South Korean semiconductor equipment and material suppliers have not benefited much from the recent global semiconductor industry boom. Yet they are taking a direct hit from the ongoing decline in memory chip demand.
Samsung Electronics and SK Hynix accounted for 74.6 percent and 46.4 percent of the global DRAM and NAND flash markets in the third quarter of 2018, respectively. Although the two companies’ market shares are high, local equipment and material suppliers’ competitiveness is not strong enough to back them.
According to Semiconductor Equipment and Materials International (SEMI), Korean semiconductor equipment suppliers’ global market share stood at 10.1 percent in 2017. Moreover, the use of domestically produced equipment in South Korea fell from 25.8 percent in 2013 to 18.2 percent in 2017. Local semiconductor material suppliers’ global market share was approximately 10 percent, too.
The average operating profit ratio of Samsung Electronics and SK Hynix is estimated to have risen from 24.9 percent in 2017 to 28.3 percent in 2018. Yet that of the other major listed semiconductor companies is estimated to have edged up by a mere 0.6 percentage point from 15.5 percent to 16.1 percent.
Meanwhile, foreign semiconductor equipment and material suppliers have made the most of the boom. For example, Applied Materials’ net sales and operating profit for 2018 increased 18.6 percent and 25 percent year on year to US$17.25 billion and US$4.8 billion, respectively.
In the non-memory chip sector, which includes foundries and fabless companies characterized by mass customization, the role of small and medium-sized companies is more important in enhancing competitiveness than in the memory chip sector where a small number of items are produced in quantity. South Korea still has a far way to go when it comes to this point. TSMC has outperformed Samsung Electronics in the non-memory chip sector based on the competitive edge of small and medium-sized Taiwanese semiconductor design firms.
The same problem is even more serious in the South Korean automobile industry, where a large number of firms are highly dependent upon Hyundai Motor Group. South Korean auto parts manufacturers enjoyed a rapid growth through vertical integration with the automaker, yet the vertical integration has negatively affected their global competitiveness and the manufacturers are going through difficulties with the group’s performance deteriorating in major markets these days. No less than 71.3 percent of the auto parts the manufacturers exported last year were sent to regions where the group’s plants are located.
As for the South Korean shipbuilding industry, the ongoing recovery is likely to be limited to the top three shipbuilders with the other companies in the industry having collapsed as a result of the previous slump. Approximately 10,000 workers left the companies for the past five years and an increasing number of them are giving up on new contracts due to the lack of workers.
At present, major South Korean business groups are planning to create 200,000 jobs until 2021 by investing more than 40 trillion won. They have an important role to play in changing industrial ecosystems. Economists point out that the ecosystems should be restored without delay by means of investment and R&D result sharing between large and smaller companies with few of the latter able to stand on their own.