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Japan-South Korea rift

Seoul eyes crash program to shield chip industry from Japan curbs

Subsidies and deregulation planned, but tech prowess hard to match

South Korean chipmakers  are dependent on Japanese supplies of essential materials, a situation they hope to change.   © Reuters

SEOUL/GUANGZHOU -- South Korea's government is considering spending 1 trillion won ($850 million) a year to support domestic production of chipmaking equipment and materials, as Japan's tightened export controls underscore the risks of relying too heavily on a single country.

Seoul will soon announce a package to deal with the restrictions, Economy Minister Hong Nam-ki said Wednesday. While he gave no specifics, the plan is expected to center on deregulation and a supplementary budget to cover subsidies.

The goal is to reduce the industry's dependence on Japan for chipmaking materials and to ensure it remains competitive, Hong said, adding that minimizing damage to domestic companies is a top priority.

Japan imposed export curbs on chipmaking materials on July 4, citing worries about South Korea's export controls. Tokyo's decision to curb the trade of these materials threatens access to products for which Japanese companies have firmly established themselves as top suppliers, thanks to technological advances enabling them to meet the exacting requirements for bleeding-edge chipmaking. Even with the subsidies, industry watchers are skeptical that South Korean companies will be able to bridge the technical gap anytime soon.

But with chipmakers scrambling to find alternative sources, Japanese players risk losing business over the long term if the trade row drags on without a resolution.

Samsung Electronics has begun trying out  hydrogen fluoride etching gas from China, Taiwan and South Korea, and peer SK Hynix has reportedly begun similar testing. It is expected to take two or three months for Samsung to determine whether it can maintain current quality levels with the alternative supplies.

"Even if the results are positive, we won't be able to pick a new supplier right away," said an executive at a major chipmaker.

The trade row has caused the spot price of benchmark 4-gigabyte DRAM memory chips -- made predominantly by South Korean companies -- to surge nearly 10% in two weeks, even amid lackluster demand, over speculation that Japan's crackdown will disrupt supply.

Global chipmaking industry group SEMI estimates that Japanese players held half the $52 billion market for semiconductor materials market last year. The share is believed to rise to 80% for advanced materials used to make high-performance chips.

Japan's Shin-Etsu Chemical and Sumco supply 60% of the world's silicon wafers. Japanese players including JSR and Tokyo Ohka Kogyo control a commanding 90% of the market for photoresist, which is among the products affected by the export curbs.

Unlike smartphones or home electronics, materials cannot be disassembled and reverse-engineered and are thus harder to duplicate. This helps Japanese producers maintain the technical edge that has made them the go-to suppliers for materials with highly demanding specifications, such as extreme ultraviolet, or EUV, photoresist.

Photoresist is used to deposit circuit patterns onto silicon wafers. EUV photoresist is necessary to accurately transfer patterns with components under 10 nanometers wide -- less than 1/10,000th the thickness of a human hair. Japan's restrictions on photoresist exports threaten to delay Samsung's plans to roll out a 7 nm chip early next year.

"Photoresists and the like are totally custom-made to meet chipmakers' needs," said Atsushi Ikeda of Citigroup Global Markets Japan, adding that tasks such as determining the right composition for a given customer's production processes "play to Japanese producers' strengths."

As such, these products are often highly profitable and difficult to replace, he said.

Japanese companies also control 80% to 90% of the market for ultrapure hydrogen fluoride etching gas. Hydrogen fluoride used in applications such as making plastics can have other substances present in concentrations of 1 part per thousand or less, but advanced chip production demands a degree of purity that is a higher magnitude.

"Arsenic and other impurities are difficult to separate out through temperature [changes] alone, so special methods are needed," said Toshiki Tajima, an associate professor of applied chemistry at Shibaura Institute of Technology in Tokyo.

Hydrogen fluoride is also difficult to handle safely, as it is highly toxic and corrosive. "It requires equipment made with special alloys," Tajima said. "Japan has been involved in chip production since the 1970s, and companies each have their own know-how."

Mainland China and Taiwan also produce hydrogen fluoride. Sunlit Fluo & Chemical of Taiwan said it began supplying the gas to South Korean companies in earnest last year.

But mainland players are less sanguine about their prospects for capitalizing on the controls. A marketing representative at GrandiT, which has made electronic-grade hydrogen fluoride since 2009, said Chinese companies cannot completely replace Japanese etching gas supplies at this stage.

"Catching up with Japan in terms of quality will take a while," the representative said.

China's Befar Group said it is "in talks with multiple South Korean companies" but has yet to sign any official contracts.

Samsung and SK Hynix are expected to continue dealing mainly with Japanese suppliers for the time being. But now that they have been directly confronted with the risks posed by letting one country become indispensable to their supply chains, their moves to diversify away from Japan may not end even if the trade row does.

Also Wednesday, Foreign Affairs Minister Kang Kyung-wha and Deputy National Security Adviser Kim Hyun-chong met with David Stilwell, assistant U.S. secretary of state for East Asian and Pacific affairs, and sought American support to persuade Tokyo to revert the export curbs.

Kim, who visited Washington last week for talks on the trade issue, told reporters after the meeting that Stilwell "understood the seriousness" of the issue.

Stilwell said "Fundamentally ROK and Japan must resolve the sensitive matters and we hope that the resolution happens soon," using the abbreviation for South Korea's official name, the Republic of Korea.

 The U.S., he said, "is a close friend and ally to both. We will do what we can to support their efforts to resolve this."

Nikkei staff writers Hiromitsu Goto and Kento Fukui in Tokyo contributed to this report.

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