Challenges for Korea's chipmakers

China competition and energy transition pose tasks

By Troy Stangarone

For much of the past year there has been a focus on how the CHIPS and Science Act and U.S. semiconductor export controls impact the long-term viability of Korea's semiconductor facilities in China. However, the growth of a competitive Chinese semiconductor industry and demands for production based on clean energy could be just as significant for Korean semiconductor companies.

Less often discussed, but relevant for Korea's semiconductor industry, is the emerging competitive challenge from China. Beijing has invested significantly in the memory chip sector in an effort to achieve self-sufficiency. So much so that, according to a 2021 report by the Semiconductor Industry Association, Chinese subsidies and investments in its semiconductor industry have reduced the cost of production in Chinese fabs below those in other countries.

On the surface, Samsung and SK hynix have a significant lead on YMTC, perhaps China's best hope for a domestic memory chip firm. Samsung and SK hynix have long dominated the memory chip segment and YMTC only had a 5 percent market share in 2021.

YMTC, though, may be a closer competitor than what it appears. Last year, YMTC initially received good news when Apple considered procuring from it upwards of 40 percent of the NAND chips needed for the production of iPhones. Apple had determined that YMTC could produce high-quality chips at a low price. While Apple often rotates its sources of memory chips, the addition of YMTC to Apple's stable of suppliers would have reduced potential future sales for Samsung and SK Hynix. It would also signal to other companies the quality of YMTC's chips.

In the end, U.S. semiconductor restrictions, along with U.S. political pressure, scuttled Apple's efforts to purchase chips from YMTC. Korea benefitted as U.S. export controls put into question YMTC's ability to acquire the equipment it would need for a new plant. However, China since then has provided YMTC with $7 billion in subsidies and reporting suggests that YMTC has been able to work with Chinese equipment producers to get the equipment it needs to open its new plant later next year.

Chinese competition is not the only potential challenge for Korea's semiconductor industry. Carbon emissions are becoming a more important issue and could raise questions about the viability of semiconductor production in Korea. Companies are increasingly working to address their scope 3 emissions, which are the emissions produced by their suppliers. Apple, for example, is requiring its suppliers to be carbon neutral by 2030.

While Apple is among the most aggressive companies in pushing for suppliers to decarbonize, it is not alone among major tech firms. Dell has set a goal of reducing its scope 3 emissions by 45 percent by 2030. Major cloud computing companies such as Google, Microsoft, and Amazon are all taking steps to reduce their scope 3 emissions. Google has set a goal of reducing their scope 3 emissions by 50 percent by 2030. Microsoft, which has set a broader goal of becoming carbon negative by 2030, plans to work with suppliers to reduce their emissions but has not set a specific scope 3 goal. However, truly becoming carbon negative would require significant steps from Microsoft's suppliers. Amazon has a less ambitious goal of having suppliers share information and set goals for carbon reduction.

Efforts to address scope 3 emissions extend beyond the tech industry. Traditional manufacturers such as Ford and Honda, for example, have also set scope 3 goals. Ford plans to reduce scope 3 emissions by 50 percent by 2035, while Honda is asking suppliers to reduce emissions by 4 percent each year from 2025.

The challenge for semiconductor production within Korea is insufficient access to clean energy. The Korean economy is among the most fossil-fuel-intensive in the world. Some progress has been made, with power generation emissions declining 2 percent in 2022 according to Ember, an energy think tank, but Korea continues to lag behind OECD countries on the transition to clean energy.

Without a robust move by Korea to develop renewable power domestically and to reduce its use of fossil fuels, the scope 3 goals of companies that currently purchase or may wish to purchase Korean semiconductors will incentivize Samsung and SK hynix to supply chips from their plants abroad with better access to clean energy.

Improved coordination on export controls and subsidy rules with the United States and the EU could help address some of the steps China is taking to make its industry competitive on price while advancing investments in clean energy can address the issue of scope 3 emissions. But deeper trends related to Chinese competition and the energy transition need to be added to the discussion of the future of Korea's domestic semiconductor industry.

Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute. He is a guest editorial writer of The Korea Times.