By Troy Stangarone
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But for all the success of South Korea's semiconductor industry over the last two years, it also demonstrated an overdependence on memory chips.
Memory chips account for all but 5 percent of South Korean production in semiconductors, making producers especially vulnerable to disruption in the memory segments and the industry overall.
In a relatively short period of time, memory chips have grown from 5 percent of South Korea's exports in 2014 to just under 14 percent of exports in 2018. In contrast, automotive exports only account for around 7 percent of exports.
When the recent super-cycle was taking off, South Korean exports had been stagnant the previous two years, but the growth in exports of semiconductors helped lift exports and accounted for more than 40 percent of South Korean export growth in 2017.
A similar effect could be seen on the corporate side. As sales of Galaxy phones and other products disappointed, the semiconductor super-cycle allowed Samsung to post record profits as semiconductors rose from 48.4 percent of operating profits in 2015 to 77 percent in 2018.
The current decline in demand for memory chips will reverse at some point in the future as demand for memory grows with the increasing integration of services into products and deployment of 5G, and Samsung, SK hynix and their American counterpart Micron Group will increasingly see their dominance in the memory chip segment challenged.
As part of its "Made in 2025" plan, China is pushing to establish its own national champions in the semiconductor industry. One of the early entrants is the Chinese government-backed Yangtze Memory Technology.
It plans to introduce a new NAND chip this year that it claims will provide "faster transmission speed and higher performance." Once introduced, the chip will likely provide direct competition to Samsung. It's also not the only Chinese firm on the horizon.
The Moon administration and Samsung are both taking steps to address this challenge, diversify South Korea's semiconductor industry and lessen the dependence on memory chips. The administration is looking to make South Korea a more favorable environment for small fabless chipmakers.
Ideally measures would be put in place to encourage startups that in time could grow into fabless chip makers similar to Qualcomm and Nvidia, which have become world-class firms in 4G and graphics processing chips.
The Moon Jae-in administration is also expected to provide support for the development of a semiconductor ecosystem at universities to help develop talent for the industry, something Samsung and SK hynix are expected to support.
Samsung has also set the lofty goal of becoming the world's top non-memory chip maker by 2030. To achieve this goal, Samsung hopes to take advantage of the shift to 5G to become a major end-to-end solutions provider that could supply firms with an array of chips that will be needed to manage and process the data over 5G.
It is also moving into more specialized areas. If 5G is the major global trend, automotive chips are another area where promising growth is expected as more technology is added to vehicles. Starting in 2021, Samsung's first automotive processor, the Exynos Auto V9, will power Audi's infotainment system.
The automotive industry and 5G are promising sectors. New technologies are expected to be deployed on 5G networks, while the push for autonomous vehicles will increasingly lead to the need for additional processing power in vehicles, but whose software will be running on the semiconductors produced by Samsung? This is the critical question that needs to be asked.
With the growing shift toward machine learning and the new applications that can be developed by applying increased computing power and data collection, much of the economic growth and innovation in the coming decades is poised to be in areas where artificial intelligence can best be applied.
While diversifying beyond the production of memory chips into different types of semiconductors is critical to protecting South Korea's long-term place in the industry, South Korea is perhaps already too dependent on semiconductors.
Emphasis, however, needs to be placed in other high-tech areas to reduce South Korea's reliance on the semiconductor industry and ensure long-term economic growth.
Troy Stangarone (ts@keia.org) is the senior director of congressional affairs and trade at the Korea Economic Institute.
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