The Other Half of 'Chip 4': Japan and South Korea's Different Paths to De-risking – The Diplomat

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As Japan’s semiconductor revival is firing on all cylinders, South Korea must move past its dependence on China to find its groove again.
Much has been said about the Chip 4 alliance — grouping South Korea, Japan, Taiwan, and the United States — since the passage of the U.S. CHIPS and Science Act in 2022, part of the U.S. initiative to de-risking the semiconductor supply chain from China. The focus is often on American subsidies to onshore manufacturing to U.S. soil, and how Taiwan’s so-called Silicon Shield may be affected, in relation to the geopolitics across the Taiwan Strait.
But what are South Korea and Japan doing?
Besides the U.S. and China, Japan is probably the most active in its pursuit of industry policies to restore its semiconductor industrial competitiveness among nations in the world. In June 2021, Japan’s Ministry of Economy, Trade, and Industry (METI) announced its strategy for semiconductor and digital industry, where it laid out three directions to follow for its semiconductor revival:
To this end, a lot has happened in Japan in the last three years. At the time of the 2022 METI announcement, the country’s Post-5G Fund (200 billion yen, or $1.5 billion in 2022 average exchange rate) and the Green Innovation Fund (2 trillion yen, or $15 billion in 2022) were already in place. The Ministry’s flagship project was the formation of Rapidus, a consortium of Japanese companies in partnership with IBM Research and Belgium’s IMEC to develop 2-nanometer chip production, with its first fabrication facility in Hokkaido, with over $33 billion in investment.
Taiwan’s TSMC, the world’s largest semiconductor manufacturer, partnering with Sony and Toyota, opened a 12-inch wafer fab in Kumamoto, in Japan’s southern island of Kyushu, in early 2024, forming a “3-hour semiconductor island chain” between Taiwan and Japan. A second facility being planned takes the total investment to over US$20 billion.
In addition, another Taiwan semiconductor contract manufacturer, Powerchip Semiconductor Manufacturing Corp. (PSMC), will also build a plant in Miyagi prefecture in northern Japan, putting up $2.6 billion with Japan’s investment firm SBI Holdings. In fact, at least nine Taiwanese chip firms plan to expand and set up operations in Japan, including AIchip Technologies, eMemory Technology, Materials Analysis Technology (MA-tek).
U.S.-based memory maker Micron will also invest $3.7 billion in a Hiroshima factory for the “advanced AI” version of its dynamic random access memory (DRAM) chips. In other parts of the supply chain besides manufacturing, Nvidia will also build an AI research and development center in Japan, and OpenAI is exploring possible partnership with Japan’s semiconductor industry.
Intel is reported to be seeking potential investment in Japan in semiconductor packaging and quantum computing. Already, it is working with NTT, Japan’s incumbent telecom carrier, to develop and produce next-generation chips using optical technology to reduce power consumption, along with other partners such as South Korea’s SK Hynix.
Even South Korean firms are not missing out on Japanese subsidies. Samsung Electronics, the world’s largest memory chip maker, will invest over $280 million to build a chip packaging plant in Yokohama, with $140 million in subsidies received from the Japanese government. As Japan has always excelled in supplying semiconductor tools and equipment as well as materials and chemicals, the sector is benefiting in more than one way. For instance, Towa, which specializes in making machines used in producing high-bandwidth memory (HBM) chips, is receiving a bonanza of orders from South Korean memory makers Samsung and SK Hynix, the two largest in the world.
Others are also reaping rewards from the U.S.-led drive to decouple from China’s chip sector, leading to the side effect of strong demand from China to secure such equipment before the doors are completely slammed shut. Tokyo Electron, a top supplier of wafer processing machines, reported that sales in China topped a record for 46.9 percent of its total for the last three months of 2023, pushing the company’s market capitalization to surpass Sony to become the third-most valuable listed company in Japan in early 2024.
In addition to government financial support and industrial policies, the bullish resurgence of Japan’s semiconductor industry has much to do with its complete alignment with the United States. With its chip industry judged to lag behind global technological leaders by an estimated 10 years, Japan has little to lose, and everything to gain by trying to catch up. Unlike in the last two decades of the last millennium, when the U.S. and Japan were caught up in competitive tensions and trade wars over semiconductor technology leadership, today the two countries are united to prevent a Chinese dominance in the sector, making cooperation over chip-making the centerpiece of the two country’s diplomatic alliance.
What about South Korea?
Compared to Japan’s emphasis on building up its domestic production capabilities through industrial policies, government subsidies, and inward investments to the country, foreign and domestic, South Korea’s response in these first few years of semiconductor de-risking has been lackluster by comparison.
Although the South Korean government just announced a 26 trillion won ($19 billion) semiconductor support package, direct subsidies to firms were excluded, with assistance centered on preferential loans, by expanding capital through Korea Development Bank (KDB), tax credits, and infrastructure support to create new industry centers, in other words, public construction. In addition to budget constraints, Minister of Trade, Industry, and Energy Ahn Duk-geun admitted that it would be difficult to “come up with a direct subsidy program” in South Korea, where such proposals would face scrutiny and opposition in its National Assembly.
Compared to the $39 billion in subsidies for advanced chip manufacturing under the United States’ CHIPS and Science Act, the recently announced $65.4 billion investment fund in China, and even the subsidies provided by Japan to attract foreign investment and technology cooperation, the South Korean program doesn’t measure up. Even Taiwan has recently approved subsidies for Nvidia at $220 million to establish an AI R&D center there, and is evaluating another application from AMD for $155 million.
However, South Korea’s dependence on China is even more problematic than the gap in subsidies. More than any other Chip 4 partners, South Korea’s semiconductor supply chain is deeply entangled with China. Over 70 percent of its memory chip exports went to China and Hong Kong in 2022. As a result, China’s economic woes have already particularly hurt export-oriented economies like South Korea. Moreover, leading South Korean chipmakers such as Samsung and SK Hynix own significant manufacturing operations inside China, making them dependent on China both in production and as a market.
Alarm bells are ringing. A South Korean Ministry of Science and ICT report earlier this year pointed out that China’s advancements in 136 key technological areas outpaced South Korea’s for the first time in 2022. The concern is exacerbated by South Korea’s $18 billion trade deficit with China in 2023, the first time the trade balance titled to China’s favor in over 30 years. Experts worry will become more entrenched as the country further loses its technological competitive edge with China.
South Korea is clearly caught between the government’s short-term economic concerns, firms’ immediate revenues from China, and long-term anxieties about technological competitiveness and intellectual property, amid a lack of political leadership. For the past two years, the government and leading chip firms appeared to be more concerned about lobbying the United States for a waiver to allow Samsung and SK Hynix to supply U.S. chip equipment to their Chinese factories, in order to keep those plants up and running.
Unfortunately, of all the partners in the Chip 4 alliance, South Korea is the most vulnerable due to its dependence on China. In addition to its export dependency cited above, it imports over 75 percent of its raw materials from China, compared to less than 10 percent and 30 percent for Taiwan and Japan, respectively. For too long, Seoul has tried to balance and benefit from both trade with China and the security alliance with the United States. That can’t last forever. After all, if and when China catches up with the West and becomes self-reliant on its technological capabilities, it will not need TSMC, or Nvidia, or Intel. And, of course, the same goes for Samsung.
Meanwhile, South Korean companies are not sitting still when there are ripe opportunities overseas. Samsung will take $6.4 billion in U.S. government subsidies to build its advanced semiconductor facility in central Texas, while it invests $45 billion of its own. SK Hynix, despite losing out on its CHIPS and Science Act funding application with the U.S. federal government, will still receive $725 million in subsidies from the state of Indiana, plus $60 million support from Purdue University, to build a $3.9 billion HBM production plant in West Lafayette. Separately, SK Hynix is also signed a memorandum of understanding with TSMC to co-develop high-end HBM AI memory chips.
Coupled with the manpower deficit in the semiconductor industry faced by South Korean companies, the hollowing out South Korea’s semiconductor industry looks imminent. What can be done?
The country must bite the bullet, and start thinking out of the box. South Korea is too focused on Samsung — the nation’s biggest asset, and in other ways, its major liability. The company is anchored in many business areas in the technology chain, from DRAM to foundry manufacturing, from smart card ICs to image sensors, as well as all kinds of end-user devices from smartphones to visual displays, and even telecom networking devices and medical equipment. It occupies or even dominates too many parts of the supply chain to be a viable partner for most other players. That is one major reason why foreign firms find it more attractive to invest in Japan with many niche companies, instead coming to South Korea, which is dominated by a few chaebols.
South Korean policymakers must also double down on effort to incubate the country’s next generation of innovators, by supporting SMEs and fostering competition. Providing upfront capital for smaller firms may be the best reason to justify subsidies to promising innovative startups. Inward investment should be encouraged with a view to revitalize and re-orient the industry to be less centered around China.
For handling dominant players like Samsung, policies must focus on how to incentivize them to remake themselves and invest ahead strategically. They must shed the baggage and break themselves loose from their dependence on China as quickly as possible – even if it means taking a hit on the bottom line today, it’s a necessary sacrifice for a better tomorrow. This is the path Intel has chosen.
The bitter pill has to be swallowed. Only then can South Korea find its own “silicon shield” — both a competitive strength and an asset to its national security.
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Much has been said about the Chip 4 alliance — grouping South Korea, Japan, Taiwan, and the United States — since the passage of the U.S. CHIPS and Science Act in 2022, part of the U.S. initiative to de-risking the semiconductor supply chain from China. The focus is often on American subsidies to onshore manufacturing to U.S. soil, and how Taiwan’s so-called Silicon Shield may be affected, in relation to the geopolitics across the Taiwan Strait.
But what are South Korea and Japan doing?
Besides the U.S. and China, Japan is probably the most active in its pursuit of industry policies to restore its semiconductor industrial competitiveness among nations in the world. In June 2021, Japan’s Ministry of Economy, Trade, and Industry (METI) announced its strategy for semiconductor and digital industry, where it laid out three directions to follow for its semiconductor revival:
To this end, a lot has happened in Japan in the last three years. At the time of the 2022 METI announcement, the country’s Post-5G Fund (200 billion yen, or $1.5 billion in 2022 average exchange rate) and the Green Innovation Fund (2 trillion yen, or $15 billion in 2022) were already in place. The Ministry’s flagship project was the formation of Rapidus, a consortium of Japanese companies in partnership with IBM Research and Belgium’s IMEC to develop 2-nanometer chip production, with its first fabrication facility in Hokkaido, with over $33 billion in investment.
Taiwan’s TSMC, the world’s largest semiconductor manufacturer, partnering with Sony and Toyota, opened a 12-inch wafer fab in Kumamoto, in Japan’s southern island of Kyushu, in early 2024, forming a “3-hour semiconductor island chain” between Taiwan and Japan. A second facility being planned takes the total investment to over US$20 billion.
In addition, another Taiwan semiconductor contract manufacturer, Powerchip Semiconductor Manufacturing Corp. (PSMC), will also build a plant in Miyagi prefecture in northern Japan, putting up $2.6 billion with Japan’s investment firm SBI Holdings. In fact, at least nine Taiwanese chip firms plan to expand and set up operations in Japan, including AIchip Technologies, eMemory Technology, Materials Analysis Technology (MA-tek).
U.S.-based memory maker Micron will also invest $3.7 billion in a Hiroshima factory for the “advanced AI” version of its dynamic random access memory (DRAM) chips. In other parts of the supply chain besides manufacturing, Nvidia will also build an AI research and development center in Japan, and OpenAI is exploring possible partnership with Japan’s semiconductor industry.
Intel is reported to be seeking potential investment in Japan in semiconductor packaging and quantum computing. Already, it is working with NTT, Japan’s incumbent telecom carrier, to develop and produce next-generation chips using optical technology to reduce power consumption, along with other partners such as South Korea’s SK Hynix.
Even South Korean firms are not missing out on Japanese subsidies. Samsung Electronics, the world’s largest memory chip maker, will invest over $280 million to build a chip packaging plant in Yokohama, with $140 million in subsidies received from the Japanese government. As Japan has always excelled in supplying semiconductor tools and equipment as well as materials and chemicals, the sector is benefiting in more than one way. For instance, Towa, which specializes in making machines used in producing high-bandwidth memory (HBM) chips, is receiving a bonanza of orders from South Korean memory makers Samsung and SK Hynix, the two largest in the world.
Others are also reaping rewards from the U.S.-led drive to decouple from China’s chip sector, leading to the side effect of strong demand from China to secure such equipment before the doors are completely slammed shut. Tokyo Electron, a top supplier of wafer processing machines, reported that sales in China topped a record for 46.9 percent of its total for the last three months of 2023, pushing the company’s market capitalization to surpass Sony to become the third-most valuable listed company in Japan in early 2024.
In addition to government financial support and industrial policies, the bullish resurgence of Japan’s semiconductor industry has much to do with its complete alignment with the United States. With its chip industry judged to lag behind global technological leaders by an estimated 10 years, Japan has little to lose, and everything to gain by trying to catch up. Unlike in the last two decades of the last millennium, when the U.S. and Japan were caught up in competitive tensions and trade wars over semiconductor technology leadership, today the two countries are united to prevent a Chinese dominance in the sector, making cooperation over chip-making the centerpiece of the two country’s diplomatic alliance.
What about South Korea?
Compared to Japan’s emphasis on building up its domestic production capabilities through industrial policies, government subsidies, and inward investments to the country, foreign and domestic, South Korea’s response in these first few years of semiconductor de-risking has been lackluster by comparison.
Although the South Korean government just announced a 26 trillion won ($19 billion) semiconductor support package, direct subsidies to firms were excluded, with assistance centered on preferential loans, by expanding capital through Korea Development Bank (KDB), tax credits, and infrastructure support to create new industry centers, in other words, public construction. In addition to budget constraints, Minister of Trade, Industry, and Energy Ahn Duk-geun admitted that it would be difficult to “come up with a direct subsidy program” in South Korea, where such proposals would face scrutiny and opposition in its National Assembly.
Compared to the $39 billion in subsidies for advanced chip manufacturing under the United States’ CHIPS and Science Act, the recently announced $65.4 billion investment fund in China, and even the subsidies provided by Japan to attract foreign investment and technology cooperation, the South Korean program doesn’t measure up. Even Taiwan has recently approved subsidies for Nvidia at $220 million to establish an AI R&D center there, and is evaluating another application from AMD for $155 million.
However, South Korea’s dependence on China is even more problematic than the gap in subsidies. More than any other Chip 4 partners, South Korea’s semiconductor supply chain is deeply entangled with China. Over 70 percent of its memory chip exports went to China and Hong Kong in 2022. As a result, China’s economic woes have already particularly hurt export-oriented economies like South Korea. Moreover, leading South Korean chipmakers such as Samsung and SK Hynix own significant manufacturing operations inside China, making them dependent on China both in production and as a market.
Alarm bells are ringing. A South Korean Ministry of Science and ICT report earlier this year pointed out that China’s advancements in 136 key technological areas outpaced South Korea’s for the first time in 2022. The concern is exacerbated by South Korea’s $18 billion trade deficit with China in 2023, the first time the trade balance titled to China’s favor in over 30 years. Experts worry will become more entrenched as the country further loses its technological competitive edge with China.
South Korea is clearly caught between the government’s short-term economic concerns, firms’ immediate revenues from China, and long-term anxieties about technological competitiveness and intellectual property, amid a lack of political leadership. For the past two years, the government and leading chip firms appeared to be more concerned about lobbying the United States for a waiver to allow Samsung and SK Hynix to supply U.S. chip equipment to their Chinese factories, in order to keep those plants up and running.
Unfortunately, of all the partners in the Chip 4 alliance, South Korea is the most vulnerable due to its dependence on China. In addition to its export dependency cited above, it imports over 75 percent of its raw materials from China, compared to less than 10 percent and 30 percent for Taiwan and Japan, respectively. For too long, Seoul has tried to balance and benefit from both trade with China and the security alliance with the United States. That can’t last forever. After all, if and when China catches up with the West and becomes self-reliant on its technological capabilities, it will not need TSMC, or Nvidia, or Intel. And, of course, the same goes for Samsung.
Meanwhile, South Korean companies are not sitting still when there are ripe opportunities overseas. Samsung will take $6.4 billion in U.S. government subsidies to build its advanced semiconductor facility in central Texas, while it invests $45 billion of its own. SK Hynix, despite losing out on its CHIPS and Science Act funding application with the U.S. federal government, will still receive $725 million in subsidies from the state of Indiana, plus $60 million support from Purdue University, to build a $3.9 billion HBM production plant in West Lafayette. Separately, SK Hynix is also signed a memorandum of understanding with TSMC to co-develop high-end HBM AI memory chips.
Coupled with the manpower deficit in the semiconductor industry faced by South Korean companies, the hollowing out South Korea’s semiconductor industry looks imminent. What can be done?
The country must bite the bullet, and start thinking out of the box. South Korea is too focused on Samsung — the nation’s biggest asset, and in other ways, its major liability. The company is anchored in many business areas in the technology chain, from DRAM to foundry manufacturing, from smart card ICs to image sensors, as well as all kinds of end-user devices from smartphones to visual displays, and even telecom networking devices and medical equipment. It occupies or even dominates too many parts of the supply chain to be a viable partner for most other players. That is one major reason why foreign firms find it more attractive to invest in Japan with many niche companies, instead coming to South Korea, which is dominated by a few chaebols.
South Korean policymakers must also double down on effort to incubate the country’s next generation of innovators, by supporting SMEs and fostering competition. Providing upfront capital for smaller firms may be the best reason to justify subsidies to promising innovative startups. Inward investment should be encouraged with a view to revitalize and re-orient the industry to be less centered around China.
For handling dominant players like Samsung, policies must focus on how to incentivize them to remake themselves and invest ahead strategically. They must shed the baggage and break themselves loose from their dependence on China as quickly as possible – even if it means taking a hit on the bottom line today, it’s a necessary sacrifice for a better tomorrow. This is the path Intel has chosen.
The bitter pill has to be swallowed. Only then can South Korea find its own “silicon shield” — both a competitive strength and an asset to its national security.
Charles Mok is a visiting scholar at the Global Digital Policy Incubator of the Cyber Policy Center at Stanford University, and a former member of the Legislative Council of Hong Kong (2012-2020).
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