1.5 Years Since Japan's Export Restrictions... 'So-Bu-Jang Independence' Remains Distant

One and a half years after Japan's export regulations, the supply of core materials, parts, and equipment has stabilized, but dependence on Japan has rather increased.

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[Sejong = Asia Economy Reporters Haeyoung Kwon and Heeyoon Kim] #Yeongdong Tech, a pneumatic and hydraulic equipment manufacturer located in Changwon, Gyeongnam, is a foundational company that led the mass production of domestic excavators by domesticating the hydraulic controller for excavators, which Japan monopolized entirely in the early 1990s. Yoon Chanheon, CEO of Yeongdong Tech, recalled the experience in 2019 when Japan’s export restrictions began, recalling how Kawasaki Heavy Industries of Japan controlled the export volume of hydraulic controllers to Korea in 1990, limiting domestic production. Coincidentally, Yeongdong Tech was focusing on developing nanoalloys as part of a new business. Japan’s technological prowess in the silver nano-particle market is world-class. Yeongdong Tech succeeded in developing oxidation-resistant silver nanoalloy technology, securing about 70% price competitiveness compared to Japanese products that had dominated the domestic market.

#Amt, a film processing company in Yesan, Chungnam, is a small and medium-sized enterprise that succeeded in developing new technology to pioneer the heat-blocking film market, which was trapped in Japan’s patent network. Among the 103 elements in the periodic table, 75 elements are included in the patents of Japanese company A for heat-blocking films. Avoiding one patent leads directly to patents held by American and German companies. CEO Kim Namhoon of Amt developed ceramic composite coating technology of the chalcogenide series, a material outside the patents, breaking through Japan’s patent monopoly and achieving material independence.

According to the government and industry on the 25th, after Japan imposed export restrictions on three major items of materials, parts, and equipment in July 2019, the government and private companies have poured efforts into domesticating these items for one and a half years, resulting in the gradual stabilization of core component supply. The government explained that this was the result of pouring a huge budget in the trillions of won after Japan’s export restrictions on some materials such as hydrogen fluoride. However, there are criticisms that because the government’s research and development (R&D) support is too broad, competitive items and technologies are either excluded from government support or do not receive sufficient support.

According to the Ministry of Trade, Industry and Energy, the government’s budget for materials, parts, and equipment was 1.0942 trillion won in 2019, 2.0745 trillion won in 2020, and this year it has more than doubled to 2.5541 trillion won in just two years. Of this, 86% of the total annual budget, 2.2 trillion won, is poured into R&D alone.

Amt, a film processing company, is a small and medium-sized enterprise that succeeded in breaking Japan's patent monopoly in the heat-blocking film market and achieving material independence. The photo shows the production of ceramic composite coating material film at the factory. Photo by Amt

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Despite such government efforts, dependence on Japan has not yet decreased. The Ministry of Trade, Industry and Energy announced that among the $167.8 billion worth of domestic imports of materials and parts last year, Japanese products accounted for $26.79 billion, or 16%. This is a slight increase compared to 15.8% in 2019. The trade deficit in materials and parts with Japan also increased from $14.15 billion to $15.37 billion during the same period.

In the field of small and medium-sized enterprises, there are criticisms that policy changes are needed for the government’s domestic materials, parts, and equipment policy to be effective. Since support is led by the government, it is difficult to select competitive or commercializable technologies, and as a result, there are complaints that support is biased toward large and medium-sized enterprises with experience in national projects.

Yeongdong Tech challenged government national projects twice with silver nanoalloy technology superior to Japanese technology but was repeatedly rejected. The reason was the difficulty in providing theoretical backing for the new material. Ultimately, the company is developing its own technology products while directly contacting customers to apply the technology.

CEO Kim Namhoon of Amt explained, "Although government support projects have expanded since Japan’s export restrictions, most import-substitution items supported by the government are projects centered on planning that medium-sized or large companies can handle," adding, "Direct participation by small and medium-sized enterprises is difficult, so they are effectively excluded from government support."

Some argue that since the government is investing astronomical budgets in fostering materials, parts, and equipment, it should select and support competitive items and companies through ‘sorting the wheat from the chaff.’ There is also an opinion that support policies should be innovated led by the private sector rather than the government.

Currently, the materials, parts, and equipment policy is far from selective and focused. The government invested a total of 2 trillion won to develop technologies for 100 items over one and a half years after Japan’s export restrictions, and technology development is currently underway for 85 items. An official from the Ministry of Trade, Industry and Energy explained, "We are investing R&D budgets after a strict screening process for technologies and companies that are absolutely necessary," adding, "We are postponing support for technologies that require excessively high costs and increasing policy execution efficiency by matching 100% with the private sector."

Professor Sung Taeyoon of Yonsei University advised, "It is practically impossible for domestic companies to localize and gain competitiveness in all materials, parts, and equipment items," adding, "The global division of labor system is specialized in areas where each company excels, so the government must focus support on materials and parts technologies that are closest to world-class and most core to increase the success rate of policies."

There are also criticisms that the fostering policy for materials, parts, and equipment should be innovated from government-led to private sector-led. The government plans to pour 2.5 trillion won into the materials, parts, and equipment budget this year, which is only one-tenth of Samsung Electronics’ annual R&D amount (20.1929 trillion won as of 2019). It is analyzed that it is more efficient to provide benefits such as tax support to encourage private sector-led investment in materials, parts, and equipment, while the government focuses on administrative support. As patent disputes with Japanese companies increase due to localization, there are calls for the government to support disputes, especially for small and medium-sized enterprises that find it difficult to respond to lawsuits, by providing legal advice and other assistance.

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