Japan’s Ministry of Economy, Trade, and Industry (METI) on July 1 announced its plans to tighten export of high-tech materials used in semiconductor chip and smartphone productions to South Korea effective from July 4 due to an ongoing diplomatic dispute.
The new measure will remove three types of chemicals and transfer of manufacturing technologies which were previously allowed to be expedited for export as part of Japan’s preferential treatment of South Korea. The chemicals include (i) fluorinated polyimide, which is used in smartphone displays and other components; (ii) photoresists, a light-sensitive material used to transfer circuit patterns onto semiconductor wafers, and (iii) hydrogen fluoride, which is used as an etching gas in the making of semiconductors. In addition, Japanese exporters will now be required to apply for a permit for each batch of export shipment to South Korea with an inspection process that is expected to take about 90-days.
Bilateral ties between the two countries have gradually deteriorated since last October when the South Korean Supreme Court ruled that Japanese steelmaker Nippon Steel must compensate South Korean victims for forced-labor practices during Japanese colonial rule from 1910-1945. Japan rejected the rulings and insists that the issue was already settled as part of the 1965 treaty signed by the two countries. However, South Korean courts retaliated by stating that the compensation did not apply to individuals.
METI is also looking to halt preferential treatment for a wider range of exports to South Korea and removing Seoul by August 2019 from an export ‘whitelist’ of 27 countries that are entitled to technology transfer with potential military applications with minimal disruptions. Countries on the list include the U.S., Germany, and France. No country has been removed from the list up to this date.
IMPACT OF EXPORT RESTRICTIONS
Japan’s new export controls on semiconductor industry chemicals used in smartphone displays and chips threatens to create a serious ripple effect not only for South Korean and Japanese chip makers but electronics manufacturing worldwide.
South Korean technology giants SK Hynix, Samsung Electronics, and LG Display are all expected to be directly impacted by the export restrictions due to the difficulty in securing alternative sources of supply. Japan produces 90 percent of fluorinated polyimide and about 70 percent of etching gas in the world, as well as 90 percent of photoresists. In particular, South Korea’s imports of hydrogen fluoride represented 22.2 percent of global imports in 2018 with Japanese exports making up 32 percent of the country’s total imports.
South Korea currently has a dominant foothold on the semiconductor industry with 70 percent of the global market for dynamic random access memory and 50 percent of the NAND flash memory. These chips are then used to support mobile devices such as Apple’s iPhone and Huawei smartphones, as well as personal computers from HP and the Lenovo Group, and televisions from Sony and Panasonic.
Japan’s proposed export control reviews are expected to take around three months, but South Korean chipmakers may not have sufficient stockpiles given that companies typically only keep one to two months’ worth of parts and materials in inventory. Sources suggest that SK Hynix does not have three months of inventory and may be forced to halt production if it cannot procure the necessary materials from Japan. Samsung Electronics stated that it was assessing the situation but did not comment further. LG Display confirmed that it would see “some impact” from any trade condition changes with Japan, but that the company does not use fluorinated polyimide for mass production of its displays. The South Korean government announced on July 3 that it would invest KRW 1 trillion (USD 854.41 million; EUR 757.77 million) to produce home-grown materials and equipment to produce micro-chips in response to Japan’s export control curbs.
Although Japan’s tightened controls are targeted at crippling South Korea’s semiconductor industry, any major disruptions to this supply chain could affect Japanese suppliers using Korean semiconductors or displays in their products. Lesser-known Japanese companies such as resist maker JSR, Showa Denko, Shin-Etsu Chemical hold majority of the market shares on the aforementioned three materials and are largely owned by foreign investors. If supplies from South Korea are delayed to international manufacturers for assembly of finished products, it will not only have an effect on product delays but international market shares are likely to drop.
Tokyo’s decision to levy high-tech export controls on South Korea is the latest example of a global trend that has seen governments use national security as grounds for targeting foreign technology firms and as means for retaliating over trade disputes. The advent of export controls being deployed could have serious implications for accelerating the ‘decoupling’ of globalized tech supply chains – that is, the disintegrating of high-tech components and reduced dependence on foreign suppliers by localizing assembly and production.
South Korea has threatened to retaliate as Industry Minister Sung Yun-mo has vowed to take necessary countermeasures including filing a complaint to the World Trade Organization (WTO). Sung reiterated that the country would be looking to diversify import sources and localize supplies to cope with Japan’s latest export restrictions. Japan is adamant that the move is in line with WTO rules, citing that “difficulties” of doing business meant that there was a need to monitor the exports of any material that may have material uses.
Resilience360 customers with chip manufacturers based in South Korea relying on key materials from Japan are advised to check inventories to assess and forecast production targets for the coming months. Companies should also coordinate with sub-tier suppliers and manufacturers on production schedules due to the potential cost for late or undelivered goods. In addition, customers should liaise with Japanese importers to understand whether applications on export permits have been initiated in order to evaluate the gap due to a three month inspection period. For long term contingency measures, suppliers and manufacturers are advised to identify alternative sources from different geographic locations to mitigate possible operational delays. Through a risk impact analysis, customers can determine the extent of the extra costs involved and if sufficient alternative supplies exist in the event of an emergency.