SMEs Caught Between War and the Auto Industry Say, "We Need Semiconductors"

Key Materials Neon Gas and Krypton
Main Production Areas: Ukraine and Russia
Prices Significantly Increased Compared to Last Year

Indirect Impact on Automotive Industry Supply Shortage
Increased Vehicle Semiconductor Production Reduces Supply Share for Other Industries

[Asia Economy Reporter Kwak Min-jae] #Agricultural machinery manufacturer A, located in Daegu, is facing difficulties in the tractor production process. Amid the ongoing semiconductor supply shortage caused by the global supply chain crisis, the situation has worsened due to the impact of the Russia-Ukraine war, making it even harder to procure semiconductor components needed for engines in tractors and other agricultural machinery. The company needs to receive 3,000 semiconductors monthly according to the production plan, but currently can only secure 70-80% of the required quantity. A company official said, "We usually sign contracts with domestic semiconductor manufacturers every five years and stockpile three months' worth of inventory, but now the stock is insufficient. We are struggling to obtain semiconductors even by paying premiums, but due to the nature of agricultural machinery being directly linked to farmers' livelihoods, it is difficult to raise product prices, so even when products are sold, profit margins are shrinking."

The risk of Russia's invasion of Ukraine has further worsened semiconductor supply for small and medium-sized enterprises (SMEs). Both countries are major suppliers of neon gas and krypton, key materials for semiconductor production, so their conflict significantly impacts semiconductor manufacturing. As semiconductor companies enter inventory management due to prolonged supply shortages for automotive semiconductors, the supply shortage impact is even greater in the relatively smaller mid-sized and small business sectors. They inevitably lose out in supply priority to the automotive industry and others.

According to data from the Ministry of Trade, Industry and Energy on the 15th, as of 2021, Ukraine and Russia accounted for 28% of Korea's imports of neon gas (23% Ukraine, 5% Russia), 47.7% of krypton (30.7% Ukraine, 17% Russia), and 49.1% of xenon (17.8% Ukraine, 31.3% Russia). The import price of neon gas announced by the Korea Customs Service recorded $150,909 per ton in February when the Ukraine-Russia war began, exceeding 2.5 times the average price last year ($58,747). Import prices for xenon and krypton also surged by 62.6% and 61.5%, respectively.

Industrial printer manufacturer B in Osan, Gyeonggi Province, recently faced another production halt crisis following last year. B experienced production difficulties for three months in the third quarter of last year due to semiconductor and raw material supply disruptions but resumed production lines from the fourth quarter. However, the company worries that semiconductor supply for central processing units (CPUs) may become difficult again due to the war between the two countries. A B company official said, "Since the end of last year, semiconductor supply issues have eased, raising hopes for recovery, but the industry says the semiconductor crisis caused by the Ukraine war could last another two to three years. Products containing semiconductors account for 30-40% of our total models, so the impact is expected to be significant."

As the semiconductor supply shortage in the automotive industry prolongs, it is also affecting semiconductor supply for SMEs in other industries. Because the production share of automotive semiconductors has increased compared to usual years, the supply share for semiconductors used in other industries inevitably decreases. In fact, unlike the global semiconductor market slowdown, the automotive semiconductor market is experiencing high growth. According to market research firm Omdia, while the global semiconductor market growth rate was 21.1% last year and is expected to drop sharply to 4.2% this year, the automotive semiconductor market is projected to grow 17.8% this year, marking five consecutive years of double-digit growth. Accordingly, automotive semiconductor sales are expected to rise from $50 billion (approximately 59.9 trillion KRW) last year to $84 billion (approximately 100.64 trillion KRW) by 2025. A semiconductor industry official explained, "As the automotive semiconductor supply issue prolongs and the market size grows, automotive semiconductor prices have surged. As companies manage semiconductor inventories, it has become even harder for mid-sized and small companies with smaller market sizes to secure semiconductors."

Experts say that since the semiconductor supply shortage for SMEs is likely to worsen due to the Ukraine-Russia war, comprehensive government measures including technological support are necessary. Professor Kwak Dong-cheol of Hannam University said, "Without government support, it is very difficult for SMEs to procure semiconductors. We need to strengthen support for technology development to domesticize related resources, as was done during the past urea solution crisis." He added, "Realistically, semiconductor supply cannot be suddenly increased, but since inventory management by semiconductor players and excessive orders by demanders worsen the problem, the government needs to exercise negotiation power to alleviate semiconductor supply issues."

This content was produced with the assistance of AI translation services.