Japan-Korea spat threatens to upend global technology

Seoul

RESURGENT tensions between Japan and South Korea threaten to wallop chipmakers from Samsung Electronics to SK Hynix, 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 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 iPhones to Dell Technologies laptops. The industry is now scrambling to gauge the fallout after Japan - citing long-standing 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 manoeuvre, 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.

Korea's largest company has lost about 16 trillion won (S$17.7 billion) in market value this month through Monday; Hynix has shed 1.5 trillion won. The two companies, which together account for 60 per cent of the world's memory chip-making capacity, declined comment.

While inventory levels differ across each material, Samsung has under a month's worth of supply on average, said 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.

This is why the Korean conglomerate's de facto leader, Jay Y. Lee, 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 Prime Minister Shinzo Abe and South Korean President Moon Jae-In can work out a compromise.

In a worst-case scenario, flexible screens for iPhones and other mobile devices could sputter; memory chips used in everything from HP notebooks to Amazon.com servers could dwindle.

Jongjun Won, chief executive officer at Lime Asset Management, said: "This is an unprecedented event. 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."

The dispute has spilled over into social media. South Koreans, angered by Japan's move, have taken to Instagram and other platforms to call for boycotts of Japanese travel and consumer products.

Japan's targeting a trio of materials that, while little-known outside of the industry, is profoundly important for electronics production. The government says it also has 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 per cent of all the fluorinated polyimide and resists it needs, and 44 per cent of its hydrogen fluoride requirements, Societe Generale estimates.

Ironically, if the dispute drags out, Japanese suppliers of those chemicals - companies from JSR to Shin-Etsu Chemical comprise a small but inextricable link in the chain - could take a hit as well.

Huh Nam-Kwon, chief executive at Shinyoung Asset Management, said: "This could be a negative factor for the world economy. 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 seven nanometer line-widths or less. This puts at risk Samsung's express goal of investing US$116 billion to become the No.1 in the logic chip business by 2030. Its rivals may step in to fill the gap in the interim.

Japan and Korea have traditionally turned to the US to mediate in their clashes, but it's unclear this time if US' President Trump is keen to step into the fray. Compounding the situation are the basic mechanics of the restrictions. While not a ban per se, would-be exporters of the affected materials need to obtain a licence from the government. That could take up to 90 days - an eternity for a fast-moving industry.

There's also disagreement by industry analysts over which corporations exactly will get hit hardest, in part because some Japanese firms have either localised production in South Korea or maintain plants in countries such as China. BLOOMBERG