Japan-Korea spat threatens to upend global tech chain

Bloomberg

Resurgent tensions between Japan and South Korea threaten to wallop chipmakers from Samsung Electronics Co to SK Hynix Inc, upsetting a carefully choreographed global supply chain by smothering the production of memory chips and other components vital to widely used devices.
As the world fixates on Donald Trump’s campaign to contain Huawei Technologies Co and China’s ambitions, a concurrent dispute between Beijing’s two richest neighbours also has far-reaching implications for the production of everything from Apple Inc iPhones to Dell Technologies Inc laptops. The industry is now scrambling to gauge the fallout after Japan — citing longstanding and unresolved tensions — slapped restrictions on exports to Korea of three classes of materials crucial to the production of semiconductors and cutting-edge screens.
That maneuver, the most recent manifestation of decades of war-time tensions, places Samsung at the centre of a firestorm and again underscores the global nature of the production machine that cranks out most of the world’s gadgets. Not only does it make memory chips, but Samsung is also the biggest producer of smartphones.
While inventory levels differ across each material, Korea’s largest company has under a month’s worth of supply on average, according to people familiar with the matter. Samsung and SK Hynix are busily sourcing alternatives, the people said, asking not to be identified talking about a sensitive political issue. The two Korean giants assured clients they would try to minimise the impact on output, but Samsung, for one, is bracing for potential production cuts or even stoppages should the situation persist, the people said.
That’s why the Korean conglomerate’s de facto leader, Lee Jae-yong, hopped on a jet to Tokyo over the weekend for emergency meetings with Japanese suppliers. It’s unclear how deeply felt the impact might be — much depends on whether Japanese PM Shinzo Abe and South Korean President Moon Jae-In can work out a compromise.
But in a worst-case scenario, flexible screens for iPhones and other mobile devices could sputter, while memory chips used in everything from HP Inc notebooks to Amazon.com Inc servers could dwindle.
“This is an unprecedented event,” said Jongjun Won, chief executive officer at Lime Asset Management Co. “If it’s lucky, the chip industry may be able to adjust inventories. There could be a happy ending if the Japan issue gets resolved in the meantime. However, the intertwining of politics and business is making it difficult to find a solution.”
Japan’s targeting a trio of materials that, while little-known outside of the industry, is profoundly important for electronics production. The government says they also have sensitive military applications. Within the tech sector, fluorinated polyimide is required for the production of foldable panels — such as those used in Samsung’s Galaxy Fold — among other things. Photo-resists are key to chipmaking, while hydrogen fluoride is needed for both chip and display production.
Finding substitutes won’t be easy: Korean corporations now depend on Japan for over 90 percent of all the fluorinated polyimide and resists it needs, and 44 percent of its hydrogen fluoride requirements, Societe Generale estimates.
Ironically, if the dispute drags on, Japanese suppliers of those chemicals — companies from JSR Corp to Shin-Etsu Chemical Co that comprise a small but inextricable link in the chain — could take a hit as well.
“This could be a negative factor for the world economy,” Huh Nam-Kwon, CEO at Shinyoung Asset Management Co, said. “All we need to do is wait and see how the situation goes. Just one word from Abe could decide anything. It’s hard to predict.”
The most significant impact will be on Samsung’s next-generation products: foldable displays as well as chips of
7 nanometre line-widths or less that are made via the so-called extreme ultra-violet (EUV) process. That puts at risk Samsung’s express goal of investing $116 billion to become the No.1 in the logic chip business by 2030. Without Japan’s materials, Samsung may be hamstrung in efforts to develop an EUV-based foundry business and in advanced memory chipmaking.
Samsung and Hynix — which together account for 60 percent of the world’s memory chip-making capacity — declined to comment.
Their rivals may step in to fill that gap in the interim. Micron Technology Inc, the only other memory chip maker of significance, stands to benefit.