Korean firms brace for impact of Japan's retaliation

Trade ministry vows full support for domestic firms

By Baek Byung-yeul

Korean companies are trying to find alternatives to minimize damage from Japan's decision to remove Korea from its “whitelist” of countries receiving preferential treatment in trade procedures, company officials said Sunday.

Tokyo decided to exclude Korea on Friday to punish Seoul over a prolonged historical dispute. Under the decision, Japanese companies will be required to obtain government approval before they export sensitive items to Korea, starting Aug. 28.

A total of 1,194 items are estimated to be affected, according to the government, and companies in semiconductor, IT and battery cell businesses are expected to take a heavy blow.

Trade, Industry and Energy Minister Sung Yun-mo vowed full support for domestic companies preparing ways to reduce the impact of the Japanese move and drawing up measures to support local industries.

He said the government would also give special treatment to affected businesses, giving assistance such as financial support to help research and development.

Samsung Electronics and SK hynix are scrambling to find alternative supply chains for photoresist and hydrogen fluoride, also known as etching gas, which are essential materials for producing chips.

Given the stock piles of hydrogen fluoride that the two Korean chip-making giants hold are expected to last for about 2.5 months, according to semiconductor industry tracker TrendForce, they are urged to find alternative ways to procure high-tech materials at the earliest opportunity.

An official in semiconductor industry forecasted it takes two to six months to find alternative materials that can replace Japanese products because it requires time to procure materials from other countries and complete test production procedures.

“Localization of high-tech materials used for chip-making process requires enormous amount of time and cost. While waiting for local companies to improve their production capabilities, they are also required to secure high-tech materials from other countries,” the official said.

The battery industry where firms from Korea and Japan are fiercely competing for the lead of battery for electric vehicles (EVs), is also expected to have difficulties due to the exclusion from the whitelist.

Officials in the industry said Korean battery makers will struggle to procure separators, one of the four main components for lithium-ion batteries, because Japanese companies have dominated the supply of separators. Currently Japanese chemical firms such as Toray Industries and Asahi Kasei have been providing their separators to LG Chem and Samsung SDI.

Among domestic companies, SK ie technology, a subsidiary of SK Group's energy and chemical arm of SK Innovation, are capable of producing high-quality separators.

SK Innovation said it is willing to provide its separators to its domestic rivals if Japan restricts exports of the material to Korean makers. “If Japan restricts exports of separators to Korean battery firms, we are willing to supply the material to domestic rivals such as LG Chem and Samsung SDI,” an official of the company said.

Kim Byeong-yeon, an analyst at NH Investment and Securities, said “the exclusion from the whitelist may affect machine tools, fuel cell EVs and other industry sectors that only Korean firms have showed dependence on Japanese makers.”

Steelmaking industry is expected to have little effect by the exclusion from the whitelist as steelmakers have imported iron ore, the main ingredient for steel, from Australia and Brazil.

Given the localization rate of automotive industry here is at around 95 percent, the exclusion from the whitelist has little effect on the sector. Hyundai Motor has been using Japanese carbon fiber to build hydrogen tanks for its fuel cell EVs but Iljin Composites who supply the tank to Hyundai has been seeking alternatives to Japanese products.

To help domestic firms replace with Japanese suppliers, the Ministry of Trade, Industry and Energy is scheduled to announce measures to improve competitiveness of local companies Monday.

A day prior to the announcement, Minister Sung held a meeting on Sunday with representative organizations from 11 industries.

During the meeting, officials from the organizations asked the government to come up support plans for each industry and improvements of administrative policies. The 11 industry sectors include semiconductor, battery cell, automotive, robot, mechanic, display, chemical, fiber, steelmaking, IT and shipbuilding.

“The government and industries should act as one on the issue by making close cooperation with each other. The government will give full support to the companies so that they can diminish their difficulties in business operations,” Sung said.

Analysts said Japan's export control could be modest if it only results in administrative delays in supply but added it is inevitable that Korean companies would face growing uncertainties over their business environments if the trade restriction continues.

“This measure effectively expands the scope of Japan's export controls introduced in early July on semiconductor and display inputs, and further increases uncertainty around the ability of Korean companies to secure key materials essential to their production processes in a timely manner,” according report from Moody's Investors Service.

“It is difficult to estimate the amount of losses Korea companies will incur because the export restrictions will be dependent upon decisions by the Japanese government. If the tough restriction continues, it could exacerbate the economic slowdown of Korea,” said Ahn So-eun, an analyst at IBK Securities.