South Korea sharpening its leading edge in chips

SEOUL – As semiconductor supply shortages keep their grip on global attention, South Korea is investing and earning on a grand scale, reinforcing its position in a crucial sector that is seeing growth in both capacity and strategic value-added.

Recent dollar figures being bandied around the South Korean chip industry – annual exports of US$100 billion, investment forecasts of $450 billion – are boggling minds. Presidential press conferences and bilateral summits in Washington add further buzz and fizz to the talk surrounding Korea’s leading, and massively capital-intensive, export item.

As the world gazes upon the sector with previously unseen intensity, South Korea’s chipmakers – armed with skilled workforces, cutting-edge plants and massive war chests, all operating via a fully established sectoral infrastructure that is backed to the hilt by Seoul – deepen and expand their footprints.

Formerly seen as un-sexy B2B commodities, chips have now leaped from the business page to the front page as their status as perhaps the 21^st century’s most critical industrial product is belatedly recognized.

Multiple trends are boosting the global importance of chips – the components that beat at the heart not just of the electronics sector, but also of formerly analog industries that are increasingly migrating into the digital space.

Chips with everything

Firstly, semiconductors and their related capital goods and intellectual property became key weapons for the Donald Trump administration to wield in the trade and tech wars it waged against China.

Secondly, demand for chips surged as the global Covid-19 pandemic required online business to upgrade data centers, while locked-down populaces worldwide acquired new devices on which to work, study and recreate from home.

Thirdly, chips are central to an expanding range of new technologies. Cloud computing, the internet of things, artificial intelligence and 5G mobile telecoms are expanding the frontiers of digital capabilities. Meanwhile, erstwhile electrical and mechanical products, from vacuum cleaners to automobiles, are being electronically networked, adding to chip demand.

Fourthly, a number of factors – ranging from underestimates of supply needed by the increasingly chip-heavy auto industry to “black swan” events including power outages in Texas, droughts in Taiwan and a fire at an autos chip plant in Japan – have converged to create a chip shortfall worldwide.

And that shortfall is not going away anytime soon.

“Evidence is growing that semiconductor supply constraints will persist longer than anticipated, intensifying and likely extending the current cyclical upturn into next year,” Fitch Ratings wrote in a May research note send to reporters.

Although chip makers are “aggressively adding capacity,” Fitch wrote, “the acquisition and validation of chip making tools and production of finished semiconductors have historically taken roughly one year. This could result in rationing available supply among customers and higher prices for many products through 2021.”

SEMI, a global industry association, anticipates an upbeat sectoral growth outlook for the next two years.

Capacity for memory chips will grow at a steady pace in single percentage digits, year-on-year in 2021 and 2022, while foundry capacity – the outsourced production of bespoke, non-memory system chips by firms that do not possess their own fabs (fabrication plants) – will see increases in the upper single percentage digits for the next two years, the organization found.

Investment bank analysts are more upbeat.

“Market size is expected to double in 10 years,” said Sanjeev Rana, senior technology analyst at securities house CLSA in Seoul. That analysis is backed up by Gartner research that found that 2020’s global semiconductor market expanded 10.4% year-on-year, to $466 billion. 

“The semiconductor market is growing two to three times faster than global GDP,” added Daniel Kim, head of research and senior technology analyst at Australian investment bank Macquarie’s Seoul branch. “Silicon consumption is exponentially growing – we need bigger and more chips per car, per PC, per vacuum cleaner.”

Even so, with so many investments being announced by companies and incentives and subsidies being hurled around by various countries, is there a risk that the current shortage will be followed by massive chip-making overcapacity?

Rana is doubtful.

“If it all comes online, then there will be overcapacity,” he admitted but mentioned doubts about some of the hyperbole ricocheting through the sector. “Although all these companies and countries have made big announcements, we have to see how they follow through. It typically takes about two years to construct a fab.”

Against this backdrop, South Korea is well-positioned as the world’s largest national maker of memory chips – produced by Samsung Electronics and SK hynix – and also home to the number-two player in foundry, Samsung, again.

National chip exports are expected to increase 10.2% year-on-year in 2021 for a value of $109.3 billion, according to a January report by the Ministry of Trade, Industry and Energy and the Korea Semiconductors Association.

In 2020, Korean semiconductor shipments were worth $99.2 billion, up 5.6% from 2019. The year 2018 was the best ever, with chip exports worth $126.7 billion at the height of the “semiconductor supercycle.”

Silicon cutting edge

Korea’s positioning looks particularly muscular at the apex of the industry. National flagship Samsung is one of only three manufacturers – along with US-based Intel and Taiwan-based TSMC – that can produce large numbers of chips with process capacities of below 10 nanometers.

It is these leading-edge chips that are leading the industry forward, as opposed to more commodified legacy chips.

By the end of 2020, chips in the sub-10nm range were “expected to count for 10% of the industry’s total wafer capacity, rising to over 20% in 2022 and 30% in 2024,” making it the largest single capacity, according to a November 2020 report from IC Insights. 

Noting the excellence of South Korean production, IC Insights wrote that the country, with 66% of its capacity dedicated to sub-20nm process technology, “remains significantly more leading-edge focused than other countries or regions.” It added that “the country has the highest concentration of wafer capacity dedicated to leading-edge processes.”

Taiwan, meanwhile, boasts 35% of output in the sub-20nm capacity, while for China, “most of the sub-20nm capacity is “owned and controlled by foreign companies” – including Korean firms – IC Insights found.

Indeed, Chinese semiconductor firms, although they are major producers of mid-range legacy chips, are behind the industry leaders Samsung in memory and Taiwan in non-memory logic, or system, chips.  

Even on Beijing’s state-run channel CGTN, a Chinese researcher admitted this lag. “Chinese companies are behind the leading foreign companies in memory and logic,” Gai Keke, of the Beijing Institute of Technology said on a news report Wednesday.

Despite ongoing investments in talent and finance, “Some say we may need another 10 years to master the key technologies,” he added.

With both the profile and the commercial and strategic value of the sector climbing, Seoul is determined that its chipmakers remain at the front of the pack. On May 13, eyebrows shot up across the globe when South Korea announced a 510 trillion won (US$453 billion) spend in the sector by 2030.

That is serious money. It is nine times the amount that the United States has pledged to sink into silicon. 

On April 12, US President Joe Biden, in a meeting with industry chiefs – including executives from Intel, Samsung and TSMC – said he had won bipartisan support for $50 billion in semiconductor research and manufacturing as part of his national infrastructure plans.

The South Korean figure also dwarfs recent investments by China, which in 2020 spent 213.6 billion yen ($33 billion) on industry subsidies, with the key focuses being on defense and semiconductors. Of the overall amount, just 10.6 billion yuan went to chipmakers.

Still, Seoul’s announcement needs to be viewed through the prism of domestic politics. It was made during a visit to Samsung’s chip plant in Pyeongtaek, Gyeonggi Province, 70 kilometers south of Seoul, by none other than President Moon Jae-in.

Joining Moon – who is constitutionally restricted to a single term as president – at the press opportunity was Gyeonggi Provincial Governor Lee Jae-myung. Lee is the current favorite to represent the ruling party in the presidential election in March 2022.

“The semiconductor industry has moved to an era of competition among countries, beyond competition among companies,” Moon said. With “global supply chains being reorganized,” he vowed to unite government and business in order to turn South Korea into “a semiconductor powerhouse.”

Perhaps it escaped the attention of Moon’s speechwriter that South Korea is already that. And beyond the gobsmacking headlines, the small print is more prosaic.

The sum is not an actual investment: It is a series of tax incentives and state subsidies to chipmakers that will, Seoul hopes, encourage them to spend the stated amount. 

Under the so-called “K-semiconductor blueprint,” Seoul will prepare a $1.34 billion budget to support the development of next-generation chips. Another $890 million worth of low-interest loans will support facility investments by local chipmakers.

A web of industrial clusters south of Seoul in Gyeonggi will be further connected, networked and renamed the “K-Semiconductor Belt.”

They include Pangyo, which will become the hub for South Korea’s “fabless” industry – made up of those companies that design, but do not manufacture chips in their own fabs. Giheung will focus on foundry. Hwaseong/Suwon and Pyeongtaek will continue as a hub of memory chips fabs.

SK hynix has already announced plans to build a new chip complex in Yongin, adjacent to Giheung. The broader plan involves 151 named companies in the foundry, fabless, capital goods manufacturing and materials supply spaces.

Gazing ahead, the country aims to more than double its annual outbound shipments to $200 billion in 2030 from the $99.2 billion worth of chips dispatched abroad last year.

Still, some cynicism has circulated about Seoul’s big talk, which came amidst global headlines about Chinese and US strategic investments. “The government had to show it’s doing something,” one local familiar with the issue said with a chuckle.

In fact, the headline numbers are on point given how capital-intensive South Korean chipmaking already is.

One expert, looking at the overall figure, and breaking it down to some 50 trillion won annually, encompassing both R&D and capital expenditure, said this is essentially what Korean players were expected to spend – regardless of Seoul’s plans. 

“If you look at SK hynix’s and Samsung’s investments, that, in itself, constitutes or exceeds 51 trillion (won) per year, so it is not a big deal,” CLSA’s Rana told Asia Times. He added, however, “Of course not all their capex is spent in Korea and some of the R&D is done overseas.”

While its grandiosity may be questioned, the announcement is a sign of determined government policy support in a nation with a history of hugely successful top-down economic management.

Under the stern eye of Seoul’s economic control tower, local companies were incentivized (and coerced) to, first, create a national industrial infrastructure in the 1960s and 1970s, and then emplace cutting-edge broadband and mobile telecoms infrastructure in the 1990s and early 2000s.

And regardless of any political hyperbole, real billions are already being spent.

In the first quarter of this year, South Korea was the largest single national spender on chip-making equipment, according to an analysis last week from global industry association SEMI that was reported in local media. According to SEMI, Samsung and SK hynix sank $7.31 billion into chip-making gear – accounting for 31% of all global equipment billings – in Q1 2021.

The number two player in Q1 was China, which invested $5.96 billion, while Taiwan was in third place with $5.71 billion. Moreover South Korean chipmakers’ spending on equipment had soared 61%, year-on-year, in 2020 from a year earlier, SEMI found.

Separately, the MOTIE report, citing data from SEMI, expected Korea’s spend on chipmaking equipment in 2021 to be the largest in the world at $18.9 billion – ahead of China’s with $16.8 billion and Taiwan’s with $15.6 billion.

Samsung also appears to be spreading the love.

In addition to its existing Texas-based fab, the company will invest $17 billion in additional US plant, the South Korean government revealed following a bilateral Joe Biden-Moon Jae-in summit in Washington in May, in a statement obtained by Asia Times.

That investment has been the subject of major speculation since early this year and is expected to produce ultra-advanced 5nm logic chips. However, Samsung’s Texas plant was hard hit by power outages earlier this year, and there is still no confirmation from the company on the details of the investment announced by Seoul

Samsung chases TSMC

Still, adding top-end foundry in the US would sync with the company’s overall strategy. Samsung is the leading global supplier of memory chips – a good space to be in – but industry experts say it cannot expand its share there for fear of facing monopoly regulation across the globe.

However, there is plentiful elbow room available in the non-memory, logic-chip foundry sector currently dominated by Taiwanese titan TMSC, with Samsung the number-two player.

Last year, according to IC Insights, Samsung was the sector’s number two spender on chip R&D behind Intel, spending $5.6 billion. According to Yonhap news agency, most of that spend was aimed at upgrading its presence in the non-memory space, notably in cutting-edge logic processes of 5nm and below. 

In 2019, Samsung had announced its plan to make phased investments, though 2030, of 133 trillion won ($120 billion) to bolster its competitiveness in the system chip and foundry businesses.

On May 13 – the same day as Moon’s headline-grabbing appearance in the Samsung fab in Pyeongtaek – the company announced in a press release that it was raising that figure by 38 trillion won to 171 trillion won ($151 billion), to be invested in the same time frame.

The 2020 R&D is part of this overall planned spend.

In the same release, Samsung announced that it had begun construction of a new production line in Pyeongtaek, which it expects to complete in the second half of 2022, producing 14nm DRAM memory chips and 5nm logic semiconductors.

“The entire semiconductor industry is facing a watershed moment and now is the time to chart out a plan for long-term strategy and investment,” said Kim Ki-nam, who heads Samsung’s Device Solutions Division.

Samsung’s ongoing investments are paying off as high-value added, non-memory chips are expanding their presence in the national export portfolio.

According to the January report from MOTIE and the KSA, exports of memory chips are expected to increase about 12% on-year in 2021 to surpass $70 billion, while those of non-memory chips are anticipated to rise 7% year-on-year to reach more than $31 billion this year.

This does not change the fact that TSMC is deeply entrenched as the global leader in foundry. The Taiwanese player controls 55% of the global foundry business, ahead of Samsung’s 17% chunk, according to MOTIE.

Hence, the big question hanging over Samsung is how successful in can be in grabbing further business in foundry.

“For [memory chips] DRAM and NAND, Samsung’s technological prowess remains unrivaled – I have full confidence,” said Kim. “But for their foundry business, the view is polarized: Some people are overly optimistic, some are overly pessimistic. The jury is out.”

“It is a mixed view,” added a Seoul-based industry watcher, who spoke on condition of anonymity as he did not have permission to speak to media. “Samsung has some boundaries to jump as they are not as yet up to the  technology level of TSMC.”

Even so, the source added that being in the number-two place behind the industry leader is powerful positioning, granting the company hedges in commoditized memory chips and bespoke non-memory chips.

Too few powerhouses        

Much current commentary bewails the world’s reliance on such a small number of manufacturing powerhouses. Yet, despite top-level focus on chip production by Beijing, Washington and even Brussels, and despite the ongoing increase in the space’s size, experts do not see any seismic change shifting the sector’s overall geography.

This is partly because of the dynamics driving the shift.

“Geopolitics is driving investments as we see in all these announcements from the US and EU as they want to lower their dependency on one part of the world – East Asia,” Rana said. “It’s ‘silicon nationalism.’”

This means Samsung and TSMC – and South Korea and Taiwan – will remain industry epicenters.

“I think it will be the same,” said Kim. Samsung and TSMC “are investing tens or twenties of billions of dollars, and on top of that, technological complexity is ever-rising, which means there are huge entry barriers to newcomers.”

As noted, due to the US grip on the sector’s intellectual property, the outlook for the domestic Chinese semiconductor industry is cloudy, absent “the full support of the US government” – support that the Biden administration looks highly unlikely to offer.

But this does not mean US chipmakers are set to lead the space. Kim noted that there is “major skepticism” in the sector about whether Intel, now under new management, can make further inroads into leading-edge plays, and supply foundry to the EU.

Meanwhile, Biden’s pledge of $50 billion of support to bring semiconductor manufacturing to the US overlooks a factor that the US president might not be pleased to hear: The two key players in the industry are basing their investment decisions on reasons that extend beyond commercial economics.

“From the perspective of TSMC and Samsung it does not make economic sense to build fabs in the US,” Rana said. “The operation of fabs in the US are, at a minimum, 20% more expensive than their operations in Taiwan or Korea.”

Not only are American costs higher, the two companies will be forced to deploy advanced engineering brainpower from their home bases, he said. The vast size of the US, and its dilapidated transport and power nets, are a further problem.

Moreover, the US lacks the kind of hubs for chip production that exist in Korea (the clusters comprising the “K-Seminconductor Belt” south of Seoul) and in Taiwan (the city of Hsinchu, TSMC’s production base). In both those locations, transport infrastructure, chip-support infrastructure, related businesses and skilled manpower are conveniently in situ.

“It is much easier to have a fab in a concentrated location,” Rana said.

This suggests that the reasons for high-profile American investments by Asian players is not just demand from US-based clients such as Apple and Qualcomm, but to keep on the right side of Washington, which – despite US weaknesses in infrastructure and manufacturing – maintains a watch on the sector’s intellectual property.

“They are doing it due to pressure from the US government and they are required to do it by their fabless US clients,” he said. “Economically it makes no sense – but overall it makes sense.” 

In other words: Samsung and TSMC are well hedged politically, but still maintain key production facilities on home soil.

This essentially means that, despite the sturm und drang buffeting the sector, both companies, as well as their home countries, are set to retain their pole positions for the foreseeable future.

“Money does not buy you technology!” Kim said. “It is impossible to leapfrog the geometric nodes.”

Rana agrees.

“TSMC and Samsung will remain leaders in the world,” he said. “Even in the US, these companies have the biggest changes of being successful. For now, there are no reasons to believe that the sector will see any newcomers or a resurgence of lagging players.”