Everyone loses

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Everyone loses


Rah Hyun-cheol
he author is an editorial writer of the JoonAng Ilbo.

While I was covering industry in the mid-2000s, many foreign CEOs envied the distribution networks of the three manufacturing powers in East Asia — Korea, China and Japan. They were particularly impressed with Korea’s position in the middle of the technology ladder, with Japan at the top and China at the bottom. The arrangement would benefit Korea most as it had a better chance of going up rather than down. East Asian manufacturing and the supply chain on which in operated seemed invincible.

It was a three step process with enviable synergy and a logical division of labor. Japanese capital goods were added to Korean intermediary goods and rolled out as finished products in China, making them price and quality competitive. Americans and Europeans tried to get by with lesser Made-in-China products after China’s power surged in 2010 following the U.S.-triggered financial crisis. But that was impossible, as the products while certainly cheap lacked the contributions of Japanese and Korean capital and technology. Trade matched the value chain.

The three-tier system began to shudder in recent years. Korea imported fewer intermediary goods from Japan, and China less from Korea due to advances in its own technologies and products. Samsung Electronics’ share in the Chinese smartphone market began to drop fast. At the same time, China began to invest heavily in components to localize the production of displays and semiconductors. As China became the world’s biggest exporter, Korea’s exports value also jumped to above 80 percent of Japan’s. The equitable distribution among the three was in jeopardy.

Japan’s trade moves in recent weeks could accelerate the breakdown. The restrictions on Korea-bound shipments on three materials widely used in display and semiconductor production will not just hurt Korea but also China and Japan. Output from China equals 25 to 40 percent of total annual chip yields of Korean makers. Disruption in the production of Korean chipmakers, which are responsible for more than 70 percent of the global memory chip supplies, would push up international prices and hurt the bottom lines of Japanese electronics companies that cannot do without chips.

The three materials — including hydrogen fluoride, also known as etching gas — are crucial in wafer fabrication process. Etching gas needed to clean chemical substances in silicon wafers are used hundreds of times during fab process. Korea’s hydrogen fluoride imports from Japan totaled $30 million from January through May this year. But the chemical is not impossible to replace. With the right focus, local companies are expected to perfect the technology within one or two years.

In the meantime, Korean companies could use Chinese or Russian imports. The export curbs will not devastate the Korean chip industry, only end its reliance on Japanese supply chain. It also would mean the collapse of the three-tier value chain.

The consumer boycott on Japanese brands is widening in Korea. Koreans have stopped drinking Japanese beer or wearing Japanese fashion brands. They have also called off trips to Japan. The voluntary movement could have huge ramifications. Local businesses are fretful of losing their connection with Japanese suppliers and clients. Japan’s capital goods could suddenly stop coming. It could cause local companies to seek out alternatives in Korea and elsewhere. Japan cannot stay atop if the value chain pyramid comes down.

Moreover, Korea’s two major markets — the United States and China — are engaged in a trade war. Washington is out to levy maximum 25 percent tariffs on practically all products coming from China. The tariff barriers not just aim at China, but its value chain as well. Korea and Japan reported huge trade deficits in the first quarter as a result of a sharp fall in their exports to China.

Japan would be fanning the breakdown of the East Asian value chain as hoped by the United States. Will Japan do better if it tries to put the brakes on Korea and China? It would be foolish to let the world’s most efficient distribution system go down the drain. The toll will affect the three economies, as well as the global economy. Japan must ask itself if its risky move is that worthwhile.

JoongAng Ilbo, July 22, Page 28
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