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Japan-South Korea rift

Korea Inc. ditches Japan chipmaking materials for homegrown supply

Export curbs give South Korean materials makers chance to blossom

Inside a South Korean semiconductor factory: Many companies are reevaluating their supply chains in response to Japan's export curbs. (Photo courtesy of SK Hynix)

SEOUL/OSAKA -- South Korea's chip and display makers have turned to homegrown chemicals to fill the vacuum after Tokyo imposed export curbs, which may deal a bigger blow to Japanese companies in the long run.

After being shut out of a crucial part of their supply chain, South Korean companies have had to seek other avenues to keep production levels humming. LG Display, the world's leading producer of liquid crystal displays, began using etching gas produced by South Korea's SoulBrain to manufacture panels in November.

LG had previously used an ultrapure etching gas solution imported from Japan's Stella Chemifa and diluted by a factor of 100 by SoulBrain. But "because we dilute it so much, we don't need products that are processed as precisely as they are in Japan," an LG official said.

In July 2019, Japan tightened restrictions on South Korea-bound exports of etching gas, photoresist and fluorinated polyimide amid an escalating row over wartime labor. These chemicals are crucial to the production of display panels and semiconductors, the prize jewels of South Korea's industrial sector.

Part of these curbs have since been lifted, but their effects linger.

Stella Chemifa suffered an 18% drop in net profit for the 12 months ended March, according to full-year results announced on May 11. Exports of etching gas fell due to changed restrictions for shipments to South Korea, the company said. Shipments of its mainstay ultrapure products fell 30%.

Rival Morita Chemical Industries resumed exports to South Korea in early January, though at levels about 30% lower than before the controls were introduced. Many of its former South Korean clients are believed to have switched to domestic alternatives.

"It will be difficult to gain back the business we've lost," a Morita Chemical executive said.

Japanese-made chemicals have been used widely by display and semiconductor producers across the world thanks to their quality, low price and stable supply. Buyers are usually reluctant to switch to cheaper alternatives, since this could disrupt their complex production processes and result in more defective output. But Japan's export controls pushed many over the edge.

Chipmakers, who use greater amounts of etching gas than display makers, are also starting to switch suppliers. Samsung Electronics has begun using a domestically produced etching gas for part of its production to ensure stable output, even though one executive conceded it would be more economical to use Japanese etching gas.

"Even if Japanese restrictions revert to what they were before July 2019, companies that have decided to use something else are not going to switch back," said Ahn Ki-hyun, a senior official at the Korea Semiconductor Industry Association.

Many companies are also heeding President Moon Jae-in's push to curb South Korea's dependence on Japanese materials makers. "One day, our materials industry will have developed and we'll be able to say, 'Thank you Mr. Abe!'," said Kim Sang-jo, Moon's chief policy secretary.

As part of this push, the government is wooing materials makers from other countries to set up shop in South Korea. Seoul helped U.S.-based Dupont secure land for a new photoresist factory and offered tax breaks as well.

"Japanese suppliers are becoming less of a priority," a sales representative at a Japanese electronics parts maker was recently told by a South Korean client. Some companies apparently are demanding price cuts in response to the recent developments.

Japan has repeatedly claimed that the export curbs were enacted because of improper incidents involving the diversion of chemical products, resulting in lost trust between the two countries, while South Korea insists it was economic retaliation over their wartime labor row. Regardless, the countries' political dispute appear to have brought a lasting shift to business activities on the ground.

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