Tech war: China’s position in global chip supply chain to weaken as South Korea closely aligns its interests with Japan and US, analysts say

Closer ties between South Korea and Japan highlight the increased US pressure on China’s semiconductor industry
That is expected to accelerate the process of China becoming marginalised in the production of advanced chips and in global supply chains

China’s standing in the international semiconductor supply chain could be on shaky ground once trading partner South Korea closely aligns its interests with the United States and Japan, according to analysts.

That prospect looms large for Beijing this week when South Korean President Yoon Suk-yeol visits Japan for two days from March 16, following Seoul’s announcement of a plan to resolve a long-standing dispute with Tokyo over wartime forced labour.

In the first visit in 12 years of a Korean head of state to Japan, Yoon is also expected to convince Tokyo to drop export controls on chip-making materials to South Korea and align their positions on supply chains.

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The anticipated reconciliation between South Korea and Japan as a result of Yoon’s state visit will accelerate the process of China becoming marginalised in the production of advanced chips and in global supply chains, according to Park Ki-soon, a senior adviser and expert in China’s economy at Seoul-based law firm Dentons Lee.

“Global semiconductor production is dominated by countries like South Korea, Japan, the United States, the Netherlands and Taiwan,” Park said. “The semiconductor supply chain of this bloc will become more stable, while China will be isolated.”

Closer ties between South Korea and Japan highlight the increased US pressure on China’s semiconductor industry, after Washington implemented in October updates that further restrict China’s ability to obtain advanced chips and US President Joe Biden in August signed into law the CHIPS and Science Act to boost America’s hi-tech manufacturing capabilities.

South Korea already forms part of the US government-backed Chip 4 Alliance that includes Japan and Taiwan. The alliance, which Beijing has criticised as Washington’s plot to exclude China from semiconductor supply chains, held their first meeting last month.

In January, the US reportedly secured an agreement with the Netherlands and Japan to restrict exports of some advanced chip-making machinery to China. While no official details of this pact have emerged, the Dutch government recently announced that restrictions on exports of semiconductor technology will be introduced before the summer.

South Korea to ask US to let chip makers keep investment in China

China is particularly sensitive about the position of South Korea, as the country is key to Beijing’s semiconductor self-sufficiency drive. Memory chip makers Samsung Electronics and SK Hynix both have plants in China, helping the country to integrate into cross-border value chains.

“If South Korea-Japan relations are normalised, it would significantly help [Korea’s] imports of semiconductor material, components and equipment,” said Kim Dae-jong, a business professor at Sejong University in Seoul. “That [trade] can recover to pre-2019 levels.”

But decoupling from China is expected to lead to hefty losses for South Korea.

“Twenty per cent of South Korea’s total exports are chips, and 60 per cent of these are exported to China,” Kim said. “If South Korea follows the US, it could lose up to 50 trillion won [US$37.89 billion] worth of investments in China.”

South Korea stands to gain from US chip alliance against China

China’s imports from South Korea shrank 29 per cent in the first two months of this year, according to Chinese customs data. The country’s imports from Taiwan fell 30.9 per cent and imports from Japan declined 23.1 per cent over the same period, signalling accelerated decoupling between China and its neighbours.

While Seoul seeks ways to allow Samsung and SK Hynix to retain their semiconductor facilities in China, the two companies had earlier won a one-year reprieve from sweeping US export controls unveiled in October that prevent chip makers from bringing in equipment for their facilities on the mainland.

There could be more bad news for Beijing next month, when Yoon goes on a state visit to the US. He will meet Biden at the White House for a bilateral summit, which is expected to include discussions on security and economic ties between the two countries.