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[Sustainable Future] Local production could be the key to global success

A do-it-yourself approach gives Korean firms some much-needed security

Oct 21,2019
Korea Inc. was thrown into turmoil three months ago when Japan curbed exports to Korea of industrial materials essential to smartphones and TVs.

President Moon Jae-in immediately called a meeting with top conglomerate chiefs, while Samsung Group scion Lee Jae-yong headed to Japan to ensure that business ties weren’t completely severed.

Many of those initial fears have since subsided thanks to the industry’s healthy backlog of materials, but as that inventory dries up, Korea has been forced to address the underlying problem of a high-tech manufacturing industry heavily dependent on Japanese materials, speeding up efforts to secure long-term sustainability through localized supply chains.

Progress has already been made.

LG Display has already found a domestic supplier of hydrogen fluoride - one of the restricted materials - while Samsung Display also has Korean companies lined up.

Semiconductor behemoths Samsung Electronics and SK Hynix have also supplemented some of their hydrogen fluoride supply with domestic sources.

The industry effort has accelerated as the trade row, which stems from a diplomatic conflict over a Korean court decision on compensation to forced laborers during World War II, intensified following Korea’s removal from Japan’s list of preferential trade partners in August.

The export curbs have triggered a rethinking of Korea’s traditional reliance on Japanese materials and focusing on establishing a sustainable supply chain by encouraging cooperation between domestic firms.



Forced to localize

Reliance on Japanese companies by Korea’s high-tech manufacturing sector runs deep, especially on the three materials Tokyo restricted in July.

Hydrogen fluoride from Japan made up 43.9 percent of Korea’s total imports of the material through May this year, while photoresists accounted for 91.9 percent and fluorinated polyimide held a 93.7 percent share, according to the Korea International Trade Association.

Japanese companies have played a key role in supplying the materials due to their superior quality compared to those of Korean competitors, ultimately weighing on efforts to localize the technology.

The level of semiconductor equipment localization stood at just 18 percent in 2017 - actually falling from 21 percent in 2013 - according to the Korean Society of Semiconductor & Display Technology. Meanwhile, semiconductor material localization has stalled at 48 percent since 2011.

The figures are relatively low considering Korean chipmakers’ dominance in the global market.

Last year, Korean companies commanded a 74 percent global market share in DRAM manufacturing and 48 percent share in NAND flash production. Semiconductors are Korea’s top export product, accounting for 19 percent of outbound shipments last month.

Japan has so far approved exports of the three materials only seven times since the export curbs were put into place. Exports of a liquid form of hydrogen fluoride still have yet to be approved.

Considering the trickle of materials from Japan and the possibility of supply shortages and production delays, companies have diversified, pivoting to local material manufacturers.

Soulbrain, RAM Technology and SK Siltron have all sprung up as potential candidates to take over from Japanese heavyweights including Morita Chemical Industries and Shin-Etsu Chemical as key suppliers for the local industry.



Localization progress

The local display industry has been especially quick to reduce reliance on Japanese suppliers.

LG Display has announced that it is only using domestic hydrogen fluoride in all display production, including liquid crystal displays (LCD) and organic light-emitting diode (OLED) displays.

“After a month testing domestic hydrogen fluoride, we have gradually adopted domestic hydrogen fluoride as we used up our existing supply,” explained a spokesperson for LG Display.

Samsung Display has also finished testing domestic hydrogen fluoride and is preparing to use the material in all display production.

“We finished testing domestic hydrogen fluoride late last month,” said a Samsung Display spokesperson. “We are currently working with multiple domestic suppliers.”

The company announced ambitious goals earlier this month, promising to invest 13.1 trillion won ($11 billion) in production, outlining goals to diversify its supply sources and strengthen cooperation with local components and materials suppliers.

The semiconductor industry has also made progress despite more challenges.

Unlike displays, semiconductors require a purer form of hydrogen fluoride. Samsung Electronics and SK Hynix have long relied on Japanese products precisely due to their much higher quality.

The entire production process for semiconductors takes up to 90 days, and local major chipmakers only have enough backlog of imported materials to last until the end of the year.

Local semiconductor companies have reportedly collaborated with domestic suppliers that process hydrogen fluoride imported from China and Taiwan and partially incorporated their materials into production.

A Samsung Electronics spokesperson said the company has replaced some of its hydrogen fluoride with domestic sources, although the company is still testing the material to check whether they are fit for all stages of production.

Much of the development in the semiconductor industry has remained low-key so as not to threaten whatever is left of the existing supply chains in Japan.

Still, local materials suppliers are expanding production, with multiple companies expanding or completing additional production lines for hydrogen fluoride and fluorinated polyimide, according to the Ministry of Trade, Industry and Energy.

Soulbrain, which has been in the spotlight recently due to its hydrogen fluoride production, has kept quiet on its expansion plans, although the company is expected to complete construction of its second production plant soon that will likely be able to match local supply needs.

The company’s hydrogen fluoride prototype - dubbed “five nine” hydrogen fluoride, a nod to its 99.999 percent purity level - is expected to be used for DRAM and NAND flash production.

RAM Technology, which produces a liquid form of hydrogen fluoride used in semiconductor manufacturing, has also been in the news.

The company’s shares have sharply risen, reaching 8,550 won per share as of Oct. 18 compared to 5,280 won per share on July 10, amid reports that it is working with SK Hynix.

SK Siltron, SK’s silicon wafer arm, announced last month that it has bought out U.S.-based Dupont’s wafer business to further reduce supply uncertainties.

The recent efforts overlap with the industry’s running focus to create a cooperative and sustainable partnership with smaller firms.

Samsung Electronics created an investment fund with smaller cooperative firms in 2010 that has since grown to 1.4 trillion won in size.

SK Hynix has also committed 1.22 trillion won into developing cooperative relationships with local firms after gaining approval in March to build a semiconductor cluster in Yongin, Gyeonggi.

The urgent trade situation with Japan has served to strengthen long-term business plans for a sustainable future with local firms, falling in line with a government effort for an industry shift toward greater self-reliance.



Seeking self-reliance

Unable to make headway in the frayed relationship with Japan and normalize supply chains, the government has placed emphasis on supporting local industrial material manufacturers and stabilizing the chronic imbalance between large and small companies in Korean industries.

According to Bank of Korea data, the difference in the operating profit rate between small- and medium-sized enterprises (SMEs) and large ones has grown to 3.6 percentage points in 2017 from 1.9 percentage points in 2009.

Considering the worsening conditions for smaller-sized companies, the share of research and development (R&D) investment from SMEs has decreased to 21.8 percent from 29.1 percent over the same period.

The Korean government, partially responsible for the worsening diplomatic spat and the resulting trade fiasco, has encouraged industry plans for localization by promising support funds, easing regulatory hurdles and committing more on R&D investment.

The Trade Ministry has announced that it will invest over 5 trillion won in R&D in key industrial materials and equipment over the next three years. For next year’s budget alone, the government has proposed injecting 1.3 trillion won to help local SMEs develop industrial materials and replace Japanese suppliers.

The government plans to develop 100 industrial materials affected by Japan’s trade restrictions by 2024, outlining an initial goal of securing a stable supply of the 20 industrial materials most impacted by the measures within one year.

The 20 materials include the three semiconductor materials restricted in July and machinery parts such as turbines and auto components including carbon fiber materials.

The government will also ease regulations to help local industries, such as reducing a 54-day period for safety tests on chemical material production to 30 days.

The government also clarified a special work hour policy so that companies will be able to skirt the country’s 52-hour workweek cap and allow researchers to crank up the hours in a bid to accelerate material development.



Localization is part of the solution

Despite the concerted effort toward self-reliance, major obstacles exist.

Analysts believe that there is still a significant gap in technology between Korean and Japanese companies.

“Japanese companies have confidence in their products,” said Lawrence Kim, an analyst at NH Investment & Securities, in a report. “They aren’t especially concerned about Korea’s localization efforts.”

According to a survey conducted by lobbying group Korea Federation of SMEs, local companies have 89.3 percent of the technologies of their Japanese counterparts.

That approximate 10 percent gap raises questions over whether Korean companies will be able to completely replace Japanese suppliers with domestic or even other foreign suppliers, considering Japan’s tried and tested product quality.

Kim cited the difference in product quality and durability that could ultimately give the upper hand to Japanese firms.

For example, in the machinery sector, such as high-precision reduction gear, products from Japan’s Nabtesco and China’s Nantong Zhenkang are identical in appearance. However, the Japanese product is heavily favored over the Chinese model even though the Chinese version is 50 percent cheaper, due to a large gap in durability.

“Localization is just one part of what the industry and government can do to reduce current risks,” said Park Jea-gun, the head of the Korean Society of Semiconductor & Display Technology and an electronic engineering professor at Hanyang University. “Korean display and semiconductor companies are huge buyers of materials, and they require only the best in global standards.”

A Samsung Electronics spokesperson said that despite the progress in finding domestic sources of hydrogen fluoride, they have yet to find a local photoresists producer that can match the quality of current suppliers.

The government has also repeatedly asked Japan to withdraw the restrictions for the sake of maintaining global supply chains.

“This is not an economic problem but a political one,” said Park, referring to the underlying diplomatic conflict between Korea and Japan.

“While we need to grow our abilities to offset risks as much as we can and support our local materials and industries, […] it is important for relations between Japan and Korea to improve.”

BY CHAE YUN-HWAN [chae.yunhwan@joongang.co.kr]


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