Korean firms dragged into U.S.-China trade war

Worries that Korean companies could soon be dragged into the middle of the U.S.-China trade war appear to be coming true as top chaebol start to feel the pressure from Beijing.

According to a New York Times report Saturday, the Chinese government called in major tech companies last week to warn them of “dire consequences” if they cooperate with the U.S. government’s ban on selling technology to Chinese companies. Among the tech firms were Korea’s top two chipmakers: Samsung Electronics and SK Hynix, the report said.

The meeting involved officials from China’s National Development and Reform Commission, Ministry of Commerce and Ministry of Industry and Information Technology. The New York Times wrote their presence “suggested a high level of coordination and likely approval from the very top of China’s opaque leadership structure.”

The response from Samsung Electronics and SK Hynix has been extremely cautious.

On the same day, a Samsung Electronics spokesperson said, “There is nothing we can confirm to the media,” adding that “The interpretation that Samsung would benefit from sanctions on Huawei isn’t pleasing either.”

The response was similar from SK Hynix. “There isn’t much we can say at the moment,” a spokesman said.

If the New York Times’ report is true, it will mark the realization of concerns that Korean firms will end up sandwiched between the powers in the U.S.-China trade war.

Both Samsung and SK Hynix have production facilities in China.

Samsung manufactures NAND flash chips in the city of Xi’an, western China, while Hynix has a DRAM factory in Wuxi, eastern China. Samsung’s second NAND flash factory is also under construction in Xi’an. Since last year, the Korean electronics giant has injected 7.9 trillion won ($6.7 billion) into the project. Its completion in 2020 is intended to boost Samsung’s maximum NAND flash production per month by 43 percent from the current 200,000 units to 660,000.

SK Hynix just finished expanding its Wuxi factory last April with 950 billion won of investment. Half of the chipmaker’s DRAM production comes from this site.

Apart from chips, Samsung Display supplies smartphone displays to Chinese firms while LG Innotek exports camera modules. Samsung Electro-Mechanics is a supplier of multi-layer ceramic capacitors, another core component on electric circuits.

Cutting off IT components from these companies could be a major roadblock to Chinese President Xi Jinping’s “Made in China 2025” initiative. The state-funded plan aims to put the country at the forefront of 10 tech industries like semiconductors and electric vehicles by 2025.

According to IT industry sources, China’s biggest concern is the possibility of the Donald Trump administration launching a “secondary boycott” in the global IT industry, which refers to indirectly pressuring a target by influencing other businesses. Non-American IT companies receiving penalties for doing business with Huawei would be a disaster for China.

“Chinese officials explicitly warned companies that any move to pull production from China that seemed to go beyond standard diversification for security purposes could lead to punishment,” said the New York Times in the same report, citing two anonymous sources familiar with the meetings.

On the other end, Huawei was recently reported to have sent senior executives to Korea in order to request the continuance of component supply. In urgently arranged meetings on May 23 and 24, a senior executive from Huawei’s mobile division met with executives at local tech firms like Samsung Electronics, SK Hynix and LG Display, local reports said, urging them to “undergo component supply according to original contract terms.”

Huawei’s executives also recently visited mid-sized companies as well.

Local industry watchers are worried that if Korean companies halt component supply to Huawei, Beijing will hit back with the same retaliations that brought down Lotte Mart.

In March 2017, Lotte Mart was forced to halt operations of 87 of its 99 branches across China for firearm violations. Orders came months after Lotte Group agreed on a land swap with the government as the deployment site of the U.S.-led terminal high altitude area defense antimissile system. The retailer decided last year to completely pull out of the market.

Back then the Chinese government used various administrative tools like fire regulations and hygiene laws to halt operations at Lotte Mart stores. The same could happen for Korean chipmakers if Beijing raises the same questions on hygiene and the usage of chemicals at their chip plants.

But some critics doubt the New York Times report. CNBC reported that Beijing sent a softer message to companies from third-party countries, including Korea, saying that as long as they continue transactions normally there will be no problems.

BY KIM YOUNG-MIN, JUNG HYO-SIK [song.kyoungson@joongang.co.kr]