Future of China Plants Uncertain
The business performances of Samsung Electronics and SK Hynix subsidiaries in China deteriorated significantly in 2022 due to U.S. sanctions against China and the impact of the COVID-19. To make matters worse, the U.S. government recently announced that it would set a technological limit to prevent Korean semiconductor companies from producing highly advanced semiconductors at their factories in China.
Sales of Shanghai Samsung Semiconductor (SSS), which sells semiconductors and displays in China, stood at 21,370.6 billion won in 2022, a decrease of nearly 10 trillion won from 32,326.1 billion won in the previous year, according to an audit report of Samsung Electronics. Samsung China Semiconductor (SCS), another Samsung subsidiary in Xian which mainly produces NAND flashes, posted a net profit of 633.8 billion won in 2022, down by a third from 1.7088 trillion won in 2021.
A similar situation is facing SK Hynix’s Chinese semiconductor subsidiary. Sales of SK Hynix’s Wuxi subsidiary, which operates a DRAM factory, came in at 9,524.2 billion won in 2022, down 26.4 percent from 12,938.9 billion won in 2021. SK Hynix’s DRAM production subsidiary in China suffered a net loss of over 460 billion won in 2022.
Under these circumstances, the U.S. government has shown its intention to limit technology upgrades at semiconductor factories in China, putting the Korean semiconductor industry on red alert. “It is highly likely that a cap will be put on the level of semiconductors that chipmakers can produce in China,” said Alan F. Estevez, U.S. under secretary of commerce for industry and security, when asked what would happen after a one-year grace period in export control granted to Samsung and SK Hynix ends. The U.S. official spoke at the Korea-U.S. Economic Security Forum held by the Korea Foundation (KF) and the Center for Strategic and International Studies (CSIS) in Washington, D.C. on Feb. 23.
Estevez’s remarks imply that chipmakers will not be allowed to produce high-tech products that exceed a certain level of technology in China. If the measure is really taken, it will be virtually impossible for Korean semiconductor makers to switch to microfabrication processes. Additional investment and sales expansion are bound to be adversely affected.
Samsung Electronics operates a NAND flash production plant and a semiconductor back-end processing (packaging) plant in Xian and Suzhou, China, respectively. Samsung Electronics’ only overseas base for NAND flash, the Xian plant in China, produces 270,000 NAND flashes per month with 12-inch wafers. This accounts for 40 percent of Samsung Electronics’ total NAND production of 680,000 units per month. Samsung Electronics’ 96- and 128-layer NAND flashes are rolling out from here.
In China, SK Hynix runs a DRAM plant in Xuxi, a back-end process plant in Chongqing, and a NAND plant acquired from Intel in Dalian. The Wuxi plant produces 180,000 DRAMs per month with 12-inch wafers. The production volume accounts for about 48 percent of the company’s total DRAM production. The Dalian plant acquired by Intel in 2020 is also mass-producing 100,000 NAND flashes per month. Samsung Electronics and SK Hynix made considerable investments in China to achieve this scale of production in China.
US restrictions have had a palpable impact on China. Samsung Electronics and SK Hynix suffered sharp drops in their business performances in 2022. The two Korean chipmakers expect to face restrictions on production following those on technology investment. Above all, they need to completely review their process conversion plans which must be carried out to boost their semiconductor competitiveness. Their chip plants in China are subject to a one-year suspension of US export controls on semiconductors to China which took effect in October 2022. Nevertheless, they are having trouble bringing equipment into their Chinese plants.
Process upgrades and equipment maintenance are continuing at their Wuxi, Xian and Dalian plants which are their semiconductor production bases in China. As memory specifications go up, the number of processes increases, requiring more advanced production equipment. Such advanced equipment is supplied by Applied Materials, Lam Research, and KLA in the United States. However, the US government’s policy to restrict production of chips more advanced than a certain technological level hampers their process upgrades. The, their competitiveness will inevitably decline.
If the two chipmakers become unable to import US equipment for process conversions and expansion due to the US sanctions, they will fall into a crisis of producing legacy products as 40 to 50 percent of their total products without technological progress.
Samsung Electronics and SK Hynix have already made astronomical investments to build local production bases in China. This means that it is a big challenge for them to make bold decisions. Samsung Electronics invested US$18 billion in Xian Plant 1 in China in 2012, US$7 billion in Xian Plant 2 in 2017, and US$8 billion in Xian Plant 2 to expand its size in 2019. A total of five trillion won was already invested in SK Hynix’s Wuxi DRAM plant.