South Korea is the world’s second-largest producer of semiconductor equipment, with a 21.5% market share, second only to the USA. Korea’s semiconductor exports amounted to $97.9 billion in 2017 and the semiconductor industry is the most valuable source of income for South Korea. Furthermore, it is the world’s largest memory semiconductor exporter, dominating over 60% of the global market. For a nation with such a disproportionate reliance on a single sector, even a slight turmoil in the supply chain can inarguably augment subsequent snags. This is exactly what happened in July 2019, when Japan imposed export restrictions on fluorinated polyimide, photoresist and hydrogen fluoride, chemicals key to the semiconductor and display manufacturing sectors.
Japan produces 70% of the hydrogen fluoride used for globally. However, it has limited reserves of the chemical. It is extremely reliant on crude HF exported by China, which has a purity ranging from 95% to 98%. For this crude HF to be employed in semiconductor applications, it is subjected to purification to achieve semiconductor-grade purity. Interestingly, only Japan has been able to achieve this level of purity on a stable basis, through timely investing resources required to develop and qualify a replacement source in this industry.
Relying on Rivals Is Not a Good Strategy
South Korean buyers were incapacitated while the Japanese manufacturers enjoyed competitive advantage by exploiting their superior technical expertise. It is a futile exercise to test the offerings from any other brands at the expense of time and money. The polyimide situation was not quite different from HF. According to KITA, Japan supplied more than 93% of South Korea’s fluorinated polyimide imports between January and May 2019. Though polyimide manufacturers are believed to be scattered across the world, their clustered presence in East Asia favored Japan. The capability to offer fluorinated polyimide as a replacement for glass screens and allow flexible and lightweight electronics left South Korean buyers at the mercy of Japanese players and enabled sellers to usurp the benefits of near exclusivity.
Adding to the woes of the South Korean technology giants was their dependence on Japanese specialists for their photoresists. Japan produces approximately 90% of global photoresists, with over 90% of 2018 Korean photoresist imports originating from Japan. There are less than five Japanese resist manufacturers currently supplying the industry. Photoresist manufacturers in Korea are reportedly less advanced and serve older manufacturing nodes.
While polyimide and HF markets merely celebrated the merits of technical superiority, photoresists characterized themselves by a supplementary layer of intricacy associated with the customization. Replacing a resist with a different product from another supplier requires months of process qualification. They need to be proven to meet the technical needs of the process and the new production needs to demonstrate an ability to scale their production while maintaining quality. This caused significant problems, as alternatives to Japanese resists are uncommon.
The Restrictions Are On, How Did It Go?
Despite the sharp drop-off, several factors helped cushion the blow for South Korean chipmakers — the first being that Japan's export restrictions on the three chemicals amount to enhanced scrutiny and not an outright cutoff. Japanese suppliers can now apply to export three years’ worth of photoresists rather than having to seek approval for each shipment separately. The Japanese restrictions on the exports to South Korea triggered a crisis, but it eventually motivated South Korean corporations to strengthen their competitive edge. Soulbrain, a mid-sized company based in Gyeonggi, successfully followed the steps of its Japanese counterparts. The company has evolved from producing hydrofluoric acid gas from 5 nine purity (i.e. 99.999% pure) back in August 2019 to 12 nine purity in January 2020.
In addition, the recent drop in global semiconductor prices and subsequent drop in demand likely resulted in higher-than-necessary inventories, thus providing some relief to South Korean chipmakers. Thus, the Japanese restrictions proved to be a boon than the intended bane for the semiconductor manufacturers.
The Need to Diversify the Supply-Chain
Attempts to localize materials successfully have a long way to go. Now that the South Korean semiconductor industry is restricting large-scale adoption of photoresists, it is seeking to lower its dependence on Japan through diversifying its supply channel rather than large-scale localization.
Chipmakers may also start turning to China or Japanese chemical companies with plants located outside Japan to evade the restrictions. But finding a new source for the other two products — fluorinated polyimide and photoresists — will prove no easy feat, given Japan's domination of the market for both exports.
Alternatively, the age-old solution advocating an exchange of intellectual capital safeguarded by the principles of goodwill appear as the most rational approach for unravelling this crisis. This is quintessential for a nation desperately seeking to eliminate dependency in the supply chain. Simultaneously, any country, including Japan, which has founded and subsequently exploited its unrivalled proficiency will ensure that the expertise is confined to its borders.
Can Rivals Work Together? Time Will Tell
Interestingly, even if the two nations settle on the prospects of mutual growth under the guise of optimism, the threat of industrial espionage and counterfeit propel exponentially, especially when they are in close quarters with a neighbor which has been recurrently profiled for intellectual theft.
If Tokyo and Seoul's trade spat persists, South Korean companies will largely be left at the mercy of Japanese regulators. However, in the long run, South Korea will strive to attain self-reliance by accelerating to modernize its infrastructure, an effort that the nation was not motivated enough to undertake so far.
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Barnali has over 20 years of experience in consulting, product management and leading teams in the development of market driven software solutions.
At GEP, Barnali is responsible for ensuring customer needs are met in an impactful way with our supply chain and procurement technology using the latest advances in next generation technology and new user experience.LET'S TALK