CONTRIBUTION Korea to remain key player in semiconductors

This file photo shows Samsung Electronics' chip production plant in Pyeongtaek, Gyeonggi Province. Reuters-Yonhap

Few sectors are as critical to the Korean economy as semiconductors. Fewer yet have changed as dramatically in recent years. From the pandemic-era surge in chip demand and subsequent shortage through to the artificial intelligence (AI) revolution and trade restrictions, technology and U.S.-China frictions are reshaping the sector at an unprecedented pace.

Stefan Angrick

But for all the forces redefining global supply chains, Korea will remain a key player in the world’s chip market.

Subsidies are luring Korean and Taiwanese chip producers to set up factories on foreign shores. The U.S. CHIPS and Science Act provides $52.7 billion for semiconductor research, development, manufacturing and workforce development on American soil. Europe and Japan are providing similar incentives. Chip shortages and China’s ambitions to grow its own semiconductor capabilities have added urgency to these efforts.

Setting up foreign operations can be lucrative. Samsung Electronics, which plans to expand semiconductor production in the U.S. state of Texas, stands to receive up to $6.4 billion in direct funding under the CHIPS Act. Memory chip maker SK hynix may be following suit, with media reports saying it is looking to establish itself in Indiana. Such moves stand to put both companies on the doorstep of end consumers.

Dave Chia

When supply chains widen — for chips or any product — costs rise. In the United States, new chip plants will rely on imported materials from Asia and machinery from Japan, Europe or both. And U.S.-made chips will still get shipped to Asia for assembly, testing and packaging, at least for the foreseeable future.

Over time, new plants will foster an ecosystem of upstream and downstream businesses catering to their needs. This will make chip supply more resilient against shocks. But that means increased redundancy, which equates to higher costs and smaller margins.

Despite the gravitational pull of foreign subsidies, it's hard to see Asia's chip giants turning their backs on the region. For now, Asia's supply chain offers superior access to chip production capacity, materials and equipment. Having producers of consumer electronics right next door also helps.

 

Capacity will also keep manufacturers tethered to their home economies. Korean and Taiwanese chip giants boast massive production capacity at home and can churn out chips for a world craving cutting-edge semiconductors to power AI.

Setting up production facilities to make advanced chips abroad has proven challenging, including for Samsung and Taiwan's TSMC, which are expanding their footprints in Texas and Arizona, respectively. Typical problems include ballooning costs and struggles to find skilled workers.

Asian economies are attractive for other reasons, too, including favorable exchange rates. Although far from popular with the Korean and Japanese publics, the depreciation of the won and yen since 2019 has boosted manufacturers' export competitiveness.

Governments are also doing their part to keep chip production on their shores. Korea's K-Chips Act offers tax incentives for domestic semiconductor investments. The government wants the country to be home to the world's largest semiconductor cluster.

This commitment to maintaining the country's footprint in chips stretches across the political aisle; the main opposition Democratic Party of Korea, which dominates in the National Assembly, and the ruling People Power Party of President Yoon Suk Yeol share the goal of strengthening the country's presence in chips.

In an era when a new high-end fab easily costs $10 billion, starting over abroad is a tall order. That means fabs under construction are mostly an effort to diversify production bases rather than replace production at home.

Chip supply chains will continue to shift. But a wholesale departure of chip production from Asia is unlikely.

Dave Chia is an associate economist and Stefan Angrick is a senior economist with Moody's Analytics.