[NAVIGATING CRISES] Supply-chain crisis forces a big business rethink

Industry

Published: 30 Aug. 2022, 18:16

[NAVIGATING CRISES] Supply-chain crisis forces a big business rethink

President Yoon Suk-yeol, third from left, and U.S. President Joe Biden, second from left, visited a Samsung Electronics chip factory in Pyeongtaek on May 20 when the two presidents vowed to further cooperate on supply chain management. [NEWS1]

Korean companies are holding high-level meetings to address supply-chain issues as disruptions have held up production and led to cascading bottlenecks in the global economy, where shortages in one place daisy-chain to the other side of the world and into unrelated industries.

The companies are throwing out the decades-old rule book of just-in-time inventory and brutal efficiency in favor of redundancy, a diversity of sourcing and bigger, more expensive, inventories. They are also rethinking the strategy of giving everything possible to China and are now seeing the value in buying more from countries with which Korea has stable relations.

Ways of doing business are being upended. Long-held beliefs are being scrapped. What ultimately emerges is not yet known, especially as the integration of China into the vision is a work in progress as Korea wants to remain more engaged and the United States is pushing for marginalizing the country and limiting exposure to it.

Efforts are cross-company and cross-border, with CEOs from one industry putting their heads together with CEOs leading unrelated businesses to cobble together solutions and come up with practices that might help.

In government, the Ministry of Industry, Trade and Energy has met with trade representatives from United States, Indonesia, Vietnam and Australia to discuss supply chain challenges in semiconductors, raw materials and energy.

Over 30 such meetings have been held. Two years ago, the ministry held fewer than five high-level meetings on the same subject.

Tensions between Washington and Beijing, the Russia-Ukraine war, inflation, component shortages and the pandemic have all contributed to making supply chain management even more tricky. Unprecedented chip shortages in 2020 demonstrated how a dearth of critical parts could turn into a nightmare, hampering car production and hurting a wide range of industries.

To build a more stable and manageable supply chain, companies hope to diversify their supply bases and buy from more production sites, while the government is planning to strengthen communication channels to share information about the flow of goods and services.

Chipmakers like Samsung Electronics and SK hynix are focused on increasing the number of parts suppliers, with the aim of reducing reliance on a handful of vendors. They have found that it is better to err on the side of too many than be caught short.

Samsung Electronics said its efforts are wide ranging and involve better communications with suppliers, increasing the number of factories used for sourcing and more stockpiling of components and materials.

One industry source said that Samsung Electronics and SK hynix now source wafers from four or five companies, which the source claims is more than before. The wafer suppliers include SK Siltron, Tokyo's Sumco and Tokyo's Shin-Etsu Chemical.

Samsung Electronics listed a total of 101 major parts suppliers in 2021 in a report released in January, up from 21 in 2019.

The vendors are located in 12 countries. In 2019, they were located in just eight countries. A notable change is an increase in the number of Korean suppliers from two in 2019 to 40 in 2021. The highest percentage of the suppliers are based in Korea.

“In the past, businesses were preoccupied with reducing costs and maximizing efficiency in forming supply chains,” Deloitte Korea noted in a report.

“But they are now trying to go beyond the previous strategy and reorient their focus toward resilience and agility to external risks. The supply chain network became more diversified as they experience Covid-19 lockdowns in China and disruptions in logistics,” the report said.

In June, Samsung Electronics Vice Chairman Lee Jae-yong met with executives from ASML, the Eindhoven, Netherlands company that dominates the manufacturing of high-end chip-making equipment on which Samsung Electronics is dependent. Subjects of discussion included extreme ultraviolet (EUV) lithography equipment, which is used to make the most advanced semiconductors.

During that trip, Lee also visited Samsung SDI’s EV battery plant in Hungary and BMW in Germany.

In June, SK Chairman Chey Tae-won emphasized the importance of building more stable supply chain systems.

In electric vehicles, battery makers and material companies are signing long-term contracts or forming joint ventures to ensure the stable supply of EV batteries and related raw materials.

LG Energy Solution, the country’s largest and world’s second-largest battery maker, signed supply deals with a total of 10 material companies from seven countries for the supply of critical minerals.

It invested 12 billion won ($8.9 million) in ASX-listed Queensland Pacific Metals (QPM) for 7.5 percent of the Australia-based battery materials company. It will buy 7,000 tons of nickel and 700 tons of cobalt from the company annually for 10 years from the end of 2023.

It also signed a deal with Compass Minerals and will source 40 percent of its lithium carbonate and lithium hydroxide from the Overland Park, Kansas-based company every year for seven years, starting in 2025. SQM in Chile will supply it with 55,000 tons of lithium through 2029.

Lithium, nickel and cobalt are the key minerals used in making cathodes, which are 40 percent of the value of an EV battery. Their quality plays an important role in the quality of the battery.

“No batteries mean no EVs, so getting enough raw materials is one of the most important and competitive segments for battery makers to grab the share in the fast-growing market,” said Lee Hang-gu, a senior analyst at Korea Automotive Technology Institute.

“Local companies must tighten their cooperation with the major mining countries that have free trade agreements with Korea, such as Australia, Canada, Chile and Indonesia.”

Samsung SDI signed an agreement with QPM for 6,000 tons of nickel every year for up to five years. QPM produces about 24,000 tons of nickel every year, 80 percent of which will be supplied to LG Energy Solution and Samsung SDI.

SK Innovation in 2019 signed a six-year deal to buy 30,000 tons of cobalt from Baar, Switzerland's Glencore, starting from 2020.

But sourcing minerals from other companies cannot be the ultimate solution. As it gets tougher and tougher to buy minerals amid the surging demand and skyrocketing prices, companies are setting their sights on the recycling of used batteries and the extraction of key materials.

“Countries that are highly dependent on imports are exposed to the high risk of the supply chains, and the biggest answer that can hedge it is the recycling of used batteries,” said Ha In-hwan, a KB Securities analyst.

LG Energy Solution invested 60 billion won for a 2.6 percent stake in Mississauga, Canada's Li-Cycle to access 20,000 tons of nickel for a decade starting in 2023. That is enough for 300,000 EVs.

It also signed an agreement with Zhejiang Huayou Cobalt to establish a joint venture that recycles battery materials. Huayou Cobalt is China’s biggest cobalt producer.

SK Innovation has been researching ways to extract lithium hydroxide from used batteries since 2019, with the goal of commercializing the process in 2025. The extracted lithium hydroxide can be used in the manufacturing of high-nickel lithium-ion batteries, the company said.

Samsung SDI purchased a stake in PM Grown, a Korean battery recycling company, in 2019, although details of the deal have not been disclosed.

The used battery recycling market is expected to grow at an annual rate of 53 percent to reach 254,000 tons in 2025.

Since managing the supply chain is a cross-border issue, the government is pushing to cooperate with other countries in a bid to ease the problem.

But frustrating these efforts are the ongoing tensions between Washington and Beijing, leaving Korea a choice between China and the United States.

China stands as the largest market for chips and electronic devices, while the U.S. holds key intellectual property for semiconductor manufacturing, software and design.

While the Korean government hopes to prioritize cooperation related to supply-chain management, the U.S. is tilting towards keeping China out of semiconductor supply chain altogether.

As for EV manufacturing, the government’s efforts are centered around agreements related to the sourcing of critical raw materials. During their discussions in late July in Seoul, President Yoon Suk-yeol and Indonesian President Joko Widodo agreed to cooperate on the stable supply of nickel.

Hyundai Motor Executive Chair Euisun Chung, sixth from left, and Indonesia's President Joko Widodo, fourth from left, attended a groundbreaking ceremony for the automaker's factory in Indonesia on March 16, this year. [HYUNDAI MOTOR]

Hyundai Motor and LG Energy Solution are jointly building a 1.17 trillion won battery cell factory in Indonesia.

The Southeast Asian country has the biggest reserves — 21 million tons — of nickel, a core material in lithium-ion batteries, according to U.S. Geological Survey data. The agency estimates that Indonesia produced 760,000 tons of nickel last year.

In December, the Korean government signed a memorandum of understanding with the Australian government for the joint development of mines and projects for critical minerals. The two countries are set to hold a business roundtable this year to discuss specific details of the plan.

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