Breaking the chip illusion

Lee Sang-ryeol
The author is a senior columnist of the JoongAng Ilbo.

The chip industry is back on the upcycle. The artificial intelligence (AI) fever has fueled a chip boom. Chip-to-smartphone behemoth Samsung Electronics is estimated to have raked in over 6 trillion won ($4.3 billion) in operating profit from chip sales in the second quarter. Memory chip prices have soared thanks to the sizzling demand for AI-powering high bandwidth memory (HBM). The two-year dry chip season from the pandemic has finally ended. That’s good news for the Korean economy, given the impressive 20-percent share of semiconductors in the country’s exports. Korea inked $23.1 billion in trade surplus in the first half of the year, owing largely to $65.7 billion of chip exports, a whopping 52 percent increase from a period a year ago.

In an interview with the JoongAng Sunday in 2022 while working as an economics professor at Yonsei University, Sung Tae-yoon, the president’s policy chief, noted that the Korean economy often struggled during a chip slump. A slowdown in Korea’s primary dollar cash cow unsettles foreign-exchange supply and demand, he said. That was the case from 2022 to 2023. The trade balance was in the red for 15 straight months from March 2022, coinciding with the downcycle in the chip industry. As the surplus in the current account balance shrank, the value of the Korean won nose-dived.

In other words, the Korean economy does well when the chip sector performs well. That was true for quite a long time. The Korean economy flourished on the mighty chip engine, but it came with a catch. Korea’s weaknesses building up over the years were veiled by the chip sector’s performance. Sans chip shipments, the country’s trade with China fell into the red from 2021 due to shriveled exports. And yet, the government didn’t recognize structural shifts in the country’s No. 1 export market and missed a golden opportunity to modify its export strategy.

To make matters worse, the sluggishness of the domestic economy is taken lightly as long as exports led by chip shipments remain strong and buttress the overall economy. Retail sales — a barometer of domestic consumption — fell 2.3 percent in the first five months of the year against the same period a year ago — the steepest decline in 15 years. Consumers have little to spend, as the self-employed are aggrieved by high-interest debt, salary earners are tormented by smaller incomes due to high inflation and the younger generation is agitated by job insecurity and low pay. They can only be annoyed by the government’s relaxed perception of the economy, as succinctly suggested by Prime Minister Han Duck-soo who declared the economy was back on track thanks to the export rebound. A chairman of a financial holding group said, “Except for a few export companies, the economy is mired in the dumps with the self-employed sinking deeper and deeper, as seen in the spike in delinquency rates for bank loans.”

A sectional boom can deafen the awareness of a looming crisis. Although you should prepare for rainy days while the sun is out, this sagacity is rarely practiced. Despite the show of rare bipartisanship on the theme of redesigning the framework for promoting the semiconductor industry, whether it can materialize in a valid law is uncertain. The design of directly subsidizing chip companies investing in new facilities and providing electricity, water and other infrastructure for their new factories is already in action in the United States, China and Japan. But liberal lawmakers opposing any favors to large companies could reason against the move. The government also is passive toward the bipartisan outline due to fiscal constraints. The government’s laid-back reasoning that it is sufficient to indirectly support chipmakers through cheaper loans also appears too casual against other governments’ astronomical spending on the chip sector.

Earlier this week, Samsung Electronics experienced its first-ever strike. The union warns of disrupting chip lines if its demands are not met. Such childish whining was unimaginable during the period when all hands were behind the communal objective to buttress chip supremacy.

In hindsight, restructuring and reform opportunities have been missed under the intoxication of the chip boom. Politicians today are entirely engrossed in partisan warfare without any care for the economy. Their ideology-driven battle sounds alarms even after the long-awaited chip spring returned.