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[Research Reports] ROK's new Yoon Suk-yeol administration rushes to strengthen semiconductor industry amid intensifying US-China confrontation

Makoto Abe (Chief Senior Researcher, Inter-disciplinary Studies Center, IDE-JETRO)
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Research Group on 'Korean Peninsula' FY2022-# 4

"Research Reports" are compiled by participants in research groups set up at the Japan Institute of International Affairs, and are designed to disseminate, in a timely fashion, the content of presentations made at research group meetings or analyses of current affairs. The "Research Reports" represent their authors' views. In addition to these "Research Reports", individual research groups will publish "Research Bulletins" covering the full range of the group's research themes.

Continuity from the previous administration - strengthening the semiconductor industry

The new Yoon Suk-yeol administration that took office in the ROK in May 2022 has significantly changed the course of many economic policies. The preceding Moon Jae-in administration implemented economic policies typical of progressive governments, including tightening regulations on chaebol and large corporations, curbing the construction of nuclear power plants and promoting distribution policies. In contrast, the Yoon Suk-yeol administration has indicated a policy of promoting economic growth by revitalizing the private sector through deregulation as well as plans to resume construction of nuclear power plants. In one regard, however, the Yoon administration is seeking to carry on with a Moon administration policy with little to no change: strengthening the semiconductor industry.

The Moon administration was pursuing the "K-Semiconductor Strategy," aimed at further bolstering the semiconductor industry while responding to requests from the United States to participate in the US' enclosure strategy for semiconductor supply chains and technologies. The ROK's semiconductor industry has become an important strategic asset not only for economic security but also for foreign policy in general. In addition, the expansion of semiconductor exports greatly supported the ROK economy during the coronavirus pandemic and the subsequent recovery process. From these facts, it is believed that the Moon Jae-in administration recognized anew the importance of the semiconductor industry, which led to its action.

The Yoon Suk-yeol administration also made clear its emphasis on semiconductors from the outset. This is evident in the appointment of Lee Jong-ho, director of the Inter-University Semiconductor Research Center at Seoul National University, as Minister of Science and ICT. Furthermore, on June 16, the Yoon Suk-yeol administration announced a vision for economic policy called the "Direction of the New Government's Economic Policy," declaring that it would focus on investing in R&D and fostering technologies and industries that are essential for economic security as "national strategic technologies" and "national advanced strategic industries". Especially, semiconductor technologies and the semiconductor industry were placed at the center. On July 21, the new government also announced its "strategy for becoming a semiconductor superpower", placing emphasis on one specific industry ahead of others. The following is an outline of this strategy.

  1. Investment support = planning to invest more than 340 trillion won in 5 years:
    Providing government support for developing factory infrastructure such as electric power and water supply in semiconductor industrial parks, expediting construction permits, and expanding tax system support for equipment and R&D investment
  2. Human resource development = planning to supply 150,000 +α persons over 10 years:
    Constructing four major infrastructure projects through industry-academia cooperation, i.e., founding a semiconductor academy, designating and supporting new graduate schools specializing in semiconductor education (Korean-style SRC operation), establishing research institutes utilizing unused and used equipment donated by companies (Korean-style IMEC), and setting up ten university departments in the fields of semiconductor materials, parts, and equipment available to contract with companies
  3. Securing leading non-memory semiconductor technologies = aiming to raise the ROK's global market share from the current 3% to 10% by 2030:
    Offering intensive support for the three major next-generation semiconductors (power semiconductors, automotive semiconductors, and AI semiconductors) and 30 star fabless companies, and providing development support in advanced packaging
  4. Building a robust semiconductor ecosystem including materials, parts, and equipment = setting a goal of raising the country's domestic production rate from the current 30% to 50% by 2030:
    Constructing material, part, and equipment clusters in 2nd and 3rd Pangyo Techno Valleys and Gyeonggi Yongin Platform City

This strategy actively supports new factory construction and expansion as well as R&D investment, which are essential for immediate industrial development, while it also aims for improvements to overcome obstacles to long-term industrial development, among these being a shortage of human resources, a business structure biased toward memory, and weak supporting industries (e.g., materials, parts, and manufacturing equipment). The purport of this strategy appears almost identical to that of the "K-semiconductor strategy" announced in the previous year. However, it has made upward revisions to corporate investment targets and human resource development targets, and to help meet these targets, further expansion of investment tax support and a new human resources development plan, such as the establishment of relevant departments at universities and graduate schools are prepared.

Prior to the government's announcement of its strategy, the ruling People Power Party also moved to develop laws that strengthen the semiconductor industry. Specifically, on June 28, 2022, the ruling party launched the Special Committee on Strengthening the Competitiveness of the Semiconductor Industry. The chairman of this committee is former opposition party (currently independent) lawmaker Yang Hyang-ja, who served as an executive at Samsung Electronics. Representative Yang joined Samsung Electronics after graduating from high school and worked as a research assistant while attending university and graduate school, eventually being promoted to an executive position in the semiconductor division. Based on the discussions at this committee's meetings, Yang presented a bill introducing the Semiconductor Industry Competitiveness Enhancement Act, the so-called "K-Chips Act", to the National Assembly on August 1. The bill, which is a revision of the Act on Special Measures for Strengthening and Protecting National High-tech Strategic Industries Competitiveness as well as the Special Tax Treatment Control Law, includes a concrete proposal to significantly increase the tax credit rate for capital investment (large companies: 6%, medium-sized companies: 8%, SMEs: 16%→large companies: 20%, medium-sized companies: 25%, SMEs: 30%)1.

One of the reasons behind the Yoon administration's clear plan to strengthen South Korea's semiconductor industry is that the Biden administration in the US has been making stronger approaches to the ROK in the semiconductor field. When President Biden travelled to South Korea on May 20, 2022, the first place he visited was the Samsung Electronics semiconductor factory in Pyeongtaek (Gyeonggi-do). In his speech during the factory visit, President Biden said, "This plant also reflects the close bonds in innovation between our countries...A critical component of how we'll do that is by working with close partners who do share our values, like the Republic of Korea, to secure more of what we need from our allies and partners and bolster our supply chain resilience." Prior to this, in March, the United States planned to establish a framework for semiconductor-related cooperation with Japan, the ROK, and Taiwan, and is said to have urged the ROK to participate2. Under these circumstances, the new Yoon administration seems to have recognized the growing strategic importance of semiconductors.

Another background factor is that the governments of the United States, Japan, and developed countries in Europe are also planning to fortify their semiconductor industries, especially to re-expand their domestic manufacturing bases. A typical example of this is Japan's plan to subsidize up to 476 billion yen in the costs for a new factory to be built in Kumamoto Prefecture by TSMC of Taiwan in order to secure domestic production capacity for semiconductors. The Korean government may find it difficult to maintain the dominance of its semiconductor industry if this trend continues. Prompted by such concerns, it is trying to further expand capital investment in the memory field, where Korean companies excel, and in the foundry business, where they are catching up with TSMC, and to actively support R&D in power, automotive and AI semiconductors, where it has fallen far behind. In addition, it aims to establish ROK as a comprehensive semiconductor powerhouse by fostering human resources and strengthening supporting industries.

Tightening US semiconductor restrictions on China and their impacts on the ROK

While the ROK's new Yoon administration seeks to strengthen its semiconductor industry, the United States is pushing further ahead with its semiconductor technology restrictions on China. On October 7, 2022, the US Department of Commerce announced tightening of controls on technology exports to China. The contents of the regulations announced at that time are as follows: (1) exports to China of high-performance semiconductors for supercomputers and advanced computers would be restricted, and exports to 28 Chinese information technology companies would effectively be banned; (2) permission would be required when selling cutting-edge semiconductor manufacturing equipment and technology capable of manufacturing chips above a certain level (DRAM of 18nm or less, NAND flash memory of 128 layers or more, and non-memory semiconductors of 14nm or less using FinFET technology), and sales of these to production facilities in China owned by Chinese companies would be effectively prohibited; and (3) applications for permits would be required if the activities of Americans in China lead to support for the development or production of semiconductors that meet certain conditions. Restrictions on the export of semiconductor manufacturing equipment and technology to SMIC, a major Chinese semiconductor company, and semiconductor export restrictions on Huawei, the largest high-tech company, were already in place, but this measure will toughen these restrictions. The intention of the United States is to maintain as far as possible its technological gap with China in semiconductors by not selling cutting-edge semiconductors through (1) above, and by preventing the production of semiconductors above certain levels through (2) and (3) above.

Of these, (1) and (2) apply in principle to ROK companies that use American technology, so it is possible that they will also be affected. Regarding (2) in particular, Samsung Electronics has a NAND flash memory factory in Xi'an and a test packaging factory in Suzhou, while SK Hynix has a DRAM factory in Wuxi and a NAND flash memory (formerly an Intel) factory in Dalian, China. As 60% of Samsung Electronics' NAND flash memory and 50% of SK Hynix's DRAM are believed to be produced in China, there are concerns about the impact. The United States has announced that it will postpone application of these regulations to manufacturing bases in China owned by Korean and other foreign companies for one year. However, an emerging view is that if these regulations are applied in the future, it will be difficult for Korean semiconductor manufacturers to produce within China. Regarding (1), there are currently few cases, if any, where ROK companies export such advanced semiconductors to China. However, 65% of the ROK's semiconductor exports are destined for mainland China, including via Hong Kong. The tightening of regulations on exports to China will impose restrictions on the expansion of business in China, and there are concerns about the future impact.

Many semiconductors produced in China or exported to China by ROK companies are supplied to Foxconn's Chinese factories that produce Apple's smartphones, so it can be said that they are incorporated into the supply chains of American companies. It is unlikely that the US government intends to completely cut off these supply chains with China. How far does the US government intend to proceed with restrictions on China, and how will the Chinese government, which has not made any noticeable moves so far, respond? The ROK government and Korean companies are likely to find themselves stuck between the US and China for some time to come.

(This is an English translation of a Japanese paper originally published on December 5, 2022)

1 However, the K-Chips bill has not yet been enacted as of December 5, 2022 due to sharp contention among the ruling and opposition parties in the National Assembly.

2 As a concrete move, the ROK Ministry of Foreign Affairs announced that a preliminary meeting of the "US-East Asia Semiconductor Supply Chain Resilience Working Group" attended by Japan, the United States, South Korea, and Taiwan (and hosted by the American Institute in Taiwan) was held online on September 28, 2022.