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Japan Short-Circuits the Tech Exports That Made South Korea Rich

Japan Short-Circuits the Tech Exports That Made South Korea Rich

(Bloomberg Businessweek) -- Think of them as weapons of mass disruption. Three ingredients crucial to the global supply chain for smartphones and semiconductors are caught up in a diplomatic wrangle between Japan and South Korea whose origins date to long before either country had transformed itself into a consumer-­electronics powerhouse.

In July authorities in Tokyo began requiring Japanese businesses to apply for licenses to export fluorinated polyimide, hydrogen fluoride, and photoresist—a liquid used by semiconductor makers to imprint silicon wafers—to South Korean customers, a process that can take 90 days or more. The three chemicals are essential inputs in the manufacture of memory chips as well as TVs and other types of displays, which are pillars of South Korea’s $1.6 trillion export-driven economy. They are ­present in Apple iPhones, Dell laptops, and a broad range of Samsung devices.

In the weeks that followed, Japan also removed South Korea from a so-called white list that accorded it preferential treatment on exports of materials deemed sensitive because they have military as well as civilian uses. These maneuvers are part of a global trend in which trade and investment rules are being weaponized in disputes between economic or geopolitical rivals—the most obvious example being the U.S.-China confrontation. “Once countries go down the road of using trade policy as a way to increase their geopolitical influence, it sets a precedent that could be quite harmful to trust in the supply chain,” says Shaun Roache, chief Asia-Pacific economist at S&P Global Ratings.

Japan Short-Circuits the Tech Exports That Made South Korea Rich

The conflict between the two Asian nations harks back to a 1965 treaty meant to put an end to all Korean claims against Japanese parties originating from the years of ­the occupation, which lasted from 1910 until 1945. Korean courts have ruled in multiple cases over the past decade that Japanese companies must compensate Korean workers forced into labor during that period. Japan’s move to restrict exports came six months after one Korean court approved the seizure of a Japanese steelmaker’s assets in Korea, threatening to establish a precedent.

Fluorinated polyimide, hydrogen fluoride, and photoresist make up only a fraction of Japan’s $55 billion a year in exports to South Korea, yet they are integral to the consumer-electronics industry. Fluorinated polyimide is a plastic film that’s used as an underlying layer in the screens on mobile phones and other devices. Japan supplies 90% of the material for this use, according to Display Supply Chain Consultants, a market-research group. A key buyer is Samsung Display, a unit of one of South Korea’s leading chaebol, the sprawling conglomerates that dominate the economy.

A clutch of Japanese producers, along with some German companies, dominates global production of hydrogen fluoride, a purified gas used to etch circuits on silicon wafers, with Japan supplying about 44% of Korean manufacturers’ requirements, according to Société Générale SA estimates. SK Hynix Inc. buys Japanese-made hydrogen fluoride for its plants in South Korea.

Japan also commands about 90% of the world supply of photoresist. If Japan were to completely cut off shipments to South Korea, it would hobble Samsung Electronics Co.

Japan Short-Circuits the Tech Exports That Made South Korea Rich

Policymakers in Tokyo are exploiting a vulnerability of the development model that South Korea has used with enormous success since the 1960s: a focus on exports that helped take the population from rags to riches. South Korea’s annual exports are equal to 40% of gross domestic product. This Achilles’ heel was exposed in 2016, when Beijing orchestrated a boycott of Korean businesses to protest the deployment of a U.S.-funded missile defense system. South Korea has also suffered collateral damage from President Trump’s trade war with China, which has disrupted supply chains across Asia and depressed corporate investment. Exports have contracted in each of the past 12 months.

Japan has rejected characterizing its moves as retaliation, and Tokyo and Seoul have lately tried to patch up their differences. Even so, South Korean companies are working to develop alternatives for essential inputs sourced from Japan. Samsung is testing materials from different local suppliers, says a person familiar with the matter, who asked not to be named because the discussions are private.

When you’re not buying in bulk, things can be easier. Main Info, a Korean startup that’s developing a navigation system using holograms, is in talks with a German supplier of photoresist after failing to get approval to buy in Japan, says Park Ik-hyun, chief executive officer at the company.

Japan Short-Circuits the Tech Exports That Made South Korea Rich

But for most of South Korea’s technology ­sector, high-quality, competitively priced substitutes for Japanese materials are tough to find, says another person familiar with the matter. The country’s trade deficit with Japan in materials, components, and equipment needed in the production of goods including semiconductors and displays amounted to $22.4 billion last year, according to the Finance Ministry, which in a statement called it a “structural vulnerability that threatens national security and manufacturing competitiveness.”

South Korean President Moon Jae-in has moved to address the issue, putting an unspecified amount of his own money into a multimillion-­dollar government fund set up in August to invest in Korean suppliers. The government plans to spend $1.8 billion on deepening domestic supply chains in 2020. Meanwhile, a presidential advisory committee is working on a broader plan that could include loosening labor and environmental rules. The stock prices of several South Korean suppliers to the semiconductor industry, including Soulbrain Co. and Ram Technology Co., have surged in anticipation.

A bigger question is whether South Korea can lessen its overall dependence on trade. The Moon administration has mounted a bold plan to bolster domestic demand by raising the minimum wage. It increased 11% in 2019, following a 16% hike in 2018. Even so, growth in private consumption hasn’t been sufficient to offset the drag from slower investment and exports. Bloomberg Economics estimates GDP expanded 1.9% in 2019, largely on the strength of stepped-up government spending and interest-rate cuts. “The key structural challenge for Korea is to rethink its economic structure,” says S&P’s Roache. —With Pavel Alpeyev

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net, Cristina Lindblad

©2019 Bloomberg L.P.