[Kim Pyeonghwa's Peace and Chips] Korea and China Played Semiconductor Cards, But Why Did the US Jump In?

China, the Largest Semiconductor Consumer... Multiple Samsung and SK Local Factories
China Transforms from Semiconductor Industry Partner to Competitor
US Tightens Regulations to Cut Off China's Semiconductor Rise
US-China Hegemony Rivalry Increases Challenges for Korea's Semiconductor Industry

Editor's NoteSemiconductors. We hear about them every day, but explaining the concept is quite challenging. They are often called the rice of modern industry, so it's something you must know about, yet articles and books on semiconductors tend to be so difficult that people avoid them. But did you know that semiconductors are actually quite fascinating? Even a single semiconductor component hides the mechanisms of the entire industry and the interests between nations. We'll spoon-feed you the hidden contexts and meanings of the somewhat uncomfortable semiconductor field here at Peace and Chips. Just place your spoon and enjoy.

[Asia Economy Reporter Kim Pyeonghwa] These days, when reading semiconductor articles, two keywords always come as a set: 'China' and 'United States.' We understand that the US and China are competing for hegemony, but why is it said that Korea's semiconductor industry is struggling like a shrimp caught between fighting whales? It's because of the tightly intertwined relationship between Korea and China through the semiconductor industry. Having built a lot of ties over years via semiconductors in both countries, Korea cannot simply side with the US nor stay with China. Regarding the Korea-China relationship, which is gradually shifting into competition in the global semiconductor market, some argue that US containment might actually benefit the domestic industry. Let's unravel the complex semiconductor knot involving industry, security, and diplomacy.

Semiconductors, Korea's Top Export Thanks to China, with Multiple Samsung and SK Factories in China

Semiconductors are often called the export breadwinner. This title comes from their dominant share in export-driven countries. Semiconductors have held the top spot in export items for nine consecutive years until last year. Last year, semiconductor exports ($128 billion) increased by 29% compared to the previous year, accounting for 19.9% of total exports. Although concerns arise due to the recent semiconductor market downturn, they remain a major item responsible for total sales.

Who are the main export destinations for semiconductors? China, of course. China accounts for about 40% of Korea's semiconductor exports. According to a report by the Korea Chamber of Commerce and Industry, semiconductors are the industry with the largest increase in export share to China over the past 20 years, making the Chinese market crucial for Korea's semiconductor sector. China's status as the largest consumer of semiconductors further elevates its importance.

Domestic companies Samsung Electronics and SK Hynix have multiple factories in China. Samsung Electronics operates NAND flash factories in Xi'an, Shaanxi Province, and packaging factories in Suzhou, Jiangsu Province. SK Hynix has factories in Wuxi, Jiangsu Province (DRAM), Chongqing (back-end processing), and Dalian, Liaoning Province (NAND flash). These factories either handle early semiconductor processes in China before importing to domestic plants or serve local procurement needs.

China has consistently supported these companies' local factory establishment and operations. The economic benefits from attracting large-scale factories and responding to local demand were significant. Especially for SK Hynix, which was under creditor management when deciding on Chinese investment in 2004 during the Hynix Semiconductor era, the Chinese government provided various benefits such as loan support, corporate tax exemptions, and free factory land. This is why 38% of Samsung Electronics' NAND flash production capacity and 44% of SK Hynix's DRAM capacity are based in China.

China Shifts from Semiconductor Partner to 'Competitor'

However, in 2015, China began repositioning itself not as a partner but as a competitor. Facing evaluations that its semiconductor technology lagged behind major countries like Korea, China set a goal to raise its semiconductor self-sufficiency rate to 70% by 2025. This is the 'Made in China 2025' strategy. Since the 2000s, China has focused on strengthening manufacturing, and given the critical importance of semiconductors, it announced efforts to reduce reliance on foreign semiconductors and build its own supply chain.

Since then, the Chinese government has vigorously supported its semiconductor industry through incentives, subsidies, and tax benefits. Chinese foundry companies like SMIC and memory semiconductor companies like YMTC have been actively working toward these goals. According to the Semiconductor Industry Association (SIA), the Chinese government is expected to invest up to $150 billion from 2014 to 2030 to support its semiconductor industry.

Thanks to aggressive government support, SMIC and YMTC have recently shown progress. SMIC, which was stuck at the 14-nanometer (nm, one-billionth of a meter) process level, recently introduced 7nm advanced process semiconductor production. Considering that the world's top two foundries, Taiwan's TSMC and Samsung Electronics, are competing at the 3nm process level, this is a significant achievement. YMTC succeeded in developing 232-layer 3D NAND flash and aims for mass production within the year. In NAND flash, where stacking level equates to technological prowess, the current world record is the 238-layer 4D NAND flash developed by SK Hynix.

As China's technology level rapidly improves, domestic evaluations suggest China could become a long-term competitor, especially in NAND flash, which is considered less technically challenging than DRAM. Recent news that YMTC might be selected as a supplier for Apple, known for its strict standards, supports this possibility. Of course, some argue that the 7nm process or 232-layer NAND development news might not be genuine or that even if developed, there could be limitations in actual mass production and yield (the ratio of defect-free products). The Korea Eximbank's Overseas Economic Research Institute analyzed in a May report that the technology gap between Korea and China is about five years for DRAM and two years for NAND flash.

US Attempts to Cut Off China's Semiconductor Rise... Korea Needs Diplomacy Focused on Practical Benefits

Amid the complex equation of Korea and China's semiconductor industries, another variable cannot be ignored: the United States. The US is engaged in a hegemony competition with China and refuses to allow certain industries to become dependent on China. Especially, semiconductors, often called the rice of modern industry, are crucial and a core of technological security, so the US clearly aims to hold the lead. A representative example is the Chip4 alliance, which seeks a semiconductor supply chain centered on the US (design), Japan (materials and equipment), Korea (memory semiconductors and foundry), and Taiwan (foundry), excluding China.

The US, dominated by fabless semiconductor design companies like Qualcomm, recently introduced the Chips and Science Act (CSA) last month to strengthen its domestic semiconductor supply chain. It includes a 25% tax credit for global semiconductor companies that build factories in the US. However, there is a guardrail clause requiring these companies not to invest in China for ten years. Additionally, the US is taking measures to curb China's semiconductor rise, such as switching exports of high-performance GPUs for AI to a licensing system and considering bans on exporting semiconductor equipment used in processes below 14nm. The export of extreme ultraviolet (EUV) equipment, a core tool in semiconductor advanced processes, is already banned, and efforts are underway to ban deep ultraviolet (DUV) equipment exports, which are a lower-level technology, indicating an attempt to cut off China's growth at the root.

This puts Korea in a difficult position. Having invested heavily in China and with a significant portion of sales dependent on the Chinese market, Korea cannot simply ignore its largest consumer market. Institutions like the Korea Development Institute (KDI) evaluate that a semiconductor supply chain centered on Chip4 could be more beneficial domestically, but with uncertainty about China's next moves, domestic companies face deep dilemmas. Some argue that since China is a potential competitor in the semiconductor industry, US regulations might actually benefit Korea. It's a truly challenging issue.

Ultimately, beyond individual companies or industries, the role of national diplomacy becomes crucial. The fundamental conclusion is that Korea should align with the US while seeking sufficient understanding from China to gain practical benefits. It is also time to find ways to strengthen the competitiveness of Korea's semiconductor industry. While the US-China hegemony competition is beyond control, the domestic industry can build resilience with active government support. Recently, the 'Semiconductor Industry Competitiveness Enhancement Act,' known as the K-Chips Act, was proposed for this purpose, but the National Assembly seems uninterested in passing the bill amid political disputes. It's time to do what can be done.

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