Thu, Nov 29, 2018 - Page 11 News List

South Korea’s bet on chip exports could hurt its economy

Bloomberg

South Korea has profited so much from the explosion in demand for semiconductors that its economy is now vulnerable to any downturn in the market for these tiny electronic components.

They now account for more than 21 percent of exports and two-thirds of earnings at South Korea’s biggest company, Samsung Electronics Co. The firm is the nation’s largest private employer and its revenue is equivalent to 15 percent of annual economic output. The stock market is similarly exposed.

While the profits have kept pouring in for Samsung and its smaller rival SK Hynix Inc, their share prices are under pressure amid concern that chip prices might fall next year.

Equally worrying is that Chinese regulators have taken aim at the pair and their US peers for alleged anti-competitive behavior, just as policymakers in Beijing seek to boost local semiconductor manufacturers.

“If chip exports were to collapse, the pain would be brutal for the [South] Korean economy,” said Lee Sang-ho, head of the Innovative Growth Department at the Korea Economic Research Institute.

He was not saying that this would necessarily happen, but saw an urgent need for alternative growth engines as the dependence on semiconductor exports increases.

Shipbuilding remains an important industry for South Korea, but its relative decline is clear amid competition from China.

The auto industry is still a powerhouse, yet much production has headed offshore and the weaker Japanese yen has been a competitive challenge to Seoul-based automakers such as Hyundai Motor Co.

The petrochemical industry is buffeted by shifting oil prices and steel exporters have been forced to accept limits on sales to the US.

Years of looking for the next cash cow, be it cosmetics or biopharmaceuticals, has done little to change the picture.

Meanwhile, Samsung and Hynix have announced about US$60 billion of investments in facilities that each year could pump out millions of silicon wafers — the building blocks of semiconductors.

In the wake of a bumper third-quarter earnings season in South Korea, CLSA analyst Paul Choi said that almost a third of the country’s corporate profits come from one specific type of chip, known as DRAM, or dynamic random access memory.

Looking broadly, forecasters at IHS Markit see a peak in revenue growth for DRAM, and another chip category known as NAND.

US-China trade frictions are another big worry, given the huge volumes of South Korean chips that go into electronics assembled in China for shipment to the US market.

In the longer term, Beijing’s aggressive investments in homegrown chip companies and its sweeping “Made in China 2025” campaign pose strategic risks to South Korean semiconductors. This can already be seen in the ramp-up of Chinese purchases of precision machinery for its factories.

Early export figures for the first 20 days of November showed a drop in South Korean sales to China and a weak figure for chip shipments. The next chance to check the trends comes with data for the full month on Saturday.

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