On March 16, 2023, Japan lifted restrictions on the export of key semiconductor materials to South Korea. This news may be one of the best pieces of news for the South Korean semiconductor industry, which has been under a "shadow" for the past six months. Semiconductors are one of the main economic industries of South Korea, and the semiconductor industry in South Korea began in the 1980s. At that time, the government launched a series of plans to transform South Korea from a low-tech country to a high-tech country. One of them was to list the semiconductor industry as a key development industry. By the 1990s, South Korea's semiconductor industry had made remarkable progress. To this day, South Korean semiconductor companies represented by Samsung, SK Hynix, and DB Hitek play an important role in the global semiconductor industry.

However, South Korea seems to be experiencing a historic difficult moment. The world is witnessing an increasingly tense competition for cutting-edge chips, which is also the key to national competitiveness. Compared with competing countries, South Korea lacks competitiveness in terms of the number of companies, scale, and human resources. The sense of crisis and anxiety about its industry competitiveness in South Korea is stronger than ever before.

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The storage market has plummeted.

Storage chips are the pillar of South Korea's semiconductor industry, and the proportion of non-memory chips in South Korea is only 5%. In the global semiconductor manufacturer sales ranking, Samsung Electronics and SK Hynix ranked first and third in 2022, respectively. Both are storage giants, with Samsung Electronics ranking first in the DRAM and NAND market share, and SK Hynix ranking second in the DRAM market and third in the NAND market.

However, due to the slowdown in demand for smartphones and other factors, the increase in semiconductor inventory has led storage chip manufacturers to try to digest inventory by reducing prices since the fourth quarter of 2022. According to data from the Japanese research company Techno Systems Research, as of the end of 2022, the cost of 1GB of solid-state drive had fallen to 0.107 US dollars. The downward pressure on prices is still ongoing. According to the forecast of KB Securities analysts, from the third quarter of 2022 to the first quarter of 2023, the total price drop of DRAM and NAND should be about 76% and 68%, respectively.

Under such circumstances, Samsung and SK Hynix, the two storage giants with such a high market share, are experiencing a great disaster in this industry downturn.

In the first two months of 2023, Samsung's storage chip business has already lost 3 trillion won, or 2.3 billion US dollars. Samsung estimates that the loss may increase to 4 trillion won by the end of the first quarter. Fortunately, in the semiconductor field, Samsung also has a foundry business, which is profitable, and the overall business can be somewhat offset.

However, for SK Hynix, which only focuses on the storage field, it is more tragic. In the fiscal year of 2022, SK Hynix's annual revenue was 44.648 trillion won, and the operating profit was 7.007 trillion won. Although the annual revenue increased by 4%, in the fourth quarter of 2022, SK Hynix recorded its first quarterly operating loss since the third quarter of 2012. The revenue in 4H2022 was 7.699 trillion won, a year-on-year decrease of 38%, and the loss is still continuing. KB Securities analysts predict that SK Hynix will lose an average of about 39,000 won in the first quarter of this year.Therefore, SK Hynix will reduce its investment scale for 2023 by more than half compared to the 19 trillion won in 2022. However, it will continue to invest in the mass production of mainstream products such as DDR5, LPDDR5, HMB3, and markets with growth potential.

But for the two giants, the more long-term and thorny issues are still ahead, which is the trade policy of the United States.

Under the U.S. trade policy, South Korean semiconductor manufacturers are "suffering"

In recent years, the United States has been striving to suppress the development of mainland semiconductors, first by tightening chip trade policies, and then by proposing the "Chip 4" alliance with the Netherlands and Japan to encircle and force South Korea to join the alliance. South Korea's attitude is ambiguous, but it is clear what any decision means. The essence of this issue is to choose the Chinese market or American technology. Although South Korea has not joined the alliance, there is no doubt that it is still affected by the U.S. ban.

Memory chip manufacturers cannot "advance"

Samsung and SK Hynix have made a lot of investments in China. In 2012, Samsung invested $18 billion in its first factory in Xi'an, China, $7 billion in its second factory in Xi'an in 2017, and $8 billion in its second factory in Xi'an in 2019. SK Hynix's Wuxi DRAM factory has invested 5 trillion won.

Among them, Samsung's Xi'an factory in China produces 3D NAND, with a monthly output of 270,000 12-inch wafers, accounting for about 40% of Samsung Electronics' monthly total output of 680,000 NAND. Samsung Electronics' 96-layer and 128-layer NAND flash memory is launched from here. In 2022, Samsung China Semiconductor (SCS) in Xi'an had a net profit of 63.38 billion won, down by one-third from 170.88 billion won in 2021.

SK Hynix's Wuxi factory produces DRAM, with a monthly output of 180,000 12-inch wafers of DRAM, accounting for about half of the company's total capacity. In 2022, the sales of SK Hynix's Wuxi subsidiary were 95.242 billion won, a decrease of 26.4% from 129.389 billion won in 2021. SK Hynix's DRAM production subsidiary in China had a net loss of more than 46 billion won in 2022.

What's more tragic is that on October 20, 2020, SK Hynix acquired Intel's NAND flash memory business in the United States for $9 billion, and Intel's NAND flash memory business was completed in the factory in Dalian, China, with a monthly output of 100,000 NAND flash memories. Under the U.S. trade policy, SK Hynix is equivalent to taking over a "hot potato". I don't know if SK Hynix regrets acquiring Intel's Dalian factory now. SK Hynix's Dalian factory accounts for about 30% of the company's 3D NAND capacity.

The U.S. export control on semiconductors to China took effect in October 2022. Although the two companies were granted a one-year exemption from export control, it was of no help. When asked what would happen after the one-year grace period, Alan F. Estevez, the U.S. Deputy Secretary of Commerce for Industry and Security, said at the Korea-U.S. Economic Security Forum on February 23: "It is very likely that there will be a limit on the number of semiconductors produced by chip manufacturers in China."Moreover, the United States has imposed strict conditions on subsidy applications. If the two companies want to obtain subsidies under the CHIPS Act, they will not be able to invest in any of the aforementioned factories in China for the next ten years, nor will they be able to produce advanced storage products in China. This means that about 40%-50% of the two companies' storage products will face the crisis of technological stagnation. For storage chips that are revolutionized every two years, not investing is equivalent to a "death sentence."

Semiconductor Equipment Export Crisis

It's not just about storage chips; export controls are also causing a huge blow to South Korea's semiconductor equipment industry. In October 2022, the U.S. Department of Commerce announced that exporters of products such as 18nm half-pitch and below DRAM storage chips, 128-layer and above NAND flash memory chips, and 16/14nm and below logic ICs, as well as manufacturing equipment, must first obtain permission from the U.S. Department of Commerce before exporting to China.

South Korea's semiconductor processing equipment exports to China account for half of the total exports (based on the total export volume in 2022). South Korea is currently showing a clear export crisis. According to the import and export statistics of the Korea International Trade Association, since the United States began to hinder the development of China's semiconductor industry, South Korea's semiconductor equipment exports to China have been declining year by year: the export volume in January 2021 was $330 million, which dropped to $230 million in 2022, and further decreased to $140 million in 2023, a year-on-year decrease of nearly 40%.

From the perspective of the sub-industries, in terms of front-end manufacturing equipment, South Korea's front-end equipment exports to China were $2.26 billion in 2021, which plummeted to $1.37 billion in 2022, and in January 2023, the export volume of front-end manufacturing equipment to China was about $32.92 million, a year-on-year decrease of about 67%; in terms of back-end manufacturing equipment, the export volume to China was about $940 million in 2021, which dropped to $660 million in 2022, and further decreased to about $23.11 million in 2023, a year-on-year decrease of about 38%.

TSMC's Aggressive Attack in the Foundry Field

In the field of semiconductor wafer foundry, South Korea also occupies an important position. Samsung is a major manufacturer in the wafer foundry field. In the field of high-end computer chips, Samsung directly competes with Intel and TSMC, especially Samsung and TSMC, which have been fiercely competing in advanced processes. This competition is not only related to the development prospects of these two companies but will also directly affect the development trend and direction of the entire industry. TSMC holds more than 50% of the wafer foundry market share, with a larger industry scale and a more dominant position, which South Korea is eager to challenge.

TSMC's 3nm process technology is already the world's most advanced technology in the semiconductor industry in terms of PPA (performance, power consumption, and area) and transistor technology. Moreover, TSMC is fully increasing the 3nm production capacity. TSMC's 3nm production stronghold is mainly based on the Southern Science Park Fab 18 factory area, which has completed four 3nm wafer factories from the fifth phase to the eighth phase of the Fab 18 factory area. In the future, the construction of the ninth phase of the 3nm wafer factory will be determined according to market demand. TSMC has announced that it will build the second phase of the 3nm wafer factory in the Fab 21 factory area of Arizona, USA, and it is expected to enter mass production after 2025.

TSMC's 2nm is also proceeding as planned. According to the information released by TSMC, TSMC is building a 2nm ultra-large wafer factory Fab 20 in the second phase of Zhubei Baoshan, which will build a total of four wafer factories from the first phase to the fourth phase. TSMC is striving for the construction land of the second phase development plan of the Zhongke Taichung Park, and after obtaining the land, it will build another two 2nm wafer factories.

So, in general, TSMC will have more than 10 3nm and 2nm wafer factories in the next five years. Looking at the investment amount of about $20 billion for a 3nm wafer factory with an advanced process monthly production capacity of 30,000 wafers, the total investment amount will exceed $200 billion.TSMC's aggressive moves have put a lot of pressure on other foundries as well.

Another South Korean wafer foundry, DB Hitek, although ranked tenth in the exclusive foundry ranking (based on 2022 revenue), has a very small market share, less than about 1%.

In order to better save and focus on the wafer foundry business, DB HiTek company disregarded the opposition of shareholders some time ago and forcibly promoted the spin-off of its fabless chip business. In a press release, DB HiTek stated that the spin-off of the design business aims to "strengthen its foundry business" by "resolving conflicts of interest with customers," as the company has been balancing its chip design and contract manufacturing business. DB HiTeck hopes to imitate TSMC's business model in Taiwan by separating the fabless department and becoming a pure wafer foundry (a chip manufacturer without internal design capabilities).

This is the second attempt at the split. Last September, DB HiTek canceled the plan to split off the chip design department due to strong opposition from shareholders, on the grounds that a promising business department may be split off and go public, causing damage to shareholder value. However, DB HiTek recently stated in a regulatory filing that its board of directors agreed to propose a plan to split off its fabless business into a subsidiary at the shareholders' meeting on March 29, temporarily named DB Fabless, which will be 100% owned by its parent company DB HiTek.

South Korea initiates self-rescue: 300 trillion won over 20 years to build the "world's largest" chip cluster.

Under various adverse factors, the South Korean semiconductor industry is at a crossroads, and on March 15, South Korea released a heavy semiconductor plan.

On March 15, 2023, at the 14th emergency economic and livelihood meeting held at the Blue House, South Korea announced that it plans to invest 300 trillion won over the next 20 years, seeking to make a large investment in six technical fields, including chips, displays, rechargeable batteries, electric vehicles, robotics, and biotechnology, to build the world's largest "cutting-edge system semiconductor cluster" in Yongin City, Gyeonggi Province. The giant cluster will have the entire semiconductor value chain, including semiconductor wafer factories, materials, parts, equipment, and fabless (Fabless). The plan was announced by South Korean President Yoon Suk Yeol on Wednesday.

Most of the investment for the construction of the cluster comes from Samsung Electronics, which will invest about 230 billion US dollars. The scale of this national system semiconductor industrial park is 7.1 million square meters, larger than the combined scale of the three parks in Yongin, Hwaseong, and Pyeongtaek. In a statement, Samsung's industrial department stated that Samsung's new manufacturing will include five chip factories (Fab) and attract up to 150 material, parts, and equipment manufacturers, fabless chip manufacturers, and semiconductor R&D institutions near Seoul. South Korea hopes to cultivate 10 fabless companies with annual sales exceeding 1 trillion won. In the Yongin cluster, Samsung Electronics' future vision is to occupy the world's first position in the field of system semiconductors and foundry, and to expand the huge gap with other companies in the memory field.In May of last year, Samsung outlined a plan to invest over $350 billion into its business by 2026 and create tens of thousands of new jobs. The company stated that it would primarily invest in core businesses such as chip manufacturing and biopharmaceuticals. It is currently unclear whether the previously announced investments will overlap with the investments announced by the government on Wednesday.

In addition to private investment, the South Korean government will also budget 25 trillion won or more over five years for the research and development of strategic technologies such as artificial intelligence. This year, about 36 billion won will be provided for the development of chip packaging technology, and about 10 billion won will be provided for water and electricity infrastructure in industrial parks.

Conclusion

In the current competitive environment, the challenges and difficulties faced by the South Korean semiconductor industry are also common problems faced by the global semiconductor industry. As TSMC founder Zhang Zhongmou recently said, "In my view, there is no doubt that globalization is dead in the chip industry." In this chip war, for all countries, what is important is execution and speed.