Home > Opinion > Columns

How to sharpen the competitive edge of K-chips

Published: 31 Oct. 2024, 19:32

Kim Dong-ho
The author is the editor of economic news at the JoongAng Ilbo.

The semiconductor industry pillaring the Korean economy is withering. SK hynix’s third-quarter earnings report made this clear. Samsung Electronics would have been beaten by its long-time No. 2 local rival in operating profit from its chip business alone in the July-September period. Instead, the smaller player — more of a pure-play memory maker — gained a decisive competitive edge against the bigger Samsung with its AI-optimized high bandwidth memory (HMB) chip that is being supplied to AI behemoth Nvidia. The embarrassment drew an unprecedented apology from chip division chief Jun Young-hyun after Samsung Electronics released disappointing earnings for the third quarter on Oct. 8.

Jun apologized to shareholders and investors for “failing to meet market expectations” and causing worries about the company’s fundamental competitiveness and business prospects. He promised that management will do its utmost to use the momentum for another leap forward. The confession of self-reflection and redetermination underpins how costly complacency can be in the fast-changing chip industry.

The latest news all paint a gloomy picture for the Korean chip industry. According to a leadership assessment on the next-generation chip standard by a research team of the Leading Future Agendas of Business & Society, Korea scored 70, far behind the United States with 95 and Japan with 90. Korea is more than four years behind the two countries which had formed an alliance of standardizing the next-generation semiconductor technology from 2021.

Things will become more unsettling if Donald Trump returns to the White House upon winning the upcoming U.S. election. He had criticized the Biden administration’s CHIPS and Science Act for putting up “billions of dollars for rich companies to come and borrow the money and build chip companies here.” Samsung, who received generous subsidies for building a next-generation chip facility in Texas, would certainly be included in those rich companies. China has been making a menacing ascent in the chip market despite U.S.-led sanctions. Its confidence in the legacy memory chip production has caused a sharp dip in Korea’s chip exports to China. Recently, China arrested a South Korean chip engineer on suspicion of “espionage” even though the country owes much to Korea for chipmaking skills. The episode suggests how confident China has become about its chipmaking technology.

In hindsight, the Korean industry has missed the timing to ride on the wave of seismic changes in the global chip landscape over the last decade to move ahead. The inflection point was the rise of big-tech players and their AI chip demand. GPU maker Nvidia came out as the predominant winner. HBM is essential to service GPUs in an AI chipset. Taiwan’s foundry TSMC shared the AI bonanza through its near-exclusive production of Nvidia’s AI chips. SK hynix was able to join the bandwagon, but how long it can fend off competitors is uncertain.

Samsung Electronics was able to withstand headwinds every time new destructive technology entered the scene with its own innovation. It defeated Japanese companies through its fast actions although it was deemed 30 years behind the technology levels of the United States and Japan when it joined the chip market. When Apple’s smartphone took down mobile major Nokia in 2007, Samsung quickly turned out its own smartphone Galaxy. Samsung has stayed at the top of the game since then. Its dominant position in the DRAM production appeared invincible.

But Korea’s chip supremacy is no longer safe. Korean companies must settle for providing memory components for Nvidia chips in case they pass Nvidia’s quality test.

Innovation is a must to recover competitiveness. Politics must do their part. Facility investments are hampered by anti-business sentiment and regulations. Lawmakers merely scorn entrepreneurs. How can business leaders devote themselves to innovation when politicians are breathing down their necks?

This explains why companies take their new facilities overseas. Having manufacturing bases overseas is important to market access, but lately reshoring has been in fashion amid protectionist competitions for economic security and a technological edge. Samsung must reinvent its innovation genes, but as long as politicians regard companies as targets for regulation and supervision, they won’t be able to invest boldly.

Korean businesses must deal with challenges at home and abroad. Work hours are strictly restricted to 52 hours per week and employers are liable for industrial accidents. If we wish the best for our companies, business conditions must become supportive so that they can freely take on risk-taking challenges.

Translation by the Korea JoongAng Daily staff.