[ANALYSIS] China's appeal as manufacturing hub is fading real fast

Tech

Published: 20 Aug. 2022, 06:00

[ANALYSIS] China's appeal as manufacturing hub is fading real fast

Representatives of Samsung Electronics and Chinese government officials celebrate the opening of its second chip plant in Xi'an in March 2018. [SAMSUNG ELECTRONICS]

China is losing its luster as a manufacturing hub for Korean companies due to tensions between Washington and Beijing, strict Covid-related lockdowns and higher labor costs.

Big Korean manufacturers spent billions of dollars to build factories in China but now they're searching for more stable locations like Vietnam — or even the United States.

Samsung Electronics and SK hynix haven’t made any major investments in China since 2019, after a trade war between the world’s two largest economies broke out the previous year.

“The latest spending in China primarily concerned maintenance of equipment and operations rather than capacity expansion or an upgrade to more advanced manufacturing processes,” said an executive at Samsung Electronics who spoke on the condition of anonymity.

The executive cited multiple layers of U.S. sanctions and regulations as the primary factor for putting a brake on investment in China, where the Korean chipmaker runs chip plants in Xi'an and Suzhou.

Samsung Electronics' workforce in China has shrunk 49 percent from 34,843 in 2017 to 17,820 as of the end of 2021, according to reports released by the company.

The U.S.-China battle in the technology sector dates to 2019 when President Donald Trump signed an executive order barring U.S. companies from using information and communications technology from Huawei, citing concerns about security.

The same year, the Department of Commerce prohibited the sale of components in which U.S. technology is used to Huawei and Semiconductor Manufacturing International Corporation (SMIC).

Since then, the U.S. government has been trying to include its allies — notably Taiwan, Japan, South Korea and Europe — in an effort to contain China’s rise in the tech sector through diplomatic dialogue and the passage of regulations at home.

The U.S. Chips Act, which was passed in July, bans any firm receiving subsidies under the Act from investing in advanced chip manufacturing in China for 10 years. The 10-year restriction does not apply to existing facilities and an exemption is possible for building plants with old manufacturing processes above the 28 nanometer generation.

“The exemption is meaningless because most of the latest memory chips are made using the 10 nanometer-range process,” said a source in the semiconductor industry.
“So, the law squarely says no new chip factory in China given that no company will be interested in building old-process facilities.”

U.S. restrictions are not confined to semiconductors. The Inflation Reduction Act, which was signed into law on Aug. 16, limits tax credits on electric vehicles to those with batteries produced in North America.

SK hynix has already tested Washington's resolve, and found it robust. The world’s second largest memory chipmaker attempted to bring in advanced lithography equipment using extreme ultraviolet (EUV) to China last year, but the U.S. government blocked entry.

SK Group Chairman Chey Tae-won said last December that the move was “unexpected,” adding, “The Wuxi plants will continue to operate without the advanced equipment.” Its two plants in Wuxi are responsible for making half of SK hynix's dynamic random access memory (DRAM) chips.

Chey struck a cautious note about locating factories in countries with such political risks.
“Geopolitical conflicts impact the semiconductor industry,” Chey said during a conference in Washington.
“In the past, we were after the places that cost less to reduce expenditures,” Chey said, “But the metrics should be changed in case that additional spending could incur due to unexpected problems.”

While companies are reducing their presence in China, big investments have been committed at home in Korea and in the United States.

Samsung Electronics plans to invest at least $17 billion to set up a new chip manufacturing plant in Taylor, Texas. The chip giant has a massive plot of land in Pyeongtaek, Gyeonggi where it plans to build at least six semiconductor plants. The third plant, widely known as P3, is scheduled to be completed by the end of this year.

SK hynix is looking to Yongin, Gyeonggi, as its next-generation manufacturing hub and has committed 120 trillion won ($90 billion) to developing a new cluster there.

In the U.S., SK companies will invest $22 billion in manufacturing advanced memory chips, electric vehicle batteries and biopharmaceuticals through 2025, Chey told U.S. President Joe Biden in a video conference last month.

The trend is not unique to Korea.

Apple has decided to shift iPad production to Vietnam from China, according to media reports, after Covid-related lockdowns in Shanghai caused massive supply chain disruptions.

U.S. sanctions and regulations will keep on isolating China, experts predict.
“The U.S. is strengthening its restrictions against China with its allies,” said Cho Eun-kyo, a researcher at Korean Institute for Industrial Economics and Trade.
“Given that the U.S. holds key technologies for chip design and manufacturing, the push to isolate China will be intensified going forward."

The U.S. government has suggested a consultative body on supply chain management in semiconductors to its allies – Taiwan, Japan and Korea.

The Korean government expressed its intent on attending a preliminary meeting for the body, called by the Korean press Chip 4.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]