Seoul's worst China tech fears are coming true

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The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Robyn Mak
HONG KONG, Oct 28 (Reuters Breakingviews) - Memory chips are inducing headaches in Seoul. SK Group Chairman Chey Tae-won recently warned that Chinese challengers were an imminent threat to South Korea's technological dominance in semiconductors. Recent developments suggest that the neighbouring competition is quickly becoming an acute danger.
It is difficult to understate the industry's importance to South Korea's $2.6 trillion economy. Semiconductors, mostly those used to store and transmit information, accounted for a whopping 40% of the country's $700 billion of exports in the eight months through August. Voracious demand from data-hungry AI models amplifies the dependence.
At a combined $1.7 trillion, Samsung Electronics 005930.KS and SK Hynix 000660.KS represent roughly half of the benchmark KOSPI index .KS11 by market capitalization. Flush with machine-learning profit, South Korea is racing to capitalize on what the government calls a "once-in-a thousand-years opportunity." In June, President Lee Jae Myung unveiled a nearly $600 billion investment initiative to cement the country's leading position.
The imminent risk isn't necessarily that fast-growing Chinese companies, such as CXMT 688825.SS and Yangtze Memory Technologies, which are taking advantage of shortages in less advanced products, will catch up to the latest generation of memory chips. Rather, it is that they will use all the capital and clout they are accumulating to leapfrog the industry and dominate what's next. It's a strategy that Chinese policymakers call "overtaking by changing lanes." The country's automakers, for example, achieved the feat by revving past combustion engines to become the international leaders in electric vehicles.
Unseating Samsung and SK would be a Herculean task. The duo accounted for more than 60% of the market by revenue for dynamic random-access memory, or DRAM, which is used for conventional data storage in everything from PCs to smartphones and data centers. They also claim more than 80% of the market for high-bandwidth memory, or the vertically stacked DRAM essential in producing cutting-edge AI chips from Nvidia NVDA.O, AMD AMD.O and others. Only Samsung, SK and US-based Micron MU.O can manufacture HBM at scale today.
There are other impediments to Chinese companies. They are hobbled by US-backed restrictions on sophisticated chipmaking equipment, particularly in extreme ultraviolet lithography tools. Those have largely confined state-backed CXMT and Yangtze to the more commoditised end of the memory market. Despite such constraints, they are just two years behind the market leaders in DRAM and three years behind in HBM, the Korea Semiconductor Industry Association estimates. In another type of memory known as flash, the gap is just one year.
Beijing's longstanding support includes direct subsidies, cheap financing, tax breaks and policy that incentivises local businesses to buy from domestic chipmakers. More recently, China's homegrown tech champions have incumbents and the AI boom to thank as well: SK, Samsung and Micron are all diverting more capacity to make high-bandwidth memory, resulting in a painful shortage of non-AI memory for everyone from iPhone-maker Apple to its Chinese competitor Xiaomi.
These shifts have created a rare opening for China's top DRAM maker, CXMT, whose market value exceeds $430 billion. Its conventional memory products may be a few years behind, but their performance is good enough to compete. And demand probably won't be limited to domestic customers only. Apple, Dell and HP are considering using Chinese memory chips in devices sold outside the United States, according to media reports, putting CXMT head-to-head against the Big Three in export markets.
The trio are doubling down on high-bandwidth memory and willingly ceding the less-sophisticated part of the market to CXMT. As a result, it's helping to ensure the company's long-term competitiveness. It's on track to generate an operating profit of 643 billion yuan ($96.4 billion) next year, up from just 8 billion yuan in 2025, according to estimates from Bernstein analysts. The money will help fund aggressive capacity expansion, with cumulative capital expenditure projected to top $68 billion over the next three years.
Those figures pale in comparison to Samsung and SK, which are also planning aggressive long-term expansion plans. Even so, CXMT's overall DRAM market share by shipments is expected to reach 11% in 2028, up from 8% last year, per research firm Counterpoint.
The growth is critical because in such a capital-intensive and highly cyclical industry, nothing matters more than size. Memory makers need to secure at least 15% of the market to stay viable, Counterpoint analysts reckon. They expect CXMT to cross that threshold in less than a decade, effectively turning the memory oligopoly into a foursome.
At least for Chey, SK's chairman, and Jay Y. Lee, Samsung's de facto boss, the geopolitical and technological rivalries between Beijing and Washington should ensure South Korea's dominance in AI supply chains. It would be unthinkable, for instance, that hyperscalers such as Amazon.com AMZN.O, Microsoft MSFT.O and Meta Platforms META.O would fill American data centres with made-in-China chips. US officials may yet tighten export controls, potentially setting Chinese chipmakers back; CXMT also risks joining compatriots Huawei and YMTC on the so-called "entity list" that blocks access to US tech and software.
Constraints can inspire creativity, however. Huawei, the country's answer to Nvidia, has been forced to explore alternative approaches because of US sanctions and export controls. It recently unveiled a novel chip design and manufacturing method called the Tau Scaling Law, which it presents as a successor to Moore's Law. In memory, CXMT and its peers are pursuing a similar strategy with developments such as bonded DRAM technology to produce faster, more efficient chips without relying on extreme ultraviolet lithography machines.
Samsung and SK are eyeing breakthroughs, too, but they have already committed billions of dollars to existing technology roadmaps. It presents the South Korean conglomerates with a classic innovator's dilemma, where mighty incumbents are slow to embrace new developments that may undermine financial returns for their established businesses.
The gradual rise of CXMT and compatriots will have far-reaching implications beyond Seoul. Just as with other industries where Chinese manufacturers have conquered, including solar panels, smaller and weaker competitors will be squeezed out. That puts Japan's Kioxia 285A.T and Micron, among others, in a vulnerable position. Moreover, Chinese semiconductor advances will give Beijing considerable trade and technological leverage, alongside rare earths. South Korea's chip angst may soon spread across world.
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(Editing by Jeffrey Goldfarb; Production by Pranav Kiran)
((For previous columns by the author, Reuters customers can click on MAK/  robyn.mak@thomsonreuters.com))