Washington has imposed limits and restrictions on South Korean chipmakers’ exports to plants in China
On August 29 the US Department of Commerce (DoC) ended a waiver that allowed certain semiconductor manufacturers to send US chipmaking equipment to their factories in China without permits. This caused falls in the share prices of the two largest South Korean memory chip makers, SK Hynix and Samsung Electronics. A week later, reports emerged that, rather than individual permits, the US administration was weighing annual chip supply and site licence approvals to reduce bureaucratic hurdles.
What’s next
For the two South Korean majors, this fresh hurdle raises both technological and political risks: fear of their fabs in China falling behind technically, and of angering US President Donald Trump. As a long-term — and costly — strategy, the companies will likely start to shift the balance of their semiconductor production elsewhere. This move, however, is likely to upset Beijing.
Subsidiary Impacts
- The new curb contrasts with Trump’s allowing Nvidia to export AI chips to China, with the US government sharing the profits.
- The policy, along with the ICE raid on a Hyundai factory in Georgia, will upset Seoul, which has increased its US investments.
- On top of US policy uncertainty, changes in China’s business environment are making it a less attractive location for South Korean companies
Analysis
A key factor enabling Seoul to win a global lead in core global industrial sectors is that, rather than designating a single national champion, it has usually encouraged domestic competition.
Samsung, the biggest conglomerate (chaebol), bought Korea Semiconductor in 1974. By 1992 Samsung Electronics was the world’s largest maker of memory chips (a position it recently lost).
In state-led restructuring after the 1997 Asian financial crisis, the Kim Dae-jung government stripped Hyundai — then the second-largest chaebol — of Hynix, its struggling chip unit. After years of seeking a buyer while racking up losses, Hynix was sold in 2012 to the SK conglomerate ( see SOUTH KOREA: Politics clouds M&A outlook – November 11, 2011).
Spotting artificial intelligence (AI)’s potential sooner than Samsung, SK Hynix took on large debts which paid off. This year it toppled its rival as the world’s leading maker of memory chips. It retained this lead in the second quarter, with global DRAM sales of USD12.23bn and a 39.5% market share, against Samsung’s USD10.3bn (33.3%).
VEU
The US announcement came on a Friday. The following Monday (September 1) SK Hynix shares fell by 4.09% on the KOSPI, Seoul’s stock exchange. Samsung Electronics slid 2.15%.
For Samsung Electronics chips are one product among many, but they are SK Hynix’s core business.
Formally, the United States has rescinded “validated end user” (VEU) status for this pair and other chip makers, including Intel and Taiwan’s TSMC. The DoC’s glossing of this as closing “a Biden-era loophole” is rather misleading.
The previous US administration crafted policy carefully, after consulting with allies and other stakeholders. The South Korean pair were granted VEU status for several reasons:
- If upgrades are restricted, this would ensure they do not lose ground to Chinese competitors technologically.
- As Seoul argued in negotiations with Washington, China already possesses the rather basic technologies needed to make NAND and DRAM chips, so that Seoul’s production raises no new security risk.
- It represented a reward for large investments in the United States under the CHIPS Act: another Biden-era measure deplored by Trump, since it involved modest US subsidies which he deems superfluous.
Big in Texas
Samsung is investing USD37bn to expand its fabs in Texas. It may also reinstate a USD7.2bn packaging unit — initially planned, then cancelled for lack of customers — as it recently won major contracts to supply chips to both Tesla (USD16.5bn) and Apple (value unspecified).
The DoC says it will grant licences to companies which had VEU status. These firms will be able to “operate their existing fabs in China”, but not “expand capacity or upgrade technology.” Both South Korean companies have been doing the latter since they got their waivers. These are large operations:
- Samsung’s plant in Xian accounts for some 30% of its output of NAND flash memory.
- SK Hynix has two fabs in China: 35% of its DRAM chips are made in Wuxi, while 37% of its NAND output is from a factory in Dalian bought from Intel for USD9bn. Signed in 2020, this sale was not fully completed until March this year. It now appears ill-timed.
Short-term damage may be limited, as global demand for legacy memory chips is strong. In order to avoid disrupting supply chains, Washington would likely not force such big fabs to close. However, South Korean firms worry that Trump’s actions are often hard to predict.
Short-term damage may be limited, as global demand for legacy memory chips is strong
Exports
Semiconductors are crucial to South Korea’s economy, whose growth remains largely export-driven — despite a now wealthy but often lacklustre 52 million-strong home market.
The latest trade data, for August, illustrate this centrality:
- Chip exports exceeded USD15bn: an all-time monthly high, up 27.1% year-on-year.
- This comprised over one-quarter (25.9%) of total exports of USD58.4bn, far ahead of any other sectors. Auto exports took second place with USD5.5bn.
The current dynamism of this notoriously cyclical sector is fuelled by strong demand for high-end high bandwidth memory (HBM) chips, driven by growing investment in infrastructure for AI worldwide. This has pushed up memory chip prices.
China looms large
Production from South Korean firms’ facilities in China is additional to that USD15bn. These operations have been booming, boosted by Beijing’s economic stimulus measures.
Samsung’s NAND flash memory plant in Xian increased its sales by 28.7%, from KRW8.7tn (USD6.2bn) in 2023 to KRW11.2tn last year. Shanghai Samsung Semiconductor, its overall China chip sales unit, almost doubled its revenue from KRW15.6tn in 2023 to KRW30.1tn in 2024.
Similarly, SK Hynix’s Chinese DRAM production unit saw revenues rise from KRW51.1tn to KRW5.6tn. Its total sales in China jumped 64.3% year-on-year to over KRW13tn in 2024.
Sales exceed local production, because both firms also import chips into China. Samsung’s imports include low-power double data rate (LPDDR) memory, NAND flash memory, image sensors and lower-grade versions of HBM.
Last year, Samsung Electronics’ total exports (including smartphones, TVs, etc) to China increased by 50%, from KRW42.3tn to KRW64.9tn: slightly more than its aggregate US sales of KRW61.5tn. China remains South Korea’s top trade partner overall, although the United States had been closing the gap before US tariffs hit.
China remains South Korea’s top trade partner
Fading attraction
China-US geopolitical tensions apart, after decades of burgeoning trade and investment ties, China has begun to lose its lustre for South Korean business (see CHINA/SOUTH KOREA: Decoupling will spread as ties sour – July 14, 2023).This is driven by a diverse range of issues and concerns, including:
- slowing GDP growth rates and rising wages;
- tighter national security laws and arbitrary restrictions (not only during COVID-19); and
- industrial espionage (see SOUTH KOREA: Technology leaks will remain a problem – October 28, 2024).
Nonetheless, unwinding South Korean chip production in China would be a huge challenge that could roil global markets. Seoul and its companies will therefore try to resist US pressure.
