Japan-Korea trade war will create smartphone and memory famine

It was hard to imagine a trade war with more impact on the telecoms industry than that between the USA and China, but then hostilities erupted between Japan and South Korea, both of them pivotal to 5G R&D, electronics and deployment.

Long-running tensions over various issues, some dating back to World War II, have apparently escalated in the course of the two countries negotiating a new trade deal. This has led to Japan threatening to halt exports of three chemical compounds (hydrogen fluoride gas, fluorinated polyimide, and EUV photoresists), which are critical to smartphone manufacture, to Korea.

Since Japan produces more than 90% of the world’s supply of these chemicals, and Korea produces about one-quarter of the world’s smartphones, the impact on the availability of mobile devices is clear, but of course, the dispute will hit the broader South Korean chipmaking sector, the biggest on the planet.

“South Korea is the world leader when it comes to chipmaking, and Japan is the world leader in the manufacturing of the key materials for chipmaking,” Ahn Ki-hyun, VP of the Korea Semiconductor Industry Association, told journalists.

If no settlement is found, the dispute could reduce availability of smartphones; drive up prices; and delay or restrict some 5G launches (since Samsung and LG are the biggest providers of 5G handsets so far). The most obvious impact will be on Samsung, which relies on the Japanese chemicals in its handset and semiconductor operations, and could lose market share to companies such as Apple and Intel, which are able to buy the chemicals from Japan still.

But the Japanese operators pointed out that, as in the US-China disputes, both sides will lose out. All four plan to have advanced mobile 5G services widely available for next year’s 2020 Olympic Games, and if there is a shortage of Samsung smartphones, in particular – or even a block on them, if the dispute escalates further – the economics of their launches, and the choices they can offer consumers, will be weakened.

In Korea, all three MNOs have already launched commercial 5G services, signing 260,000 subscriptions between them in the first month, a figure now getting close to one million. A shortage of handsets from the popular local brands might slow further uptake, or force the operators to pay higher prices and import duties to shift their product mix towards an external vendor such as Motorola.

There are many factors at work behind the dispute, exacerbated by the two countries’ difficult history – one issue is whether Japan has made sufficient compensation for using Korean forced labor during its occupation of the country, and in World War II. Now the two nations are politically quite aligned, and sometimes united in political and trade rivalry with China, but old wounds are reopening. Japanese prime minister Shinzo Abe has been appealing to some nationalist elements with his recent rhetoric, while adopting the Trump-style slogan of ‘national security’ to justify the barring of exports to Korea. In another echo of the US-China situation, Japan has so far failed to produce evidence that South Korea is using the chemicals for military applications.

The ban is not complete – Japanese suppliers could obtain an export permit to ship the compounds to Korea, but it is unclear whether any will be granted, and the new process is reported to add at least 90 days to an export arrangement anyway. But the impact on Korea’s electronics giants will be significant. According to 2018 data from the Korea Trade Association, Korea sourced 84% of its fluorinated polyimide from Japan, at a cost of $19,720,000; 93% of its photoresists, worth $ 298,890,000; and 42% of its hydrogen fluoride, worth $66,850,000.

If the situation persists, Korea will eventually find other sources of the chemicals – mainly from China and Taiwan – just as Huawei will eventually develop alternatives to all its US-sourced components, and at that point, Japan and the USA will have lost important customers and revenue sources, probably forever. The loss of trust and mutual interest will carry on long after the trade deal has been worked out.

Among the products which rely on one or more of these compounds are organic EL screens for smartphones and TVs; and EUV lithography, a new and advanced chip manufacturing technology which Samsung is using for 7-nanometer components, for the Galaxy portfolio’s application processors, and for 16-nm memory chips. According to EETimes sources, Samsung has only about a month’s supply of hydrogen fluoride and EUV photoresists, after which production of key components like the app processor will slow down, limiting smartphone volumes.

In DRAM memory, the impact would also felt by SK Hynix, second only to Samsung in this market worldwide. Together, they have 72.6% market share, so slowdown in production would affect makers of handsets, computers and other electronic devices round the globe. The third and fourth DRAM vendors, Micron and Elpida, would be unable to ramp up quickly to fill the gap.

Another type of memory, NAND Flash, would also be affected – Samsung and SK Hynix have almost 50% of this global market, though it is a more diversified sector, with Toshiba, Western Digital, Micron and Intel also being major suppliers. And in solid stated devices (SSD), the two Korean chipmakers have combined share of 43.3%. The latter is a technology which is used extensively in cloud infrastructure as well as PCs and consumer devices.