Analysis: South Korean chip giants face 'strangling' from Japanese export curbs

STELLA CHEMIFA

01/08/2019 07:01

* S.Korean chip industry scrambles to secure Japanese
materials
under new trade restriction 
    * No approvals for materials critical for chipmaking have
been
granted since early July - sources 
    * S.Korea imported $11 bln worth of Japanese chip parts and
equipment in 2018 

    By Heekyong Yang and Ju-min Park
    SEOUL, Aug 1 (Reuters) - South Korean chipmakers are hitting
a dead end in their quest to find alternatives for key Japanese
materials that have been slapped with export restrictions,
raising the prospect of major disruption to their operations in
the coming months. 
    Japan is now requiring special approval for sales of three
high-tech materials, including two that are critical for
chipmaking, to South Korea amid a deepening diplomatic dispute
over compensation for forced labour during World War
II. urn:newsml:reuters.com:*:nL4N2420DG
    South Korea-bound exports of the materials, including
hydrogen fluoride gas and chemicals known as photoresists, now
require government approval. No approvals have been granted
since the dispute broke in early July, South Korean industry
sources said.
    "Japan is slowly strangling our neck", one senior official
at a major South Korean major chipmaker told Reuters, requesting
anonymity due to the sensitivity of the matter.
    South Korean chipmakers have been plotting workarounds, such
as seeking supplies directly from factories in China or Taiwan
owned by their Japanese suppliers, but government officials this
week warned them not to go that route. 
    At a closed-door meeting on Monday, South Korea's chip
industry group handed out government guidelines to its members,
including Samsung Electronics  005930.KS  and SK Hynix
 000660.KS .
    The guidance seen by Reuters cautioned that Japanese firms
can rightly refuse to ship the materials from third countries,
and that any efforts to bypass restrictions could subject both
chipmakers and suppliers to broader international trade
sanctions.
    "Simply put, don't sweat over importing Japanese materials,"
said one official at the Korea Strategic Trade Institute who is
not authorised to speak to media.
    
    LIMITED ALTERNATIVES
    Efforts to find alternatives to the Japanese suppliers have
also struggled to make headway. 
    Although there have been offers from Russian and Chinese
suppliers, chipmakers say that for most purposes they need
Japan's high-purity hydrogen fluoride because it helps them get
high "yield" rates, which is critical to making chips
profitably.
    Yield is especially important in manufacturing memory chips,
used in everything from smartphones to vehicles and where
Samsung and SK Hynix control more than half of the global
market.
    "Even if we want to use products from other countries to
replace Japanese, it will take months to prove them as suitable
for our current manufacturing systems and performance," a second
official at a South Korean major chipmaker said, who also
requested anonymity.
    Major South Korean chipmakers are now testing some
non-Japanese materials, South Korean deputy trade minister Kim
Yong-rae told foreign media on Wednesday.
    Samsung said Japanese curbs on the export of chip-making
materials were blurring its business outlook as it reported a
halving in quarterly profit on Wednesday.  urn:newsml:reuters.com:*:nL4N24R117
    "Even though the recent measures by the Japanese government
do not ban export of materials, we are facing difficulties due
to the burden of this new export approval process and
uncertainties this process will bring, so the visibility is
low," Robert Yi, Samsung's head of investor relations, said on
an earnings call.
    The company was reviewing various measures to minimise
impact, he said, without providing further details.
    The curbs on photoresists only apply to those used in
producing chips based on an advanced technique known as extreme
ultraviolet or EUV lithography. 
    But that could hobble Samsung's efforts to use the
technology to catch up with rival Taiwan Semiconductor
Manufacturing Co Ltd  2330.TW  in the booming business of
building advanced chips for other companies.
    "If Japan's exports controls continue further, Samsung will
inevitably face long-term consequences operating its EUV
machines and a hard time meeting their production agenda," said
Park Sung-soon, an analyst at Cape Investment & Securities.
    South Korean chipmakers and their local suppliers are
bracing for further moves by Tokyo to drop South Korea as a
preferred trading partner, which would mean tighter regulations
for a broader range of chip products bound for South Korea.
    South Korea's top imports from Japan by value last year were
semiconductor components and equipment ranging from silicon
wafers to chip etching machines, according to data provided by
Korea International Trade Association.
   In 2018, South Korea bought a total $11 billion worth of
semiconductor parts and equipment from Japan, accounting for
nearly 20% of Japanese imports, the data shows.
    The South Korean government has launched a campaign to
nurture local suppliers to counter Japan's restrictions, but
analysts and officials at suppliers say the goals are
unrealistic.
    "On top of local suppliers' efforts, current nationwide
efforts to localise high-tech materials will continue, but we
cannot replace all materials by ourselves," said an executive at
a South Korean supplier for Samsung and SK Hynix. 
    "It will take a long time to get there and we need to
cooperate with Japan."

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
S.Korea's imports of Japanese chipmaking products interactive   
https://tmsnrt.rs/2yqYnmF
S.Korea's imports of Japanese chipmaking products png    https://tmsnrt.rs/2yq4lnM
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 (Reporting by Ju-min Park and Heekyong Yang in Seoul.
Additional reporting by Makiko Yamazaki in Tokyo and Hyunjoo Jin
in Seoul. Editing by Jonathan Weber and Lincoln Feast.)
 ((Heekyong.Yang@thomsonreuters.com; +82 2 3704 5647; Reuters
Messaging: heekyong.yang.thomsonreuters.com@reuters.net))