Korea grapples with U.S. push against 'made in China'

Economy

Published: 16 Oct. 2022, 18:00

Korea grapples with U.S. push against 'made in China'

Flags of Korea, the U.S., Taiwan and China are shown on a printed circuit board. High-tech products like semiconductors are a focus for the United States as it seeks to protect its economy from China by shifting the manufacturing of these products to the home market. Companies in Korea are finding that their dependence on China for high-tech manufacturing and materials has become a liability.

Korea Inc. faces an uphill battle as a push in the United States for economic security is taking its toll on companies dependent on China for manufacturing or for the supply of materials and components.

The U.S. is passing laws and enacting executive orders to bring the manufacturing of products important to national interest back to U.S. soil. Chips, batteries, electric vehicles(EV), solar cells and certain biotechnology products are on the list, and China is the main country of concern.

A number of Korean companies have been affected already.

Hyundai Motor’s EV sales in the U.S. have fallen since the passage of the Inflation Reduction Act (IRA), as its EV models won’t be qualified for the subsidies under the act.

Samsung Electronics and SK hynix are having to rethink their use of China as a major manufacturing base for semiconductors as a number of U.S. rules are making it difficult to transfer key technologies to China, which is the second largest source of memory chips for these companies after Korea.

Korea feels betrayed by its ally and is fighting for workarounds that would allow its companies to continue sourcing heavily from China. It is now engaged in an intense lobbying effort to get the rules watered down or waivers for its companies.

This anniversary special will explore the impact of the U.S.-China tech war on Korean business and map out ways to curtail the damage. It is based on interviews with academics and researchers.

Some argue that the dependence on China needs to be reexamined, while others argue that the Yoon Suk-yeol administration should come up with sizable financial incentives and tax cuts to attract manufacturing facilities for chips and high-tech products to Korea.

Electric Vehicles

A Hyundai Motor employee works at the company's assembly plant in Montgomery, Alabama. [HYUNDAI MOTOR]

Korea’s auto manufacturers and battery makers using China as a major supplier are finding it difficult to qualify for U.S. subsidies.

A recently-passed made-in-America EV tax rule offers no subsidies to Hyundai Motor and Kia, at least until 2025, as they are not assembled in the United States and the batteries in their vehicles use Chinese material and components.

Under the terms of the IRA, buyers of EVs assembled in the United States are eligible for a $7,500 tax credit for vehicles purchased after Aug. 16, 2022, extending an existing program that offered a $7,500 tax credit for EV purchases regardless of origin.

After Jan. 1, 2023, content requirements for batteries begin to phase in over a number of years. In 2023, 40 percent of critical-mineral value will have to come from the United States or countries with which the United States has a free trade agreement to qualify for $3,750 of the credit. That number increases 10 percentage points a year to 80 percent in 2027.

Fifty percent of battery-component value will have to come from the United States to qualify for another $3,750 of the tax credit. That number will increase 10 percentage points a year to 100 percent by 2029. To qualify for the subsidy, a vehicle must be completely free of Chinese-made components from 2024 and free of Chinese critical minerals from 2025.

Critical minerals include lithium, cobalt, nickel, tin, tungsten and graphite, while components include cathodes, anodes, electrolytes and separators made with those minerals.

The U.S. government released a list of 21 models that qualify for the credit in the second half, and neither the pure EVs of Hyundai Motor and Kia nor their plug-in hybrids made the list, including the Ioniq 5 and EV6.

German automakers like Audi, Mercedes-Benz and BMW each have at least one model on the list.

Hyundai Motor and Kia have no EV manufacturing in North America. Hyundai Motor plans to start building an EV factory in Georgia, but mass production will not begin until 2025. Kia has no plans to build an EV plant in the United States.

This means, in effect, customers must pay $7,500 more to buy a Hyundai Motor EV. The sticker price of the Ioniq 5 is normally $4,000 lower than the sticker price of the Ford Mustang Mach-E. But since the Mach-E is qualified for the credit and Ioniq is not, the Ford car is now about $3,500 cheaper than the Ioniq 5.

Hyundai Motor employees work at the company's Ioniq 5 plant in Ulsan. [HYUNDAI MOTOR]

The Ioniq 5 is now about $450 more expensive than Tesla’s Model 3 in the U.S. market.

“Hyundai Motor's Ioniq 5 and Kia’s EV6 were generally about $10,000 cheaper than similar-size EVs from other brands,” said Lee Hang-gu, a senior analyst at the Korea Automotive Technology Institute (KATI). “But without the price advantage, the sales will likely decrease by 1,000 units per week.”

“This is a very serious issue as Hyundai Motor and Kia have been expanding their share very rapidly in the U.S. market as Ioniq 5s and EV6s got good feedback from customers,” Lee added.

Hyundai Motor and Kia were together No. 2 in the U.S. EV market after Tesla, with a combined share of 9.1 percent as of end of July. It was only 4.7 percent in 2021.

Hyundai Motor sold 1,306 Ioniq 5s in the U.S. in September, down 34 percent compared to 1,984 in July, the month before the EV tax credit rule went into effect. Kia sold 1,440 EV6s in September, down 16.1 percent from July.

“A total of 72 EVs are currently sold in the U.S. market, and of them, 70 percent are not eligible for the tax credit,” said Lee Ho-geun, an automotive engineering professor at Daeduk University. “This raises concern that the rule will reduce purchases of EVs, and eventually lead to a decrease in the EV market.”

“Biden emphasized ‘combat the climate crisis’ with the IRA, but this is totally opposite what President Joe Biden intended with the IRA,” Lee said.

A bigger problem awaits Korean battery makers, which are highly dependent on China for critical minerals.

Those minerals can also be mined in many other countries, like Indonesia, Canada and Australia, but they have to be processed in China, as 70 percent of the world's facilities for refining the materials are in China.

Hyundai Motor Group Executive Chair Euisun Chung shakes hands with U.S. President Joe Biden during his visit to Seoul in May. [HYUNDAI MOTOR]

Sixty-eight percent of lithium used in the global market is being processed in China, according to Samsung Securities. Around 59 percent of lithium and 73 percent of cobalt are processed in China.

“No electric vehicle on the market will qualify for the full tax credit when battery requirements take effect in 2023,” according to a recent report from the Alliance for Automotive Innovation.

China is home to four of the world’s five biggest lithium processing companies, including Ganfeng Lithium in Jiangxi Province. The largest graphite producers are in China.

“Construction of processing facilities is not an easy task. It costs a lot of money, and also faces fierce resistance from environmental associations and nearby residents,” said KATI's Lee.

“Even if other countries, like Canada and Indonesia, can build one, it takes at least three to four years to complete,” Lee added. “Building an eco-friendly facility is even a bigger problem.”

Korea is also highly dependent on China for battery components. Nearly 85 percent of anodes used in Korean batteries last year came from China, according to data from the Korea Institute for Industrial Economics and Trade (KIET). Around 73 percent of cathodes and 55 percent of separators were from China.

Kim Dong-myung, left, head of advanced automotive battery division at LG Energy Solution, and Mary Barra, CEO of General Motors, pose for a photo after signing a deal to build a third battery plant in Lansing, Michigan. [LG ENERGY SOLUTION]

“Supply chain diversification is no longer a matter of choice, it is a matter of survival,” said Hwang Kyung-in, an analyst at the KIET. “Korean battery makers are expanding their partnerships with alternative countries, like Australia and Indonesia, but it will not be enough to qualify the U.S. EV tax rule requirements."

LG Energy Solution acquired a 7.5 percent stake in Queensland Pacific Metals (QPM) to source 7,000 tons of nickel and 700 tons of cobalt annually for 10 years from the end of 2023 from the Australian company.

It also signed a deal with Kansas-based Compass Minerals and will source 40 percent of its lithium carbonate and lithium hydroxide from it for seven years starting in 2025.

QPM will supply Samsung SDI with 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 for its SK On battery subsidiary from Switzerland's Glencore starting from 2020.

“If Korean companies can diversify the supply chain, the IRA could act as an opportunity for them as they have been expanding their partnerships with U.S. automakers like General Motors and Ford while Chinese companies will lose their share in the U.S. market,” Hwang said.

“The U.S. Treasury Department is set to announce specific guidelines before 2023, so the Korean government must have deep negotiations with the U.S. government for the guidelines to maximize benefits for Korean companies.”

Kim Pil-soo, an automotive engineering professor at Daelim University, emphasizes that it is essential for the government to offer additional incentives to Korean major automakers and battery companies. Kim also serves as chairperson of the Korea Electric Vehicle Association.

“Of course, handing out cash to large companies will face opposition from mid- and small-sized firms, but there’s no choice,” Kim said. “If big companies collapse, smaller companies also collapse. Then it will cause a slump in the country’s whole economy.”

Semiconductors

U.S. President Joe Biden, left, visits a Samsung Electronics chip manufacturing factory in Pyeongtaek, Gyeonggi, in May. He pledged cooperation to build a resilient semiconductor supply chain. [YONHAP]

Chipmakers like Samsung Electronics and SK hynix will have to make huge investments to shift chip manufacturing away from China. Korea and the U.S. are often mentioned as alternative sites, but the cost of building and maintaining the plants will be higher, considering a big gap in consumer prices and labor costs compared to China.

For the two Korean producers, China acts as the second largest manufacturing base for memory chips after Korea, with multiple production lines for dynamic random-access memory (DRAM) and NAND flash chips and packaging facilities in places like Wuxi and Xi’an.

“There is an urgent need to diversify supply chains that are centered around a certain country,” said Jeong Hyung-gon, senior research fellow at the Korea Institute for International Economic Policy.

“In the mid-to-long term, the semiconductor industry should reduce reliance on China for packaging given the extremely high dependency,” the researcher noted.

SK hynix has higher exposure to China than Samsung Electronics since it makes half its DRAMs in Wuxi. It also has a packaging facility in Wuxi and another packaging line in Chongqing.

To produce high-performing DRAM chips, the adoption of manufacturing equipment using extreme ultraviolet (EUV) is required.

Samsung Electronics Vice Chairman Lee Jae-yong, right, visits the Netherlands to meet with the executives at ASML in July this year. [SAMSUNG ELECTRONICS]

The chipmaker’s attempt to bring the machines into China was blocked by the U.S. as the administration of Donald Trump struck an agreement in 2019 with the Dutch government to prohibit ASML, the world’s sole maker of EUV machines, from selling high-end equipment to entities in China.

Samsung Electronics operates two NAND flash chip factories in Xi’an, producing around 40 percent of its NAND output, according to analysts. Over 30 trillion won has been spent on the site so far.

“The U.S. is well aware of the key chip choke point,” said Yeon Won-ho, head of the economic security team at the Korea Institute for International Economic Policy.

“It has the key equipment makers — ASML, Applied Materials and Lam Research — on its side, and many of their products are not allowed to be supplied to chip plants operating in China,” he said. “Without them, it is impossible to make advanced chips.”

The latest salvo is the U.S. Commerce Department's export restrictions announced Oct. 7 that widen the range of technologies that must be kept out of China.

The Korean government was quick to respond, saying that the new rules will have just a small impact on Samsung Electronics and SK hynix, citing the U.S. department’s decision to provide a one-year waiver to Korean companies.

The new restrictions concern technologies for DRAM memory chips rated 18 nanometers or less and NAND flash with 128 layers or more.

Waivers from the new rules will not affect existing restrictions.

The U.S. Chips and Science Act, which was passed in July, prohibits companies receiving subsidies under the act from making new investments in China for a decade.

“In the short-run, they could be able to keep the China-based factories operating,” said Chae Min-sook, an analyst at Korea Investment & Securities. “But with Washington’s tightened restrictions against China, more investment in China comes with a high level of risk."

A July photo of the site of a Samsung Electronics chip plant being built in Taylor, Texas [CITY OF TAYLOR]

Against this backdrop, the latest investments in new chip factories are directed toward either Korea or the U.S., including a $17 billion project in Taylor, Texas.

“As protectionism runs deep in separate economic blocks, the U.S. has taken the role of blocking the rise of Chinese companies competing with Korean corporations,” said Kim Yang-hee, an economics professor at Daegu University.

Doh Hyun-woo, an analyst at NH Investment & Securities, echoed the view, noting that the U.S. restrictions will prohibit Chinese companies like SMIC, YMTC and CXMT from making advanced chips.

Wuhan's YMTC achieved significant technological milestones recently, including the development of 192-layer NAND flash chips. Apple has reportedly considered sourcing chips from YMTC for new iPhones. But YMTC may not be able to make chips with more than 200 layers as the new rule prohibits the sale of equipment that can make chips with more than 128 layers.

Biopharmaceuticals

U.S. President Joe Biden’s made-in-America program extends to biopharmaceuticals and threatens Korean companies that rely on the exports of products that are made in Korea.

On Sept. 12, the president signed an executive order to introduce a National Biotechnology and Biomanufacturing Initiative. It calls for over $2 billion of investment, with $1 billion specifically going to manufacturing infrastructure in the U.S. The funds will go toward both private and public initiatives to expand manufacturing capacity and supply chain boosting efforts.

It said the focus of the initiative is to “increase the domestic manufacturing to limit the dependence on foreign suppliers” and create jobs.

Samsung Biologics exported a total of 448.6 billion won ($313 million) of biopharmaceuticals to the U.S. last year, around 29 percent of its sales.

The company currently produces all products at its facilities in Songdo, Incheon. It has three plants, with the fourth beginning partial operations on Oct. 11.

Samsung Biologics is contract manufacturing organization (CMO), a company that provides drug manufacturing services in the pharmaceutical industry on a contract basis.

Samsung said it is considering building a plant in the United States, with no details set yet. CEO John Rim narrowed down the promising candidates to four: North Carolina, California, Washington and Texas.

“This is a U.S. attempt to keep China and India in check, and with their absence, many other countries, like Japan and those in Europe, will try to enter the U.S. market,” said Lee Seung-kyou, vice president of the Korea Biotechnology Industry Organization (KoreaBio). “This could be a threat to Korean companies, which have been expanding their business in the U.S. rapidly in the recent years."

Celltrion also produces major biosimilar products at plants in Songdo.

“More Korean companies will choose the U.S. to build their next facilities, which could reduce their investment in Korea,” Lee said. “Other global companies were considering making investments in Songdo, but this could be affected depending on the latest U.S. announcement.”

SK bioscience announced last week it will establish a subsidiary in the United States, SK bioscience USA. It currently produces the Novavax Coivd-19 vaccine in its Andong plant under a CMO deal.

Some analysts argue that the $2 billion-investment is unexpectedly small and that Biden’s order is not targeting Korean companies.

“Given the scale of the recent investment plan, it will be difficult for the U.S. to build high-volume production facilities for biologics drugs any time soon, meaning there will be no significant risks to Korean companies, at least in the short term,” said Im Yoon-jin, an analyst at Daishin Securities.

Im said Biden’s executive order was more to contain China.

“The U.S. investment goes toward the development of manufacturing technology for drugs that are in preclinical trials or in the early stages, which does not apply to Korean companies that run businesses manufacturing large quantities of products.

“Exports to the U.S. by Wuxi Biologics increased 10 percent in two years, and 54.4 percent of its total sales came from its U.S. exports as of the first half of 2022,” Im added. “And around 54.4 percent of its total sales came from drugs in preclinical or Phase 1 and 2 stages, a key area that the U.S. will invest in as part of the latest plan."

'Surviving' the U.S.-China row

To survive as the United States legislates and passed rules to protect itself from China, trade policies in Korea must be reviewed, corporations supported and the U.S. government lobbied.

The U.S. push to isolate China from high technologies prompted China to be self-sufficient in producing computers, chips and other electronic components, which led into reduced imports from Korea.

Against this backdrop, Korea should be swiftly moving to look for new market opportunities in countries like the U.S. and its allies where they try to reduce the portion of made-in-China products.

“The U.S. is replacing many items imported from China with the ones originating from its allies,” said Jung Hye–sun , a researcher at the Korea International Trade Association. “Korean companies also benefit from the change."

Korea’s exports to the U.S. increased by 17.1 percent in the January-to-August period on year to $73.7 billion.

Exports to China dropped 1.9 percentage points in the first half compared to the same period the previous year, according to trade statistics data from the Korea Customs Service. Korea also posted a trade deficit of $1.1 billion with China in May, its first trade deficit with the country in 28 years.

To further increase its presence in the United States, Jung said that the Korean government and the country's companies alike should expand the range of items with a competitive edge over competing exporters, like those in Taiwan.

“Since Korea’s main export items to the U.S. often overlap with those of Taiwan, we need strategies to up technological supremacy and diversify the type of products,” she said.

Choo Kwang-ho, head of the economic policy department at the Korea Economic Research Institute, echoed the need to enhance economic fundamentals.

“We need to enhance competitiveness by increasing exports,” Choo said. “One of the biggest culprits behind the current trade deficit is increased imports of energy, which gets more expensive as the dollar strengthens. In this respect, the government needs to embark on a long-term project to develop energy resources, along with other measures, including a currency swap to stabilize the markets.”

In the short run, the Korean government should make efforts to win waivers for the companies.

The IRA is most urgent.

“We are currently working on three angles — through the U.S. Commerce Department and the White House, outreach to U.S. Congress and through public opinion,” Lee Chang-yang, Minister of Trade, Industry and Energy, said.

Since the bill was passed into law, top government officials including Lee traveled to the United States to meet with U.S. government officials, including Commerce Secretary Gina Raimondo, and legislators, including Senator Tommy Tuberville, while Trade Minister Ahn Duk-geun met with US Trade Representative Katherine Tai.

In meeting with Raimondo, "we were able to confirm her will to solve the problem,” Minister Lee said last month.

Georgia Senator Raphael Warnock introduced a bill to delay the EV subsidy rules under the IRA. This would give some time for Korean automakers, particularly Hyundai Motor, to get manufacturing in place.

“The U.S. government is working on guidelines for the IRA. Given the process will continue through the end of this year, the government’s priority should be conveying our message in terms of these guidelines,” said Cho Chuel, senior research fellow at the Korea Institute for Industrial Economics & Trade.

Samsung Electronics and SK hynix have received waivers on the new chip rules. Only SK hynix confirmed. But these temporary exemptions are more about postponing the risk rather than fundamentally resolving the problem.

Lobbyists have called on the government to enact measures to support industry.

“Korean companies are worried about exports, especially for the second half of this year,” said Lee Seong-woo, head of international trade department at the Korea Chamber of Commerce and Industry.

“The companies are in need of long-term supportive measures that could bolster exports and help them weather harsh business conditions."

A set of bills aimed at supporting export-oriented tech companies has been introduced, but none have been passed yet. Among them are the so-called K-Chips acts. One of the bills in the legislative push will increase tax cuts for companies building chip facilities in Korea. It is pending at the National Assembly.

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