[ANALYSIS] IPEF to deepen Korean firms' 'dual-track' strategy with US, China

Samsung, SK say their investment strategies not affected by geopolitical issues

By Kim Yoo-chul

South Korea's official joining of the U.S.-led Indo-Pacific Economic Framework (IPEF) could possibly jeopardize Seoul's long-standing strategic partnership with Beijing, as the core purpose of the IPEF is to counter China's growing economic and political influence in Asia.

The rationale behind such concerns was illustrated early by a series of recent remarks by Chinese Foreign Minister Wang Yi, who has expressed his dissatisfaction with the launch of the economic framework, which excludes China. Wang said in his May 16 videoconference with Korean Foreign Minister Park Jin that China doesn't want to see "technological decoupling" through the launch of the IPEF.

But because the prime goal of the IPEF is aimed at ensuring supply chain resiliency, the point of which is also embraced by China, given Beijing's continued heavy investment into the semiconductor industry, experts and executives at Samsung and SK ― the world's top two chip manufacturers ― said Seoul's participation in the IPEF will help domestic tech companies deepen their "dual-track" strategy for dealing with both the United States and China.

The Joe Biden administration is continuing the former Donald Trump administration's economic "decoupling" strategy to reduce U.S. reliance on Chinese imports and supply chains. Decoupling from China will cost a lot and China still lags far behind in the race for semiconductors, for example, when it comes to the level of tech being applied to manufacture advanced microprocessors, according to experts.

"The point is that China still has to rely on technology support from foreign companies in batteries and semiconductors, the industries which the country has identified as strategically important. Interestingly, because of South Korea's joining of the IPEF, China is expected to offer more incentives and benefits for Korean semiconductor and battery manufacturers doing business there," said Jeon Byeong-seo, the director of the Institute of Chinese Economic and Financial Research. China accounts for a 63-percent market share of the global consumption of semiconductors as of May of this year, according to estimates by market research firms.

The world's top memory chip manufacturer, Samsung Electronics, said it is on track to manufacture a massive quantity of chips with finer 3-nanometer processing technology. Its existing semiconductor plant in Austin, Texas, has been fully operational to manufacture chips with highly advanced technology, while its new chip plant, to be built in the city of Taylor, near Austin, will also be assigned to handle chips with premium technology. SK hynix, the world's No. 2 chipmaker, is investing heavily in the United States with a huge focus on high-end semiconductor technologies.

Washington's priority is banning Chinese tech companies from buying parts and components from U.S. companies or those of its allies, for use in manufacturing cutting-edge products, without its approval.

"In the case of semiconductors, a lot of Chinese companies are still relying on less-advanced 20-nanometer-level processing technology as the mainstream tool for semiconductor production. This level of technology is classified as a second-tier technology. However, Beijing's concern is how to shield itself from Washington's economic squeeze by announcing extra billion dollar investment plans in the semiconductor industry. Samsung and SK will benefit a lot," a former high-ranking trade ministry official said in a brief telephone interview.

The precondition to make the decoupling strategy actually happen is to get more countries currently maintaining a high level of economic partnership with China into an alternative U.S.-led economic bloc. But the point is not many countries are ready right now to follow suit. Plus, Europe and Asia do not necessarily want to see a decoupling from China because doing so would undermine the competitiveness of their companies and could slow economic growth.

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"Given the amount of investments in China by Korean tech companies, it will be a sensible scenario for China to provide more benefits for Samsung and SK affiliates in a way to retain them and to persuade them to level up their technology collaboration. At the time of Korea's joining of the IPEF, China didn't overreact to it or even make remarks signaling its intention to impose retaliatory measures," a senior executive at a first-tier parts supplier for Samsung, which has operations in China, said by telephone. "Beijing doesn't believe it can win support from Japan, the United States and Taiwan."

A protester holds signs during a rally outside the foreign ministry in Seoul during a trilateral meeting among the United States, South Korea and Japan, June 3. AP-Yonhap

Representatives at Samsung and SK said they've been studying how Korea joining the IPEF could affect their mainstream businesses in China. They said that the principle of their go-to-market strategy will be maintained regardless of geopolitical issues.

Over the last decades, China's core role in the semiconductor industry has been one of a mere assembler and packager. In 2018, Chinese President Xi Jinping noted China's dependence on core technologies is the biggest hidden trouble for the country and asked officials to put more focus on accelerating the development of "core semiconductors." In 2019, China created a state-backed fund worth $28.9 billion in a bid to make its own chip supply chain. However, the trade conflict between the world's top two economic powerhouses has been curbing this aim.

The Quad, a potential risk factor

Given China's significance and influence in the global economy, even Washington's allies are preferring to remain on healthy terms with both the U.S. and China, hedging between China as a trading partner and the United States as a security partner.

Political analysts say Washington's definition of the IPEF ― that it isn't intended to pressure China politically as it is more about economic cooperation ― leaves the door open for Beijing to apply a "phased approach" to its partners in Asia because the IPEF is more a signal, a statement of purpose and an ambiguous vision rather than a pact such as the Trans-Pacific Partnership (TPP) or the Regional Comprehensive Economic Partnership (RCEP).

Two chips are on display at the Taiwan Semiconductor Research Institute in Hsinchu, in this file photo. Reuters-Yonhap

But other than economic considerations, if South Korea eventually joins the Quadrilateral Security Dialogue ― a strategic security dialogue among the United States, Japan, India and Australia ― then China's position toward South Korea will be different, as Seoul's participation in the Quad would raise security concerns for China, the analysts said. South Korea showed its interest in joining the Quad at the May summit but the United States responded by saying that it is not considering adding Korea.

The Yoon Suk-yeol administration is departing from the former Moon Jae-in administration's engagement-driven North Korea policies, which had sought Beijing's support for a peace process on the Korean Peninsula, as China holds a permanent seat in the United Nations Security Council and is the economic lifeline for North Korea. President Yoon is expressing strong interest in advancing Korea's partnership with the United States, possibly at the expense of relations with China.

"There is a possibility that the nature of the Quad will be redefined as an 'anti-China alliance.' India is taking the role of balancer. That's why India wants South Korea to join. If South Korea joins the Quad, then that could make China very angry, as the Quad is more about an exclusive security group," said Kim Joon-hyung, former head of the Korea National Diplomatic Academy. Out of the four Quad members, India and the United States are nuclear states, while Japan and Australia are positioned to manufacture nuclear weapons quickly given their holdings of enriched uranium.

"The United States defines today's tensions with China as a 'limited war.' The other three Quad members are believed to take a central role in the U.S.' trade and economic war against China, as these countries are considered safe from China's military threats, unlike Taiwan and the Philippines. Washington regards Seoul as leverage to defend Japan and it also acknowledges China's uneasiness regarding South Korea's participation in the Quad, if it were to actually happen. Various retaliatory actions are expected to follow if South Korea joins the Quad," said Kwon Young-keun, head of the Korea Defense Reform Institute.

Regarding any updates about the government's attempt to join the Quad and any expected economic effects, an official at the presidential office declined to comment.