Geopolitical Risks Growing
South Korean semiconductor companies’ business conditions are deteriorating. Memory chip prices are falling fast to affect their profitability and the United States is increasingly curbing China’s growth in the sector with their business in China already large in scale.
According to market research firm TrendForce, the average contract price of 8Gb DDR4 DRAM chips for use in PCs fell from US$3.35 to US$2.88 in July this year. The rate of decrease, 14.03 percent, is the highest since February 2019 and the price fell below US$3 for the first time since 2020. In the third quarter, the DRAM and NAND flash prices are estimated to fall 5 to 10 percent and 8 to 13 percent, respectively. This means the second-half performances of Samsung Electronics and SK Hynix are likely to be poor.
The two companies are facing increasing geopolitical risks, too. The United States is urging them to sever relations with China. Although they can expand their markets outside China by cooperating more with the United States, China alone accounts for 60 percent of South Korea’s semiconductor exports and it is something South Korean semiconductor companies cannot lose at any cost.
The House of Representatives passed the Creating Helpful Incentives to Produce Semiconductors for America (CHIPS) Act on July 28 so that semiconductor-related facility construction and expansion by U.S. investment beneficiaries can be banned for 10 years in certain countries, including China. According to the US$280 billion investment bill, the beneficiaries’ chip production in 28 nm and more advanced processes is also banned in those countries.
The act is a dilemma on the part of Samsung Electronics and SK Hynix. Samsung Electronics is planning to build a new foundry in Taylor, Texas by investing US$17 billion, SK Hynix is planning to build memory chip packaging facilities in the United States, and tax incentives based on the act are expected to be provided for them. The companies are producing chips in China as well, and the act may affect the production at the same time.
The semiconductor industry alliance in the making by the United States, Japan and Taiwan and resisted by China is another burden. The alliance is to isolate China in the global semiconductor industry and China is threatening South Korea not to join it while the United States is demanding the opposite.
The South Korean government is failing to choose one side as cooperation with the United States is essential and the Chinese semiconductor market is of extreme importance. South Korea is structurally dependent on the United States on the technology and production side and China on the demand side. The Korea Institute for Industrial Economics and Trade said in its recent report that the United States is capable of controlling foreign chip production with its source technologies and South Korea’s non-participation in the alliance may lead to its semiconductor production failures in the worst-case scenario.