The aggravating trade dispute with Japan reveals some hard truths about South Korea’s lack of basic technologies despite being dubbed as a tech powerhouse, not to mention the dire need to diversify its supply channels to reduce its heavy dependence on the neighboring nation.
On July 1, the Japanese government tightened the export process to Korea of three classes of hi-tech materials crucial to the production of chips and display panels and removing it from the white list. The materials include fluorinated polyimide, photoresist and hydrogen fluoride, which are dominated by Japanese companies globally.
Fluorinated polyimide is used to make flexible organic light-emitting diode displays. Photoresist is a thin layer applied to transfer a circuit pattern to a semiconductor substrate. Hydrogen fluoride, or etching gas, is needed in the semiconductor fabrication process.
As for hydrogen fluoride, Samsung Electronics and SK hynix rely on two Japanese companies, Stella Chemifa and Morita Chemical, for most of their supplies. Hence, the restrictions may disrupt the operation of their chip plants.
The reliance on the three materials shows a side of unbalanced trade relations between the two countries. Since Korea normalized diplomatic ties with Japan in 1965, it has never seen a trade surplus with the country over the last 54 years. Its accumulated trade deficit stood at a combined $604.6 billion as of 2018, according to the Korea International Trade Association.
“The three materials are just a small card Japan has presented,” said Park Hee-Jae, a professor at Seoul National University’s engineering college.
There are so many parts and materials in the manufacturing sector that Japan has a dominant market share and Korea needs to rely on, Park said.
For example, Japan has nearly 100 percent market share in cellulose triacetate film, a chemical compound used for liquid-crystal displays. The nation also has around 80 percent share in other materials, including cathode material and anode material for lithium-ion batteries, capacitors for secondary batteries, compound semiconductors and semiconductors packaging material.
Lee Ji-pyung, a researcher at the LG Economic Research Institute, said Japan was able to become competitive in the materials by “spending a lot of time and money” to develop basic technologies to overcome its position of being a resource-poor island country.
He cited carbon fiber that Japan now dominates as one example.
Carbon fiber requires high technology. It is one-fourth the weight of steel but 10 times stronger. It is used as a key ingredient in fiber-reinforced plastics and other composites. Japan began the development of carbon fibers in the 1960s.
“As a fast-follower, South Korea has been busy catching up in various technologies, thereby neglecting original technologies,” said Lee Hang-koo, a senior researcher at the Korea Institute for Industrial Economics & Trade.
This means every time Korean firms sell smartphones, televisions, displays and chips in the global market, many of the benefits go to Japan, Lee said.
Poor basic science has often been blamed for Korea’s failure to produce a Nobel laureate in science, even as Japan has produced 23.
Another reason for the dependence is that when Korean firms began developing chip and display technologies decades ago, they used essential parts, materials and equipment from Japan, which was the No. 1 in the global chip market in the 1990s and in the display market in the 2000s, according to Kim Dong-hwan, a visiting professor at Kyunghee University.
Since the first use, the Korean firms have made little changes to the supply channels of parts and materials to make the process stable. They also did not find it necessary to change because the material costs accounted for only a small fraction of the total production costs. “This has delayed the diversification of supply channels and localization,” Kim said.
On Wednesday, President Moon Jae-in arranged a meeting with business leaders to discuss ways to handle the emergency situation. It was attended by the heads of 30 large companies, including Samsung, Hyundai Motor, SK, LG and Lotte.
Moon said the government would actively support the diversification of import channels and domestic production of core industrial materials.
He also vowed administrative support for minimal customs procedures and the allocation of more funds to help firms accelerate technological development.
During the closed-door session, a businessman was quoted as suggesting Korea expand partnerships with Russia and Germany for the supply of chemical materials as a way to curtail reliance on Japan, according to Cheong Wa Dae spokesperson Ko Min-jung.
Although Ko said the comment referred to cooperation in general as the nations are strong academically and historically in chemical sectors, industry watchers anticipated future partnerships with companies in the nations.
Germany has been a strong chemical powerhouse with many key players, including Basf, Merck and Siemens. Merck recently acquired US chemical firm Versum Materials, which produces gas materials used for chip making.
As for Russia, its chemical firm Umatex recently developed carbon fibers, which are deemed as Japan’s next target. Although local firm Hyosung has developed the original technologies, Japanese firms Toray, Toho-Tenax and Mitsubishi Rayon dominate the market with around 70 percent share.