The potentially grave risk that a trade dispute between Japan and South Korea poses to the global tech goods supply chain is starkly laid out in a report from JP Morgan Chase.
The report, ‘Economic Research Global Data Watch July 5, 2019’, looked at the ramifications of a new, 90-day approval process that Tokyo has instituted for semiconductor material exports to South Korea.
The two countries have long been embroiled in historical disputes related to Japan’s colonial rule of the Korean peninsula from 1910-1945. These leaped from the diplomatic to the economic sphere in January, when a South Korean court ordered the seizure of assets of Japanese firms in Korea.
The assets should be sold to compensate domestic workers forced to labor in Japanese wartime factories, the court said.
A furious Tokyo insists that compensation was dealt with during a diplomatic normalization treaty in 1965, that came with related financial compensation.
Japan appears to have retaliated against the legal decision with 90-day approval process announced early this month.
However, it is not yet clear whether this process will simply cause delays, or will prove to be an outright embargo.
A major share
“According to the OECD’s Inter-Country Input-Output(ICIO) table, Korean tech products constitute 7.9% of the rest of the world’s intermediate tech goods inputs,” the report said. “Moreover, the potential negative impact could be greater than the ICIO table suggests, considering that memory chips are a linchpin of global manufacturing products, and considering Korean producers’ dominant share (above 70%) in the global DRAM market.”
The ICIO table hints that China could be hit harder than the rest of the world as Korean-made intermediate tech goods account for 10% of all intermediate tech goods in the China market.
Kim Yang-paeng, a researcher at the Korea Institute for Industrial Economics and Trade, agreed with JP Morgan.
“Combined global DRAM market share of Samsung Electronics and SK Hynix account for higher than 70% as of the first quarter of this year, and their global NAND flash market share accounts for higher than 50%,” he said. “DRAM and NAND flash is used for mobile phones and other electronic devices…we can’t make electronic products without them. So if the Korean semiconductor industry suffers a production setback, the impact on the global intermediate tech good market will inevitably be very significant.”
Concerns over production disruptions at Korean chipmakers have prompted inquiries from major global customers such as Apple and Amazon about the supply of DRAMs. Concerns about potential disruptions have raised DRAM spot prices.
“Naturally, major companies are inquiring into the situation,” Kim said. “The notable phenomenon is that DRAM prices, which had been falling since October last year, started to rise in July. In particular, some DRAMs have risen more than 25% in about two weeks – a level experienced during the DRAM super boom period.”
According to an industry source who cited DRAM exchange, the spot price of DDR4 8-gigabit DRAM for PCs rose 23% to $3.74 dollars as of July 19 from $3.03 on July 5, a day after the Japanese government enforced the export regulations. The spot price of DDR3 4-gigabit DRAM rose 25% to $1.77 dollars from $1.42 over the same period.
But, large customers like Apple do not buy memory chips for spot prices; they sign long-term supply contracts for contract prices.
There are mixed views on whether the current rise in spot prices will lead to an increase in long-term contract prices.
Long-term impact, or short-term blip?
Kim predicted that long-term supply prices are likely to rise. “Now, only retailers pay more for memory chips. But, in the future, giant customers will have to secure memory-chip inventory due to rising spot prices, which in turn will lead to rising long-term contract prices.”
But an industry source viewed the matter differently.
“The products traded at the rising spot prices are mainly low and medium-priced products, and it is not likely that rising spot prices will affect contract prices,” he explained. “Both suppliers and demanders still have a high level of memory-chip inventory as an oversupply of memory chip remains.”
Meanwhile, JPMorgan’s view was that the short-term impact of Japan’s export restrictions on the Korean economy would be limited.
“It is still unclear whether the new restriction would decrease the supply of materials, weighing on the Korean production of semiconductors and displays, or [would] only complicate documentation,” the report stated. “Also, the major tech manufacturers have an inventory buffer that would allow them to maintain production at least for now, but there is a risk of a proactive production adjustment.”
According to industry sources, if the Japanese government does not approve the export of etching gas to Korea, Korean chipmakers can survive without any production disruptions for just one to two months.
Currently, South Korean chipmakers are testing locally-made etching gas, made of materials imported from China and Taiwan.
However, it takes months to mass-produce chips using new etching gas. If the quality of the domestic etching gas is lower than the customary Japanese supply, it will lead to lower productivity or lower quality chip production.
Last week, a Korean government source told Asia Times that Japanese partner firms have applied, under the new process, for materials for their Korean clients. However, no information has yet leaked out as to when – or indeed whether – the essential materials will pass the approval process.
In this atmosphere of uncertainty, JP Morgan predicted that South Korean chipmakers might start controlling output.