Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / South Korea's Chip Dominance Reshapes Global Supply Chains
Transcript
- Lucas: South Korea's semiconductor exports just hit another record in April, and the iShares MSCI South Korea ETF — ticker symbol e w y — is up more than five percent in the last five trading days alone. That's a stark contrast to what we're seeing in other emerging markets this month. Luna: Right. The EEM — the broader emerging markets ETF — is up only about two percent over the same period. So Korea is really outperforming. What's driving that? Lucas: It's almost entirely about memory chips. South Korea's two biggest companies, Samsung and SK Hynix, together control more than sixty percent of the global market for DRAM and NAND flash memory. And those chips are essential for everything from data centers to smartphones to AI training clusters. Luna: So the AI boom is effectively a Korea boom. But we've also had years of US export controls on advanced chips to China. Has that actually helped Korea? Lucas: It has, in a counterintuitive way. When the US restricted sales of high-end chips and chipmaking equipment to China, Chinese companies scrambled to stockpile memory chips from non us sources. Korea was the natural alternative. Samsung and SK Hynix were able to charge premium prices, and their margins expanded. Luna: But aren't the Chinese also building their own memory chip industry? I know there's been a push with companies like YMTC. Lucas: They are trying, but they're still years behind. YMTC makes NAND flash, but it's not competitive on density or power efficiency. And without access to advanced Dutch lithography machines, they can't shrink their nodes the way Samsung can. The technology gap is widening, not narrowing. Luna: That makes Korea's position look almost unassailable in the short term. But what about the longer-term risks? If every country's AI infrastructure depends on chips from one country, that's a single point of failure. Lucas: Exactly right. And that's the tension we're seeing now. On one hand, Korea's dominance is a huge competitive advantage for the country. On the other, it creates a concentration risk for the entire global supply chain. If a geopolitical crisis hit the Korean peninsula, you'd have a global tech shutdown. Luna: We saw a preview of that in 2023 when memory chip prices spiked on news of any North Korean missile test. So diversification is being discussed, but is it actually happening? Lucas: Not really. The US is trying to onshore some advanced logic chip production through the CHIPS Act, but memory is a different story. Building a memory fab from scratch takes three to five years and costs over twenty billion dollars. And even then, you need the engineering talent, which Korea has in spades. Luna: So it's not just about money. It's about the ecosystem. Samsung has been making memory chips for over forty years. That kind of institutional knowledge can't be replicated quickly. Lucas: Precisely. And there's another angle here that's interesting: the yen. The Japanese yen has weakened to 158.7 per US dollar as of mid-May. That makes Japanese chip equipment makers like Tokyo Electron more competitive on price. But for Korea, a weaker yen means Japanese competitors in memory — like Kioxia — also get a cost advantage. Luna: So Korea's edge isn't just about technology; it's also about currency. And the won has been relatively stable compared to the yen. Is that going to last? Lucas: The Bank of Korea has been intervening to prevent too much won strength, because a strong won hurts exporters. But if the Federal Reserve cuts rates later this year, the dollar could weaken, and the won might appreciate against the yen. That would squeeze Korean margins. Luna: Let's zoom out to the trade data. The US trade deficit in goods and services widened to over sixty billion dollars in March. How much of that is chips? Lucas: A significant chunk. Semiconductor imports from Korea alone were about three point five billion dollars in March. But here's the twist: a lot of those chips go into products that are then exported back. So it's not a simple one-way flow. Korea imports raw materials and equipment, exports finished chips, and those chips end up in iPhones and servers that the US sells globally. Luna: So the trade deficit number is a bit misleading. The real value is in the integrated supply chain. But when politicians see a deficit, they want to fix it. Could we see tariffs on Korean chips? Lucas: It's possible. The Trump administration has already floated tariffs on a range of imports. But targeting memory chips would be politically dangerous because it would raise prices for American consumers and disrupt the tech industry. So far, the administration has exempted most semiconductor components. Luna: Still, the risk is there. And Korea knows it. That's why Samsung is building a massive semiconductor cluster in Taylor, Texas, and SK Hynix is investing in Indiana. They're hedging. Lucas: Exactly. Those US fabs are designed to produce logic chips, not memory, but they give Korea a political foothold. It's a smart strategy: make yourself too big to tariff. Luna: What about the China factor? The renminbi has weakened to 6.81 per dollar. That makes Chinese goods cheaper globally, but Chinese chip imports are still restricted. So how does that affect Korea? Lucas: China is still Korea's largest trading partner, but the composition is shifting. Korea exports fewer finished goods to China and more intermediate goods like chips and displays. As China's economy slows — its GDP growth is now around four point five percent — demand for these components has softened. But the chip segment remains robust because of AI buildout. Luna: So the narrative is really about AI driving demand for memory, and Korea being the primary beneficiary. But I wonder if this is a cyclical peak. Memory prices are notoriously volatile. Lucas: They are. The memory market has a classic boom-bust cycle. We're in an upcycle now driven by AI and data center demand. But past cycles have shown that when supply catches up, prices can crash. Samsung and SK Hynix are both increasing capital expenditure this year, which could lead to oversupply by late 2027. Luna: So investors in e w y need to watch the capex announcements carefully. The five percent rally this week might be pricing in continued strength, but the cycle could turn. Lucas: Right. And that's the thing about this episode's angle: Korea's dominance is real, but it's not risk-free. The concentration risk for the global economy, the potential for tariffs, the currency headwinds, and the cyclical nature of memory all create uncertainty. For now, though, Korea is the indispensable nation in the chip supply chain. Luna: And that's a pretty powerful position to be in, even if it's not permanent. Lucas, thanks for breaking that down. Lucas: Thank you, Luna. Next time, we'll look at how India is trying to muscle into this space with its own semiconductor incentive program.