[ANALYSIS] Seoul expected to join Washington-led 'Chip 4' alliance

Korea still needs US support for country's chip ecosystem to evolve

By Kim Yoo-chul

Modern history tells us that economics and politics are inseparable, yet over the last few decades, the world has witnessed something of a sideshow in terms of the two. Such political shortsightedness leads to weakened economies, with the brewing U.S.-China tech cold war being a vivid example of this.

The impact of COVID-19 on backbone industries in the United States has been huge, as the automobile and technology sectors, among others, have been hit hard by the severe shortage of essential manufacturing components such as semiconductors and batteries. This scene has been interpreted as an important reminder of the significance of understanding the high-degree of vulnerability in today's inter-connected world.

Of note is that the COVID-19-triggered semi-conductor component supply chain issues have caught the attention of top U.S. policymakers, as the severity of the shortage could gravely impact emerging technologies that Washington has identified as key strategic growth engines: AI, quantum computing, 5G and the internet of things. These technologies all require highly-advanced chips.

The White House actively responded to this situation with U.S. President Joe Biden signing an executive order to review supply chains for semiconductors, aimed at advocating further for more investment on U.S. soil and strengthening onshore manufacturing with the help of its Asian allies. Additionally, Washington's aim to build stronger global component value chains with a focus on semiconductors is aimed at seeking "partial technological decoupling" from China.

As the pandemic has strongly awakened nations to the huge necessity of having a solid semiconductor supply chain, given their vast usage in items such as cars, electronic devices and a wide range of next-generation technologies, the United States thinks that becoming more resilient is a necessity in the current environment. Within that context, South Korea and Taiwan, as well as Japan, have emerged as the linchpin for the Washington-led semiconductor alliance, known in Korea as the "Chip 4."

"The global semiconductor shortage has led to an increase in support among Asian partners. Taiwan-based foundry chip-making king TSMC is hoping to win more support from the United States in the Taiwan Strait, while global memory chip manufacturer Samsung is hoping to boost its foundry business with U.S. assistance. From the U.S. perspective, Seoul's participation in the Chip 4 initiative is very necessary," said a high-ranking diplomatic source in Seoul by telephone. Beijing views democratically governed Taipei as a breakaway state from mainland China that should be taken back by force, if necessary.

Both the United States and China are betting heavily on boosting their semiconductor industries. However, in terms of focus and the specifics of growth metrics, the two countries are showing differences. By chip production, China leads the global market with a 24-percent share, followed by Taiwan (21 percent), South Korea (19 percent) and Japan (13 percent). Only 10 percent of chips are made in the U.S., according to the Semiconductor Industry Association (SIA).

U.S. Secretary of Commerce Gina Raimondo speaks during an address at Brown University, March 15. The Biden administration and congressional Democrats are warning of dire ramifications for the economy and for national security if Congress fails to pass a bill by the end of July that is designed to boost semiconductor manufacturing in the United States. AP-Yonhap

While China is the world's consumer market, Beijing is pursuing "semiconductor self-sufficiency" because the country is focusing more on wafer fabrication, assembly, testing and packaging, which are segments that are labor- and capital-intensive. The United States is seeking to advance knowledge-focused activities along with chip design, manufacturing equipment and core intellectual property (IP), which are segments that require solid infrastructure and skilled workforces. The White House said semiconductor firms including Samsung announced nearly $80 billion in U.S. investments through 2025.

Both Samsung and TSMC are operating massive foundry chip plants in the United States. Samsung and its cross-town rival, SK, have wafer fabrication, assembly and testing facilities in mainland China. TSMC and Samsung are the only global players in manufacturing chips using below-7-nanometer processing nodes. This status means that they support top-tier U.S. technology companies including Apple, Qualcomm, NVIDIA, AMD, Broadcom and Xilinx.

"Samsung and TSMC have become the top beneficiaries after the U.S.' imposition of restrictions on Huawei suppliers over security concerns. The point is that, because the United States is pursuing partial semiconductor decoupling from China, more assistance programs will be available to South Korean and Taiwanese companies," said a former executive at Samsung. As an illustration of the U.S. crackdown on Chinese technology companies, Huawei's global mobile market share, for example, dropped to 3 percent in 2021 from 15 percent in 2020, said data collected by Omdia, a market research firm.

Korea unwilling to fully decouple from China

The South Korean presidential office has said it's in discussions with the United States about ways to strengthen cooperation in semiconductors after local reports said the United States had asked South Korea to inform it whether or not it will join the Chip 4 alliance by August of this year.

Japan and Taiwan have said yes to joining the United States-led chip alliance, said officials. Samsung Electronics representatives in Seoul have declined to comment.

But given South Korea's participation of the United States' launch of the Indo-Pacific Economic Framework (IPEF) and President Yoon Suk-yeol's desire to upgrade the Washington-Seoul partnership into an "economic and security alliance based on cooperation in supply chains and advanced technology" ― about which a statement was made during U.S. President Joe Biden's recent summit in South Korea ― officials and analysts have said that South Korea will follow Taiwan and Japan to join the alliance.

"South Korea will join the alliance because receiving U.S. support is very important in terms of building a high-level chip ecosystem from wafer fabrication to software and semiconductor equipment. As seen in Washington's imposition of sanctions on Huawei, it's very possible for the United States to grant access for the use of U.S. technologies exclusively to its allies," said Kim Yang-paeng, a researcher at the Korea Institute for Industrial Economics and Trade (KIET).

On a related note, the world's top semiconductor equipment maker, Applied Materials, agreed with Gyeonggi Province to construct a next-generation semiconductor research center. The agreement came after Netherlands-based ASML, U.S.-based Lam Research and Japan's Tokyo Electron confirmed their plans to build semiconductor research centers in the province, which also houses cutting-edge Samsung and SK chip plants.

Because Washington doesn't want to pursue a full-pledged decoupling with Beijing in semiconductors and its allies also don't want to cut off their trade with China, chances are low for the United States to apply imminent actions for tougher semiconductor export controls or secondary sanctions.

This illustration shows U.S. Treasury Secretary Janet Yellen, left, and an actual view of LG Science Park, western Seoul. Korea Times file

"Washington officials don't have any question about the fact that the cost of complete U.S.-China chip decoupling will be huge. As the Chip 4 alliance isn't something that could immediately threaten China's national security, chances are low that China would take retaliatory actions against South Korea even after Seoul joins the Chip 4. Samsung and SK are two of the top foreign investors there and their partnerships with top Chinese officials are quite solid," said a high-ranking government official asking not to be named.

The second phase of Samsung Electronics' NAND flash-chip production line in Xi'an, in northwestern Shaanxi Province, a result of its $25-billion investment there, includes two wafer fabrication plants and a packaging and testing facility. It became operational in 2021 and the plant is assigned to produce over 40 percent of Samsung's total NAND flash production capacity. SK operates a DRAM wafer fabrication plant and packaging and testing facility in Wuxi, Jiangsu Province, and Chongqing, Sichuan Province, respectively.

SK's C2 plant in Wuxi, its first 12-inch wafer fabrication line that started operations in 2006, has been expanded with an additional $780-million investment and began mass production in mid-2019, said the company.

China is South Korea's biggest trade partner. Out of the country's $69-billion memory chip-driven exports back in 2021, exports to China accounted for 48 percent, data by Korea International Trade Association (KITA) showed. Korean companies in China reported massive losses upon the Chinese economic retaliation to the Korea-U.S. deployment of a THAAD missile defense system.

"That's because China had viewed the THAAD system as a direct and imminent threat to its national security. With chips, China is far behind the United States when it comes to the technology level and focus segments," said a senior industry executive.

Plus, because emphasis has been focused on the significance of developing domestic battery supply chains for electric vehicles (EVs) and even energy storage, by the Biden administration, with the United States highly reliant on imports, U.S. Treasury Secretary Janet Yellen plans to highlight why maintaining a solid partnership between South Korea and the United States in batteries matters the most in terms of solidifying supply chains.

Yellen plans to visit LG's technology research center in Seoul on the sidelines of her scheduled two-day visit, here, from July 19. "During Yellen's visit to LG Science Park, she will be briefed on the strengths of LG's battery technologies," said an official. LG Chem is the largest shareholder of LG Energy Solution (LGES), which operates a joint venture with General Motors (GM) in the United States.

Yellen will likely advance policies that will strengthen and grow the U.S. economy and its middle class and highlight why maintaining a supply chain that is stronger and more resilient matters a lot in terms of avoiding costly disruptions that have driven up inflation not only in the Unites States but globally.

South Korea is also home to the world's leading battery makers including LGES, Samsung SDI and SK.