Gotta Export Somewhere
Following China, the United States has also cut back on Korean semiconductor imports.
Korean semiconductor exports to the United States fell 68.6 percent year on year in April, according to a report on the characteristics and implications of Korea’s semiconductor demand structure released by the Bank of Korea (BOK) on May 29. The decline eclipsed that of China (a 37.7 percent drop) and that of Vietnam (a 35.5 percent drop). As a result, Korea’s semiconductor exports in April were down by 40.5 percent year on year. This was larger than the decline (39.2 percent) in the first quarter.
Korea’s semiconductor final demand structure shows that Korea is highly dependent on the United States and China for its semiconductor giants. Korean semiconductors account for 44 percent and 20.6 percent of global demand for chips for smartphones and servers, respectively. In the case of smartphones, Korea has similar dependence on the United States and China, but in the case of chips for servers, Korea depends more on the United States than China. This is because U.S. tech giants such as Amazon and Google have entered the cloud market, increasing their demand for server semiconductors. For this reason, U.S. tech giants’ business conditions and investment sizes generally determine Korea’s server semiconductor exports.
In fact, server CAPEX by big tech companies such as Alphabet, Microsoft, Meta, and AWS is on the wane. Meta, AWS, and Alphabet all pruned their CAPEX by 15 to 23 percent in the first quarter of this year compared to the previous quarter. Microsoft alone scaled up its spending by 14.7 percent to US$7.8 billion.
Meta, which runs Facebook and Instagram, has reportedly decided to cut its server orders by 30 to 40 percent in the second quarter. In February, market research firm Trendforce revised downward its forecast for the growth of global big tech companies’ servers this year from 6.9 percent to 4.4.
Smartphones also saw a slow recovery in demand due to a global recession. In the first quarter of this year, smartphone shipments fell 14.6 percent year on year to 268.6 million units with China’s reopening effects not as big as expected.
The BOK forecasts that it will be difficult for Corporate Korea to significantly expand semiconductor exports due to sluggish consumption in the U.S. and China. However, Korean semiconductor exports are expected to gradually recover in the second half of the year, easing a slump in the Korean semiconductor industry. U.S. demand for memory semiconductors are also expected to climb in the future, mainly demand for chips for high-performance servers due to a digital transformation and the expansion of artificial intelligence services.
However, uncertainties are expected due to an escalating conflict between the United States and China, which account for the largest share of demand for Korean semiconductors. The United States has banned the export of advanced semiconductor production equipment to China and restricted subsidized companies from expanding their facilities in China through the CHIPS Act since October 2022.
In addition, Korea’s semiconductor industry is vulnerable to fluctuations in demand countries and changes in their industrial structures compared to Taiwan, which is competing fiercely with Korea for semiconductor market leadership, the report says. The volatility of Korea’s semiconductor exports is twice as high as that of its competitor, Taiwan, analysts say. Compared to Japanese semiconductor exports, Korea’s semiconductor exports have 2.7 times higher volatility.
This is due to the concentration of demand for Korean semiconductors in certain sectors and countries. Korea sent 55 percent of its semiconductor exports to China last year. Vietnam accounted for 12 percent, Taiwan 9 percent, and the United States 7 percent. Korea’s semiconductor exports are mainly in the form of intermediate goods. China and Vietnam receive Korean semiconductors to produce semiconductors for smartphones, PCs, and servers, which are then domestically distributed or re-exported to other countries. The United States uses them at data centers in its own country.
The report added that 44 percent of the semiconductors produced and exported by Korea ended up being used in mobile devices such as smartphones. Exports to the United States accounted for 9.1 percent and those to China for 9.0 percent. While China shows a small share of Korean smartphone sales, Chinese smartphone makers often use Korean semiconductors in their smartphones. Semiconductors for servers accounted for 20.6 percent, mainly used in data centers of global big tech companies in the United States. Accordingly, more than 65 percent of Korea’s semiconductor demand was concentrated on smartphones and servers.
By semiconductor type, non-memory semiconductors accounted for 44 percent of Korea’s semiconductor exports while 72.3 percent focused on those for mobile devices (as of 2021). Thirty-nine percent of memory semiconductors, which accounted for 56 percent of Korea’s semiconductor exports, were chips for servers.
Taiwan, on the other hand, faces more diversified semiconductor demand than Korea. In particular, its main semiconductors include non-memory semiconductors for electric vehicle batteries and semiconductors for general home appliances. Although Taiwan has a high proportion of semiconductors for smartphones and servers, it produces other items that react differently to economic conditions, so its semiconductor demand volatility is relatively low.
A recent deep slump in Korea’s semiconductor exports is also attributed to simultaneous slumps in markets with concentrated demand. Korea’s semiconductor exports have been on a steep decline since August 2022 when they returned to a year-on-year decline. The decline was 24.5 percent in the fourth quarter of 2022, 39.2 percent in the first quarter of this year, and 40.5 percent in April.