THE TTALK QUOTES 

On Global Trade & Investment
Published By:
The Global Business Dialogue, Inc.
Washington, DC  Tel: 202-559-9316
 
No. 73 of 2019
WEDNESDAY, NOVEMBER 13, 20219

Click HERE for last Friday's Brexit quote from Joanne Thornton.


SEMICONDUCTORS, AND SUPPLY CHAINS
ACROSS THE SEA OF JAPAN

 "Semiconductors are the enabling hardware for all information technology."

Samuel M. Goodman, Dan Kim, and John VerWey
in an ITC Working Paper
October 2019 (publication date)
CONTEXT
A year ago the often difficult relationship between Japan and South Korea stepped into something of a diplomatic deep freeze. Dates are always arbitrary, but you can make a case that the walk into the freezer began on October 30, 2018, when Korea’s Supreme Court decreed that, arguments to the contrary notwithstanding, Koreans who were forced to work for Japanese companies during Japan’s occupation of Korea (1910 to 1945) have the right to sue those companies for damages. And, of course, that is hardly the end of it. Today, November 13, the Central District Court in Seoul, will hear oral arguments in the case brought against the Government of Japan by 21 former “comfort women.”

At some point we are bound to return to those emotionally charged issues and their role in what may be a changing geopolitical landscape in Northeast Asia. Today, however, our focus is on the immediate fallout from the forced labor decision for two sets of companies: Korean manufacturers of semiconductors and the Japanese chemical companies that supply them. A good deal of what follows, like today’s quote, is taken from a working paper prepared by three professionals at the U.S. International Trade Commission, namely, Samuel Goodman, Dan Kim, and John VerWey. 

Their report is The South Korea-Japan Trade Dispute in Context: Semiconductor Manufacturing, Chemicals, and Concentrated Supply Chains . It is relatively short – 26 pages, not counting notes – and makes an effort to be user friendly for those not familiar with the technology. Still, it is more than we can do justice to here. We shall have to settle for a few nuggets.

Global Wafer Capacity as of December 2018
Source: IC Insights: “Taiwan Maintains the Largest
Global IC Wafer Fab Capacity” as published in the USTIC Working Paper cited below.


Background . The starting point for the authors of this ITC working paper is July 1, 2019. On that date, they explain:

Japan announced that it would restrict exports of certain key semiconductor manufacturing materials to Korea. These materials – hydrogen fluoride, fluorinated polymides, and photoresist/resist, “and their relevant technologies” – are important inputs for Korea’s semiconductor industry.

We will not say much about these chemicals, except that they are each critical to the process of manufacturing semiconductors, that the Japanese chemical companies concerned have developed close working relationships with their Korean customers – relationships that are critical to the iterative process of semiconductor development and production – and, finally, that the nature of that process and the sophistication of the products are such that Korea’s semiconductor producers have no immediate alternative sources of supply. 

Proportional Harm.  Japan has, understandably, argued that the restrictions it has imposed are not direct responses to the decision taken by Korea’s Supreme Court. Still, if one assumes that punishing Korea is a factor in Japan’s decision to put new restrictions on these exports, the question arises: what is the potential cost to Japan? After all, just as Korean semiconductor manufacturers may not be getting needed supplies, their Japanese suppliers are not making sales. Alas, using the figures the U.S. International Trade Commission has put together, the picture that emerges is more than lopsided. They write:

If supply disruptions were to occur, the short-term export loss for Korean semiconductor producers are approximately 250 times that of Japanese chemical exports. 

That is admittedly an extreme case, built as it is on the assumption of all parties losing a month’s sales. These are estimated at $8.4 billion for Korean manufacturers of semiconductors and certain display parts against $33.6 million for the Japanese chemical producers.


A Unique Situation
The authors of this report acknowledge other cases of supply chain interruptions, including interruptions in the supply chains for semiconductors. The 2011 Tohoku Earthquake and Tsunami caused significant disruptions. So too did the conflict between Russia and the Ukraine. As they explain:

The supply of highly purified Neon gas (necessary for semiconductor lithography) was severely impacted due to the Russian-Ukraine conflict in 2014.

Ukraine is the world’s principal supplier of such neon.

In their assessment, however, Japan’s recent actions are of a different character altogether. As they put it, “supply chain disruptions and risks due to trade policy among major producing countries is largely unchartered territory for the industry.”
COMMENT
We do not know where all this is going, but we are glad that Messrs. Goodman, Kim, and Verwey have put out this working paper on developments to date. They have illuminated elements of global supply chains – specifically the supply chains for semiconductors—that are valuable in themselves. Take today’s featured quote. It does not speak directly to the topic because it is broader than the current disruptions and underscores just how essential semiconductors are to modern life. Implicitly, it also makes the point that semiconductors are inputs as well as final products. As for the wafer chart, which we have reproduced from the report, it is a useful reminder of where the world’s semiconductors are produced – 72 percent in Asia.

A more general point from the same report is that, though we may think of supply chains as global – and they are – the number of suppliers in critical areas has tended to shrink over the years. Especially in expensive, hi-tech areas, companies like Samsung and SK Hynix, for example, have become more and more dependent on fewer and few suppliers for essential inputs. 

Response.  If you are a Korean manufacturer of semiconductors, one, obvious response is “Never again.” The ITC paper puts it more diplomatically:

As semiconductors encompass a significant portion of Korean exports (about 19 percent of total Korean exports), this type of supply chain vulnerability will not be tolerated in the long run. 

The report goes on to list some of the things the Korean government is doing to encourage domestic production of the needed supplies. And it isn’t just domestic Korean suppliers who might benefit. There is a company here in Oregon which would seem to be in the mix.  Inpria is a 2007 spinoff from the Chemistry Department at Oregon State University. It promises new photoresists, chemicals used in “Extreme Ultraviolet Lithography,” and its investors include Samsung, Intel, Applied Materials, and JSR Corporation, a Japanese chemical company. Those initial investment decisions were made back in 2017, and the promise of Inpria’s new technology was undoubtedly the main draw, but the need for diversity of suppliers is now part of the picture as well. 

Politics and Geopolitics . Finally, on the politics of all of this, the question we cannot escape is, why now? Put differently, are there political drivers in Korea and Japan – but especially in Korea – that seem to be forcing action now on these often dormant but highly emotional issues? We don’t know the answer to that, nor can we say what role is played by the evolving relationship between North and South Korea. We were struck, however, to read the result of a recent poll which found that:

Under a rather extreme hypothetical situation in which war may break out between North Korea and Japan, 45 percent [of South Koreans] would choose to help North Korea and 15.1 percent Japan.

Reported by Newsweek and conducted by researcher Lee Sang Sin , the poll was presented at the 11th annual Peace Forum of the Korea Institute for National Unification, an institute funded by the South Korean government.
SOURCES & LINKS
A Working Paper takes you to the paper by the staff of the U.S. International Trade Commission that is the source for today’s featured quote and the basis for much of the entry.

Inpria is a link to the website of this company.

Impressive Investors is a July 2017 article from Business Wire on Inpria success in attracting big names in the semiconductor industry as investors in its new technology.

A Korean Poll takes you to the Newsweek article with the results of the poll by Lee Sang Sin quoted above.
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