starting to close, China might choose to implement the real thing.
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