CHIP on the Shoulder

As the one-year anniversary of the CHIPS and Sciences Act passes, South Korean semiconductor giants Samsung Electronics and SK Hynix face a major dilemma amid escalating US-China geopolitical tensions. While the CHIPS Act is designed primarily to promote US security and competitiveness vis-à-vis China, there is concern that it simultaneously places the South Korean semiconductor industry in a state of vulnerability.

The CHIPS Act leverages US influence over key parts of the global semiconductor supply chain, to prohibit semiconductor manufacturers from “expanding or upgrading their advanced chip capacity in China for 10 years.” While the US ultimately provided certain exceptions for non-Chinese firms producing in China, limitations to upgrading manufacturing facilities guarantee their loss of effectiveness in the long term, incentivizing South Korean chip manufacturers to seek alternative solutions outside of China.

Firms like Samsung and SK Hynix, who have recently made significant investments in their Chinese facilities, seemingly have the most to lose – Samsung completed a $25 billion expansion of its semiconductor fabrication facility in Xi’an in 2022, while SK Hynix purchased NAND facilities in Dalian in a $9 billion transaction set to conclude in 2025. Consequently, South Korean chip manufacturers are placed at odds against US policies that aim to slowdown manufacturing capabilities of Chinese semiconductor facilities.

South Korea’s Semiconductor Landscape

South Korea’s semiconductor industry is the nation’s largest source of exports, accounting for 18.9% of total exports in 2022. Moreover, an overwhelming 55% of last year’s semiconductor exports was directed at China. Such a heavy reliance on China as a trading partner is even more accentuated in the memory chip industry, as exports to China and Hong Kong accounted for over 70% of all South Korean memory chip exports last year.

This China-dependent structure of the memory chip industry is further exacerbated by the fact that a large proportion of the manufacturing facilities of South Korean semiconductor firms like Samsung and SK Hynix are located in China – 40% of Samsung’s NAND chips, approximately half of SK Hynix’s DRAM chips as well as 30% of their NAND chips are all manufactured in China.

The US-China technology competition is not showing any signs of slowing down. As long as South Korean operations remain heavily invested in China, they will continue to face political pressure and vulnerability to unfavorable economic policies from both sides. For South Korean chipmakers to maintain a stable and dominant presence on the global stage, they must quickly find short- and long-term alternative strategies to secure production capabilities and maintain profitability.

“K-Chips Act”

Recently, Samsung unveiled a 300 trillion won project to build a chip cluster with five advanced chip manufacturing plants in Yongin by 2042, while SK Hynix has also announced plans to invest 120 trillion won into building a semiconductor cluster in the region as well.

These investment announcements are closely linked to South Korea’s recent “K-Chips Act” enacted in March, which raised the corporate tax break for facility investment in South Korea, from 8% to 15% for large corporations in the semiconductor and other strategic industries. Combined with the latest amendment, which provides an additional 10% deduction on the increments in investment, firms like Samsung and SK Hynix could be eligible for a tax cut of up to 25%. South Korea was already one of the top government incentives providers in the world for semiconductor manufacturing last year covering between 25% to 30% of total semiconductor manufacturing costs, only behind China and tied with Taiwan.

As such, the K-Chips Act is crucial step towards developing a powerful domestic supply chain, to secure South Korea’s position as a memory chip powerhouse and to shield South Korean semiconductor firms from supply chain risks from geopolitical tension and unfavorable foreign policies.

South Korea’s Domestic Challenges: Talent Pipeline & Market Diversification

However, ambitious plans to boost domestic chip manufacturing require the necessary infrastructure and manpower, something that South Korea has been lacking in the past. Data from the Korea Institute for Advancement of Technology noted, that in 2020, only 650 new university graduates from semi-conductor related departments were supplied to an industry that needed to fill 1,600 positions. Furthermore, the Korea Semiconductor Industry Association estimates that South Korea’s semiconductor industry will face a shortage of at least 30,000 workers over the next 10 years. To remain competitive in the fast-paced global semiconductor industry, addressing the current weaknesses in the semiconductor workforce pipeline is imperative.

While South Korean firms lead the world in the memory chip sector, the Korean semiconductor industry lags behind in departments other than memory chips like the NAND and the DRAM. South Korea led the global memory chip market last year at a dominant 56.9% share, yet it only represented less than 3% of the global market share in all other sectors of the industry. Such an over-dependence on a single sector within the semiconductor industry results in a highly volatile business structure sensitive to supply chain disruptions and macroeconomic trends. As Samsung and SK Hynix continue to onshore manufacturing facilities and develop domestic supply chains, it is critical that sufficient resources are pooled into non-memory sectors as well.

Recommendations

Moving forward, South Korea may seek avenues towards solving the talent-deficit and market diversification challenges to support the development of domestic supply chains.

For example, the South Korean government could provide exceptions to the 1944 quota, which serves to restrict the number of students at universities in Seoul and Gyeonggi Province, for semiconductor-related departments. While the Yoon administration did raise the student quota last year, industry experts were doubtful that the move was sufficient to fill the talent deficiency problem. The Education Ministry recently selected five universities and three university coalitions to receive a total grant of 54 billion won to nurture semiconductor talent, on the condition that recipients produce at least 50 graduates from semiconductor departments each year as well as developing specialized semiconductor curricula. These financial incentives are an important next step for South Korea’s talent pipeline.

Additionally, the expanding market for artificial intelligence development holds promise for South Korean firms. Artificial intelligence requires significant memory to be produced, and South Korea’s expertise in memory chip production places its firms at the forefront of the global AI chip race. Notably, South Korean equities experienced a huge inflow of $3.1 billion in May, driven by a surge in interest in AI and related hardware exporters from foreign investors.

As global semiconductor supply chain continues to shift and grow, there will be key opportunities for South Korea to expand its industry both at home and abroad—Early investments today in next-gen talent development and research diversification will pay dividends in the years to come.

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The views expressed are the author's alone, and do not represent the views of the U.S. Government or the Wilson Center. Copyright 2023, Asia Program. All rights reserved.