Japan-Korea tensions pose new risks to electronics supply chains
- The three high-tech materials on Japan’s restriction list are crucial…
- … for the manufacturing of semiconductors and display screens
- Japan currently dominates global supply of these materials
- South Korea plays a key role in the global supply of memory chips and OLED screens
- A shortage/delay of component supply could affect the downstream electronics producers
Significant impact on South Korea’s electronics industry
The three high-tech materials on Japan’s restriction list are crucial for the manufacturing of semiconductors and display screens. Among them, fluorinated polyimides are used to make flexible OLED displays, while resist polymers and hydrogen fluoride are used to imprint and etch chip circuits. Japan currently occupies as much as 90% of global production of fluorinated polyimides and resists. Given the scarce sources of alternative supply, Japan’s export controls would effectively slow/disrupt the manufacturing process of certain components among the Korean tech firms, including Samsung, SK Hynix and LG.
As a result, South Korea’s financial markets did not participate in the region’s relief rally over the US-China trade truce struck at G20 Osaka Summit. Instead, the KOSPI and the KRW reacted negatively to Japan’s trade restrictive measures on Monday.
Ripple effects on the regional electronics supply chains
The ripple effects on the regional electronics supply chains cannot be underestimated. South Korea is currently the world’s second largest producer of semiconductors, holding a 70% share in the global DRAM market and 50% in the global NAND flash market. Meanwhile, Samsung and LG also dominate more than 90% of the global OLED screen market.
While substitutes for the Korea-made semiconductors and displays are available from the US, Taiwan and even China, the substitution process may not be smooth in specific areas in the short term. The shortage/delay of component supply would hurt the downstream producers for smartphones, computers and TVs, such as Apple, Huawei, as well as the Japanese firms like Sony and Panasonic.
South Korea’s electronics exports have been on a cyclical downturn since 4Q18. Current headwinds include the global economic slowdown, a saturated smartphone market and heightened business uncertainties from the US-China trade/tech war. The recent US-China trade truce struck at the G20 has, in the short-term, reduced the risk of supply chain disruption and provided some temporary relief for regional electronics producers. Unfortunately, this has been offset by an increase in Japan-Korea tensions. We are staying cautious over South Korea’s 2H growth outlook and reaffirm our call for a 25bps rate cut from the Bank of Korea in 3Q.
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