Korea's Semiconductor Industry: Adapting to US Production Ramp and AI

The global semiconductor industry is undergoing a significant shift as major countries, led by the United States, aggressively invest in domestic production and restructure supply chains. This trend poses challenges for South Korea, a powerhouse in memory semiconductors, as it risks losing its competitive edge in advanced chip manufacturing. Recent forecasts by the Semiconductor Industry Association (SIA) and Boston Consulting Group (BCG) predict that South Korea's share of advanced semiconductor production, currently at 31%, could drop to less than 10% by 2032. This decline is attributed to major Korean players, such as Samsung Electronics and SK Hynix, opting to establish their latest factories in the United States instead of their home country. The US, on the other hand, is expected to see its production share rise from 0% to an impressive 28% over the next eight years, driven by substantial subsidies and incentives aimed at attracting semiconductor manufacturers.

The US government's comprehensive act to support its semiconductor industry, which includes a $52.7 billion subsidy package, has already yielded results. Samsung Electronics is constructing an advanced foundry in Texas, while SK Hynix is building a packaging plant in Arizona. With a $6.4 billion subsidy, Samsung plans to produce next-generation cutting-edge 2-nanometer chips at its US plant. The Biden administration's goal of producing 20% of advanced semiconductors domestically by 2030 appears to be well within reach, and current projections suggest that this target may be significantly exceeded. This shift in production capacity has raised concerns about the future of South Korea's semiconductor industry, which has long been a backbone of the country's economy.

South Korea's government has announced plans to develop a semiconductor mega-cluster in Yongin, Gyeonggi-do, with an investment of 622 trillion won ($455.4 billion) by 2043. However, the project faces hurdles, such as delays in the construction of Samsung's Pyeongtaek semiconductor plant due to transmission line problems and delays in starting construction at SK Hynix's Yongin plant due to water supply issues. These setbacks, coupled with strict labor policies like the 52-hour workweek and regulatory hurdles such as the Severe Accident Punishment Act (SAPA), could further accelerate the exodus of semiconductor firms from South Korea. Industry experts warn that if the country fails to address these challenges and the share of domestic production of advanced semiconductors declines significantly, it could lead to a national disaster, given the economic and geopolitical importance of maintaining local semiconductor production.

US Commerce Secretary Gina Raimondo's recent remarks at the Intel Foundry Services (IFS) DirectConnect 2024 event in California, where she expressed a desire for the US to lead the production of major semiconductors, have raised concerns in the industry. While her message does not explicitly state that the US will prioritize subsidies and policy support for domestic companies, the fact that Intel is expected to receive $10 billion (about 13 trillion won) in US government subsidies ahead of Samsung and SK, which are also building US factories, has led to concerns about potential discrimination against foreign companies. The distinct "America's One Team" vibe among US companies, with Intel announcing plans to mass-produce 1.8-nanometer semiconductors later this year and 1.4-nanometer processes in 2027, aiming to become the world's second-largest foundry, has further fueled these concerns. Microsoft's deal with Intel for 1.8-nanometer semiconductors, which is the size of an AI chip, has also highlighted the US semiconductor supply chain policy's focus on building a self-sufficient supply chain for advanced AI semiconductor production.