Sino-NK

China has struck back against efforts to restrict access to materials and technology needed in the semiconductor industry by stringently limiting exports of two critical minerals, gallium and germanium. Looking at Korea’s own role in the global semiconductor supply chain, Beijing-based Korean Mo Jong-hyuk sees several vulnerabilities in the ROK’s own position vis-à-vis China, especially when compared with those of other members of the “Chip 4” alliance, and warns that Seoul faces a much bigger disadvantage than other US partners in light of the PRC’s mineral export restrictions. 

Korea is the biggest loser in the China-US semiconductor war^[1]

China’s gallium, germanium export control measures aimed at Chip 4 alliance members, not US.

Clock is ticking for Korea to find alternative export partners to China. 

On July 9 at the US embassy complex in downtown Beijing, US Treasury Secretary Janet Yellen, who had been visiting China since the 6th, held a press conference before returning to the US. On July 7, Ms. Yellen met with Vice Premier and Director of the Office of the Central Financial and Economic He Lifeng, and China’s Finance Minister Liu Kun. As she was wrapping up her visit to China, Yellen stated that “We are not going to decouple from China.”

“Decoupling” refers to removing a specific country from global industrial and supply networks. The US has been adopting a policy of decoupling from China over semiconductors for the past several years. However, the basis for the policy began to change following the G7 summit last May. At a press conference immediately following the summit, US president Joe Biden said “We are not decoupling or turning inwards” yet “At the same time, we recognize that economic resilience requires de-risking and diversifying.” By “derisking”, President Biden means removing security risks caused by China. China, however, has issued strong warnings that both decoupling and derisking are policies histile to Beijing. As such, while in China, Janet Yellen spared no effort to convince the Chinese that this was not the case.

Ms. Yellen asserted that “A full separation of our economies would be disastrous for both countries. It would be destabilizing for the rest of the world.” Nevertheless, while saying that decoupling and diversifying supply networks are clearly different, the US government announced that it was moving to restrict exports of advanced technology to China as part of its derisking bid.

Yellen was the second US government cabinet member to visit China recently after US Secretary of State Tony Blinken visited in June. As such, there has been a define thaw in China-US relations following tensions due to the incident with the spy balloon flying over US territory. In her official statements, Ms. Yellen stated at least twice that the US is not decoupling from China.

The US, Japan and Taiwan feel the effects of China’s export restrictions differently

However, the very Chinese government that hosted Ms. Yellen hasn’t gone soft. On July 3, China’s commerce ministry announced that “From August 1, exports of gallium, germanium and related compound materials will be restricted.” From that time, permission from the commerce ministry will be necessary to export these materials, and exporters will have to present detailed reports regarding overseas buyers. The commerce ministry added that these measures will “benefit China’s security and national interest.” In other words, China is using restrictions of gallium and germanium exports as a weapon because these materials are critical to the production of semiconductors.

Gallium is used to facilitate the transmission speed and efficiency of compound semiconductors, TVs and phone chargers as well as solar panels, radars and electric vehicles. In particular, gallium arsenide is more durable than silicon in the face of heat and moisture, and is used as high tech and semiconductor material because of its high conductivity. Germanium is used in fiber optic networks, night vision goggles and solar batteries for artificial satellites, among other items. The two minerals have diamond crystal lattice structures, and are not produced in large quantities anywhere in the world. What’s more, China dominates the global production and supply of gallium and germanium. According to data from the EU, China controls 94% and 83% of the world’s gallium and germanium supplies, respectively.

Yet the biggest issue is the fact that China’s export restrictions are not directly aimed at the US. Rather, it appears to be more directly aimed at the “Chip 4” alliance that the US has been developing over the past several years for the purpose of pursuing its decoupling policy. The reason why is because the biggest consumers of semiconductor mineral components including gallium, germanium as well as silicon and indium antimonide are Taiwan, China and Korea.  According to a report released by the Semiconductor Equipment and Materials International (SEMI) in June, the size of the global semiconductor materials consumption market in 2022 was $72.7 billion. Taiwan spent 20 billion dollars and kept the top spot for 13 consecutive years, while Korea came in third at 12.9 billion dollars.

Taiwan and Japan joined the US-led Chip 4 alliance together last year first. In December of that same year, Korea officially announced that it would be joining. China believes there will be no change in the US’s decoupling policies as long as the global semiconductor alliance exists. China’s concerns are not unfounded. This is because on June 30, the Dutch government stated that it was planning to implement a regulation requiring permission to export deep ultraviolet (DUV) lithography systems produced by the Dutch semiconductor lithography equipment producer ASML to China. Since 2019 the Dutch government has, at the US’s request, banned the export of extreme ultraviolet (EUV) lithography equipment produced by ASML to China. 

EUV lithography is absolutely necessary for producing high-tech semiconductors. According to the US’s announcement last October regarding regulations restricting the export of high technology and semiconductors and other equipment, this means logic semiconductors of less than 28 nanometers, DRAM under 18 nanometers and Nand flashes of less than 128 layers. During that time, the Netherlands did not restrict exports of DUV lithographic equipment that could produce 28 nanometers or more. This time, however, they have unveiled new restrictions, which are expected to enter into force from September. If even DUV exposure equipment cannot be secured, China will suffer a blow to its semiconductor production for automobiles and smart home appliances.

With this, the sense of urgency in Beijing has been growing. A few days after Amsterdam’s announcement, China unveiled its restrictions on gallium and germanium exports. Some would argue that this type of measure is comparable to the way export restrictions on rare earths has been used as a weapon in the past. Yet situation at that time is utterly unlike the current state of affairs. China’s weaponization of rare earth exports was in response to the 2010 incident near the disputed Senkaku Island (which China claims as Diaoyu). While China did restrict rare earths exports to Japan, as with today, they didn’t issue a statement in advance or state that it is “for the sake of security and the national interest.”

The problem is, China placing restrictions on gallium and germanium exports doesn’t really affect the US. The US has a significant amount of gallium and germanium, due to their being classified as strategic resources in 1984 and subsequently stockpiled. However, Korea, which urgently needs gallium and germanium, is in a completely different situation. Semiconductor production lines cannot run without a secure supply of mineral resources. This was exactly what China schemed to do: carve a hole in the global semiconductor supply chain – consisting of the US at the center as the origin of source technology and assembly, with the Netherlands and Japan in charge of equipment and spare parts as well as materials processing and with Korea and Taiwan producing finished products –  and attack. 

China, US acting in accordance with their economic interests

As such, the country that will suffer the biggest loss is Korea. Seeing as Beijing sees Taiwan as a part of China, there is a good chance that they will not sanction exports of mineral materials for semiconductors to Taiwan. The longtime, close-knit cooperation between Taiwanese and Chinese semiconductor firms also proves Taipei with a safety valve. In contrast, time is running out for Korea to find alternatives to China as a mineral export partner. On top of that, if the export of DUV lithography systems to China is blocked, this will bring about serious problems for factories operating in China.  Samsung Electronics currently has a factory in Xi’an, while SK Hynix currently have large factories in Wuxi and Dalian.

Another thing to pay attention to is the story behind the US’s shift to derisking in its semiconductor policy toward China, which is the fading away of the benefits had from forming the Chip 4 alliance. Yet the shift in the US’s stance is purely based on its economic interest. On July 8 the New York Times reported that “Overall, China accounts for roughly a third of global semiconductor sales. But for some chipmakers, the country accounts for 60 percent or 70 percent”. This reality is why China’s own restriction of Micron chip exports to the US in May was seen as a 600 million dollar investment opportunity in China. Thus, there is a high chance that as China and the US weigh their interests, a semiconductor war could erupt.

Original article by Mo Jong-hyuk. Translated by Anthony V. Rinna.

[1] [Source] Korea is the biggest loser in the China-US semiconductor war [미·중 반도체 전쟁의 최대 피해자 된 한국], Sisa Journal, July 16, 2023, https://www.sisajournal.com/news/articleView.html?idxno=267794