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Japan-South Korea rift

Korean chip material makers face 'Death Valley' to counter Japan

Conglomerates dubious about price and quality of domestic materials

Samsung is reliant on Japanese suppliers for the chips that power its products.    © Reuters

SEOUL -- South Korea is funneling resources to realize domestic production of high-tech materials to end its semiconductor industry's dependence on Japan, but closing the technological gap with Japanese suppliers remains a tall order.

The restrictions Japan imposed in July on exports of chipmaking materials bound for South Korea has exposed the reality that the nation's bread-and-butter industry is reliant on Japanese technology. But the country's past attempts to churn out made-in-Korea etching gas have ended in failure, with the challenge of bringing products into commercialization often described as crossing the "Death Valley."

South Korean media was abuzz Oct. 15 with the news that LG Display succeeded in fully localizing production of hydrogen fluoride, which is crucial for producing cutting-edge displays. Many welcomed the announcement as a major breakthrough that came just a little over 100 days after Tokyo's export limits.

But "100% made in South Korea" may be an overstatement. 

LG Display uses etching gas made from low-purity hydrogen fluoride, which is not subject to Tokyo's export controls. Having previously imported the final product from Japan, the company, seeking to enhance logistics efficiency, started preparations -- prior to Japan's move to curb exports -- to process low-purity hydrogen fluoride bought from Japan into etching gas in South Korea.

"It may mean domestic production in terms of the place of processing, but the raw material comes from Japan after all," said one industry source.

In August, the South Korean government hammered out a blueprint to develop domestic production of 100 materials, parts and manufacturing equipment with the goal of ending its reliance on Japan in five years. It pledged to pour 1 trillion won ($866 million) a year to this end, and find suppliers elsewhere within the next year for 20 Japanese exports, including the three subject to stricter controls by Japan.

But the plan is strikingly similar to the components and materials development plan that Seoul first developed in 2001, albeit with a different budget size and different materials targeted.

In fact, Seoul has updated this plan whenever tensions with Tokyo flared. President Lee Myung-bak unveiled the second version of the plan in 2009, when reducing the country's trade deficit with Japan was one of his biggest political challenges. President Park Geun-hye also released the third and fourth plans when the bilateral relations soured over the so-called wartime comfort women issue.

Its trade deficit with Japan for parts and materials has been shrinking, declining to $15.1 billion in 2018 from the 2010 peak of $24.2 billion. But South Korea continues to rely on Japan for these products, particularly technically advanced parts and materials.

Why is South Korea having so much difficulty shifting to domestic production of those materials?

A top official at a South Koran electronics maker had a clear-cut answer. "Japanese products meet all three conditions: quality, price and speedy delivery," the official said. "South Korean companies can make these materials if they try, but they may have higher deficiency rates or the prices may be too high. So it would be difficult for us to adopt their products. Prices and delivery times are also part of quality."

"There is a high barrier called Death Valley between R&D and commercialization of products. It will be difficult for Korean companies to overcome that barrier," said Yun Jong-yong, a former vice chairman of Samsung Electronics. "Japan has expertise in perfecting manufacturing processes. Trying to deliver results in a short period of time may not work."

This time, South Korea is going all-out. It has forced conglomerates like Samsung and Hyundai Motor to not just promise technological assistance but guarantee procurement from mid-size suppliers.

On Oct. 10, Samsung Electronics signed a memorandum of understanding on cooperation with mid-size suppliers at a display plant in South Chungcheong Province. South Korea President Moon Jae-in was present to add weight to the occasion.

"This marks an important step toward the independence of core display materials, parts and equipment, which are currently reliant on a certain country," Moon said.

But in truth, major South Korea conglomerates would rather continue doing business with Japanese suppliers. While they recognize the risk of relying on Japanese suppliers, the companies do not have the luxury of waiting for the development of domestic suppliers.

"Our plan is to procure the best quality material under the best terms," said a senior official at a South Korean conglomerate.

"Domestic production does not fit the economic logic. The division of labor with countries like Japan is ideal," said another executive.

Crossing the "Death Valley" to reach commercialization is not as easy as the South Korean government envisions.

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