South Korea’s Chip Industry Is Caught Between China and the U.S.

(Bloomberg) -- South Korea has long relied on the U.S. for security and on China for trade, seeking to keep politics out of business to avoid picking sides.

That geopolitical balancing act is becoming increasingly untenable as Washington and Beijing square off over technology.

South Korea’s advanced semiconductor industry is witnessing soaring global demand as consumer electronics sell out during the pandemic, with exports by Samsung Electronics Co. and SK Hynix Inc. leading what is shaping up to be the strongest quarter of economic growth since 2018.

Yet with chips at the heart of the U.S.-China conflict, Seoul risks serious collateral damage if the superpower rivalry intensifies under presidents Joe Biden and Xi Jinping. Intel Corp.’s announcement that it’s committing to advanced chip fabrication in the U.S. dovetails with the Biden administration’s objectives of regaining the lead in technology, suggesting competition with China will only deepen.

An extended standoff between Washington and Beijing poses a dilemma for American allies across Asia as Biden rallies them to take a unified stand against China, forcing governments to make a choice over how far they’re prepared to risk a backlash from the world’s second-biggest economy. South Korea avoided joining a U.S.-coordinated condemnation of China’s alleged human-rights abuses in Xinjiang, which provoked a furious reaction from Beijing.

South Korea’s status as a world-leading chipmaker makes its predicament particularly acute, further straining its efforts to maintain good relations with both China, the destination for about a third of its exports, and the U.S., which provides security particularly to defend against North Korea’s nuclear threat.

The “long-term partnership and alliance with the U.S. has always been Korea’s priority,” said Choi Ji-eun, spokeswoman for President Moon Jae-in’s Democratic Party, not least because South Korea wants to safeguard the global system of free trade that has allowed it to prosper as a top ten exporter.

South Korea’s significance in the tussle between the world’s two biggest economies was made clear when U.S. Secretary of State Antony Blinken and Defense Secretary Lloyd Austin visited Seoul during their first overseas trip.

But its actions in relation to semiconductors — the country’s biggest export by far — are more ambiguous, fueling speculation that South Korea could be the weak link in Washington’s attempts to deny Beijing access to advanced chips and equipment.

“We don’t benefit from pursuing a hostile policy toward Beijing, neither in terms of security nor the economy,” said Kim Young-ho, a ruling Democratic Party lawmaker who sits on the Foreign Affairs and Unification Committee. As a result, South Korea’s national interests are not fully in line with Washington’s China strategy, he said.

Semiconductors have jumped up the political agenda as countries from China to Japan, the U.S. and in Europe all seek to secure the supply chain for chips that are vital to every aspect of digital life, from data centers to smartphones. That strategic imperative — what the industry calls a rush toward “techno-nationalism” — has been compounded by a pandemic-induced shortage of chips that is forecast to cost $61 billion in sales for automakers alone this year.

While much of the focus has been on Taiwan Semiconductor Manufacturing Co. to remedy the shortfall as the world’s largest contract chipmaker, Samsung is the only company able to compete at the cutting edge. And yet the South Korean giant appears far more keen than TSMC to maintain its foothold in China.

Why the world is dangerously dependent on Taiwan for chips

Samsung is considering spending $17 billion building an advanced semiconductor fabrication plant, or fab, in Texas. At the same time, Samsung began operations last year of a second fab in the Chinese president’s hometown of Xian as part of a $15 billion investment. SK Hynix has meanwhile announced plans to acquire $9 billion-worth of Intel’s memory and storage business including its fab in Dalian, China.

A senior trade official in Seoul, who asked not to be named discussing sensitive political matters, said that South Korea can ill afford to lose either market given its export-driven economy. The best scenario, according to the official, is that the U.S.-China conflict doesn’t deteriorate further.

That may be wishful thinking after the first face-to-face contacts between China and the Biden administration descended into a slanging match. Responding to Blinken’s comments that he’d encountered “deep concern” about some of Beijing’s actions during his Asia tip, Politburo member Yang Jiechi played the economic card as he pointed out that Japan and South Korea are China’s No. 2 and No. 3 trade partners respectively.

South Korea had a taste of what China’s economic wrath looks like when it was hit by unofficial retaliation for the decision made by a previous government to deploy the U.S. THAAD missile-defense system in 2017. 

Seoul’s position is further complicated by its reliance on China to help mediate with the regime in North Korea — South Korea needs Beijing’s support if it wants to achieve its chief foreign policy aim of denuclearization by Pyongyang. Kim Jong Un’s regime called for stronger ties with China and also fired its first ballistic missile since Biden took office.

Confrontation with China would simply push it closer to North Korea, according to lawmaker Kim Young-ho. “I think Washington understands that and shares our concerns,” he said.

Rocky relations with Tokyo due to the legacy of Japan’s colonial rule of the Korean peninsula during World War II are another layer of geopolitical complexity that has spilled into the chip arena. In 2019, Japan imposed export curbs on chemicals used in smartphones and semiconductors claiming that its “trust” in South Korea had been damaged.

With so many considerations, South Korea has yet to provide a definitive answer to Washington’s unofficial offer to join a coalition with the U.S. and Japan to deal with North Korea and China. Foreign Minister Chung Eui-yong has said that South Korea is seeking an early summit with the U.S. as it aims for a “comprehensive” development of bilateral relations. 

The key question is how the government will respond to the Biden administration on the issue of tech transfers to China, said Mathieu Duchatel, head of the Asia program at the Institut Montaigne in Paris, who researches the geopolitical dimension of semiconductors.

Biden’s emerging approach appears to be to build small coalitions depending on the technology involved to update export controls and deny access to Beijing, he said. For South Korea, “especially under the Moon administration and its North [Korea] policy, it’s clear that they won’t be as confrontational on tech.”

South Korea’s best card may be that, as much as it needs to stay in the good graces of both the U.S. and China, they in turn need the irreplaceable skills of its chip industry. That reliance is growing: Samsung makes more than a third of the world’s memory chips and an increasing portion of the advanced logic that’s at the heart of the world’s phones and computers. When you add in Samsung’s local rival SK Hynix, the need for Korean chips only grows.

Moon has pushed to diversify export markets to Southeast Asia and India after the THAAD dispute. But geography matters in trade, and South Korea’s overall exports to China were still more than double those to the U.S. in 2019. Chip sales were worth more than twice the No. 2 item, cars, with China the main destination.

That might not last if it’s forced to take sides. 

“Korea may have to compromise some of its market share in China if Washington pushes Seoul to be part of an economic alliance among democratic countries,” said Wi Sung-rak, a former South Korean ambassador to Russia who previously served as director of the Foreign Ministry’s North American Affairs Bureau.

For now, according to a separate government official, the Moon administration has to continue to support the global chip supply chain. Like the U.S. and China, however, it’s also taking steps to strengthen its domestic semiconductor capacity, spending a planned 2.1 trillion won ($1.9 billion) last year to boost local material, parts and equipment suppliers focused on chips and displays.

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