The Research Group on 'Korean Peninsula' FY2021－# 3
"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.
The US administration's enclosure strategy of supply chain and technology
In recent years, as the conflict between the United States and China has taken on the appearance of a competition for technological hegemony, semiconductors and in-vehicle batteries have become products of ever greater importance. China is rapidly increasing its technological capabilities in fields such as wireless information technology and AI, which poses a major threat to the United States. However, in China, the technology in the semiconductor field, which is the core of these technologies, is relatively behind, and in particular, the technology accumulation in the manufacturing process is insufficient. For the United States to take the lead in competition with China, it will need to maintain and strengthen its superiority over China in semiconductors. On the other hand, the Biden administration is trying to shift to a decarbonized society and has set a goal of having electric and other zero-emission vehicles account for 50% of new car sales by 2030. The core component in the electrification of automobiles is the battery, and China's great stride in this field has been remarkable, with Contemporary Amperex Technology Co. Limited (CATL) having the largest production share in the world. There are no leading battery manufacturers in the United States, which urgently needs to strengthen its domestic development and production system.
As semiconductors and in-vehicle batteries become strategic materials, the US government is focusing on cooperation with its ally the Republic of Korea (ROK). At the US-ROK summit meeting held on May 21, 2021, it was agreed to strengthen cooperation on the supply chains for manufacturing high-tech products. In addition, the US government released a report entitled "Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-based Growth" on June 8, and the key products discussed therein comprised four categories: semiconductor manufacturing and advanced packaging, large-capacity batteries including batteries for electric vehicles, important minerals including rare earths, and pharmaceuticals and active pharmaceutical ingredients. The report emphasized the need to strengthen cooperation in supply chains with the ROK along with Japan and Taiwan.
The US government attaches great importance to cooperation with the ROK because Korean companies are the world's main players in the fields of semiconductors and in-vehicle batteries. In semiconductors, Samsung Electronics has maintained the world's top position for many years in DRAM and NAND flash memory. Samsung Electronics also holds the second-largest share in the world after TSMC in Taiwan in the foundry business, the globally important contract manufacturing of logic semiconductors. In the in-vehicle battery sector, LG Energy Solutions had the second-largest share in the world market in 2020, Samsung SDI the fourth, and SK Innovation the sixth. Collaboration with these Korean companies is essential for the United States to maintain and strengthen its supply chains vis-à-vis China.
Measures taken by the US to maintain and increase its advantage over China in semiconductors have extended to the enclosure of technology, and Korean companies are involved here as well. On March 29, 2021, MagnaChip Semiconductor (hereinafter referred to as "MagnaChip") announced that it would be selling the company to a consortium centered on WiseRoad Capital, a Chinese fund, for $1.4 billion. MagnaChip is the system semiconductor division of the former Hynix Semiconductor (now SK Hynix) and is based in the ROK. The company has the second-largest share of drive chips for organic EL, which are becoming popular as next-generation display devices, after Samsung Electronics. On May 30, the United States Committee on Foreign Investment in the United States (CFIUS) announced that it would review the acquisition agreement on the grounds that MagnaChip was listed on the New York Stock Exchange and issued an interlocutory order to suspend all procedures for selling shares. On August 30, MagnaChip revealed that it had received a letter from the CFIUS confirming that the company's sale to WiseRoad Capital poses a national security risk to the United States. This appears to have made the sale quite difficult.
ROK responses to US strategy
The ROK government and companies have been responsive to the US's strategy. In the field of semiconductors, Korean companies depend on the United States not only for their sales but for much of their technology and manufacturing equipment as well. The United States is also the largest market for Korean vendors of in-vehicle batteries. These companies thus have to be sensitive to moves by the US government. The ROK government is naturally in a position to support the responses taken by Korean companies. In addition, cooperation on semiconductors and in-vehicle batteries can be a powerful bargaining chip for the ROK government, which wants the US government's cooperation in improving relations with North Korea and acquiring supplies of COVID-19 vaccines. As we saw earlier, the ROK government agreed with the United States at the ROK-US summit meeting in May to strengthen cooperation on supply chains for products such as semiconductors, and to establish a task force between the two countries for that purpose. Representatives of Samsung, LG and SK accompanied President Moon Jae-in to the United States. Samsung already had a logic semiconductor plant in Austin, Texas, and LG and SK, which were both building in-vehicle battery factories in the United States, announced during this US visit that they would be adding more plants in the United States. Regarding the sale of MagnaChip, there were concerns in the ROK about semiconductor companies being sold to foreign capital when the sale was announced, but the ROK government initially showed no posture to intervene. However, on June 9, immediately after the US took clear steps, the Ministry of Trade, Industry and Energy designated OLED-driven chip-related technology a national core technology under the Industrial Technology Outflow Prevention and Protection Law. As a result, the approval of the ROK government became also necessary for the sale of MagnaChip to overseas companies.
The ROK government's aspiration for a self-sustaining economy
However, it is also risky for the ROK to focus solely on cooperation with the United States on semiconductors and in-vehicle batteries, now categorized as strategic goods. First, it goes without saying that the US's strategy is directed at China, but the ROK has a close relationship with China regarding these two commodities. China is the ROK's largest semiconductor export destination. Although most of these semiconductors are re-exported to third countries in finished products, China's presence as a market is still extremely large. Samsung Electronics and SK Hynix, two major semiconductor manufacturers in the ROK, both have manufacturing plants in China. All three major Korean in-vehicle battery companies have factories in China. If China takes any countermeasures against US strategy in this area, Korean companies will be unavoidably impacted. In fact, when the decision was made to deploy THAAD (Terminal High Altitude Area Defense) missiles in the ROK in 2016, Korean companies were dealt a heavy blow because the Chinese government excluded electric vehicles equipped with batteries made by Korean manufacturers from its subsidy programs. Moreover, if China in future establishes a development and manufacturing system that is superior to that of the United States for any of these goods, the ROK will be forced to radically change its strategy at both the government and corporate levels. Second, the ultimate aim of the US government is to build a supply chain centered on the US, and it will naturally be US companies that are most strongly responsive to this idea. For example, Intel, the world's largest semiconductor maker, is looking to enter the foundry business in keeping with the US government's strategy. A successful entry into this business by Intel will pose a significant threat to Samsung Electronics, which is aiming to expand its foundry business.
Caught in the middle in the struggle between the US and China for technological hegemony, the ROK government is trying to survive by maintaining and strengthening the domestic competitiveness of semiconductors and in-vehicle batteries, which have become strategic materials. The government announced the "K-Semiconductor Strategy" to make the ROK a comprehensive semiconductor powerhouse on May 13 and the "2030 Secondary Battery (K-Battery) Development Strategy" on July 8. Both are long-term industrial development strategies with many parts in common, including tax and financial support for facility expansion and R&D and more robust human resource development. In particular, both strategies emphasize the domestic production of materials, parts and production equipment. Although Korean companies have become world leaders in the fields of semiconductors, they depend on imports for many of the materials and manufacturing machines required for production. The export control review undertaken by Japan in July 2019 brought about a strong awareness of this issue. Although the domestic production of the materials and manufacturing machines for batteries in the ROK has been steadily progressing, China has been catching up in this field as well in recent years. The ROK government had already announced a strategy of stepping up the domestic production of materials, parts and equipment in response to the global rise of protectionism in addition to Japan's measures, and it is now re-emphasizing its policy especially for semiconductors and batteries.
Both strategies also place emphasis on strengthening technology management. In addition to the MagnaChip case mentioned earlier, there are an increasing number of instances where advanced technologies seem to have been leaked to China from the ROK through experts. There is a growing recognition of the need to prevent technology leaks not only to keep in step with the US's strategy but also to maintain the ROK's own competitiveness, and this is being reflected in moves to tighten legal restrictions. As mentioned earlier, the ROK governs technology control through the Industrial Technology Outflow Prevention and Protection Law. Under this law, government approval of technology transfers is only required for national core technologies that have received R&D support from the government. Accordingly, the government and the ruling party are currently preparing a new law to require the government's approval to transfer technologies such as semiconductors, batteries and vaccines that are important to the nation even if they have not received government development support, and to stiffen penalties for violations.
At the time of its inauguration, the Moon Jae-in administration was not so keen on policies to directly support the growth of companies and industries, and instead promoted distribution policies as its core growth strategy. However, many of the progressive politicians and scholars who support the Moon government have insisted from the outset on moving away from external dependence and establishing an independent economy. With the US-China conflict intensifying, the ROK's aspirations for an independent economy have come to the fore.
(This is an English translation of Japanese paper originally published on September 10, 2021.)