Samsung, SK face risks to chip production in China amid tighter US chips curbs

An overview of Samsung Electronics' NAND flash chip factory in China's Xi'an / Courtesy of Samsung Electronics

Samsung Electronics and SK hynix are facing increasing risks in upgrading their chipmaking technologies on time, as the United States moves to tighten controls on the shipment of equipment from the U.S. to the Korean firms’ manufacturing facilities in China, experts and industry officials said Sunday.

The U.S. Department of Commerce Friday announced a plan to strip the two Korean companies as well as Intel Semiconductor of their validated end-user (VEU) status, a decision requiring them to obtain separate licences each time they seek to send U.S. chipmaking equipment to their plants in China. The firms will be given a 120-day grace period.

Samsung Electronics’ plant in Xi’an, China, serves as its major NAND flash memory chip base, accounting for nearly 40 percent of its total NAND output. SK hynix operates factories in the Chinese cities of Wuxi and Dalian, where it produces its DRAM and NAND chips, respectively.

SK Group Chairman Chey Tae-won, right, takes a look at the company's chip production line in the Chinese city of Wuxi, in this 2015 file photo. Courtesy of SK Group

While an immediate suspension of production lines is unlikely, industry observers warn that the restrictions could, in the long run, prevent process upgrades and equipment replacements, seriously undermining the technological competitiveness of their Chinese manufacturing facilities.

In addition, concerns are also growing that Korean chipmakers' overall competitiveness may weaken further as Chinese companies ramp up mass production of general-purpose semiconductors.

In that respect, experts urge local chipmakers and the government to appeal more to the U.S. that their semiconductors manufactured in the Chinese factories do not pose a security threat to the U.S.

“Chipmakers must hold more talks with the U.S. and focus on convincing the country that the chips from their Chinese facilities do not harm the national interest of the U.S.,” said Kim Dae-jong, a professor of business administration at Sejong University.

The discussions should start immediately, as chipmaking equipment should be upgraded at least once every six months, he said.

“It is realistically tough for local firms and the government to retract the latest decision by the U.S., but we need to keep persuading the country,” he said.

An official from Korea’s Ministry of Trade, Industry and Energy said the government will also hold close negotiations with the United States.

“The government will keep negotiating with the U.S., so Korean firms face minimal influences from the withdrawal of the VEU status,” the ministry official said.

China's Ministry of Commerce voiced opposition in response to the change.

"China calls on the U.S. to immediately correct its wrongdoings and safeguard the security and stability of global industrial and supply chains. China will take necessary measures to firmly safeguard the legitimate rights and interests of its enterprises," a ministry spokesperson said, according to the Global Times, China's state media.

Meanwhile, Kim Moon-tae, head of the industry policy division at the Korea Chamber of Commerce and Industry, said the U.S. move seems aimed at pressuring Korea to increase investment in the U.S., despite a recent tariff deal that cut reciprocal tariffs on Korean imports from 25 percent to 15 percent. Last week, Korean firms announced $150 billion (208 trillion won) in planned U.S. investments amid lingering trade concerns.

“There is no clear breakthrough for the time being,” he said. “The government will have to engage in further talks with its U.S. counterpart to ease regulatory pressure.”