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Japan-South Korea rift

South Korean companies brace for broader Japan export curbs

Samsung asks suppliers to stock up on parts as Tokyo's decision on 'white list' status looms

SEOUL/TOKYO -- South Korean companies are scrambling to stock up on Japanese parts as Tokyo prepares to impose an export curb on the country as the trade spat between the two countries heats up.

Wednesday is the deadline for public comment on the Japanese government's plan to remove South Korea from its so-called white list of preferred trading partners. Removal from the list would require Japanese suppliers to obtain government approval before exporting certain items to South Korea -- a process that could cause delays and disruption to supply chains.

Seoul plans to send a letter to the Japanese government asking to be kept on the white list by the deadline. Japan is expected to make a decision by next month, though it could come any day after Wednesday, an official in the Japanese trade ministry's security export licensing division told the Nikkei Asian Review.

Hundreds of South Korean companies, including Samsung Electronics, Hyundai Motor and LG Inntek, are expected to be directly affected if the export curb is implemented. In a separate move earlier this month, Japan imposed restrictions on three key semiconductor and display materials.

Samsung Electronics sent a letter to its suppliers earlier this month, telling them to buy three months' worth of Japanese parts, according to a company source who asked not to be named. Samsung promised to provide financial aid for the procurement, if needed.

"It is our natural reaction to keep our supply chains safe," the source said. "It is one of the toughest challenges we have ever faced. We are almost dead [if the curb is imposed]."

Samsung Electronics Vice Chairman Lee Jae-yong, de facto head of the conglomerate, visited Tokyo earlier this month to discuss the issue with its Japanese suppliers. South Korean media reported that Hyundai Motor Vice Chairman Chung Euisun made a similar trip to Japan last week.

Goldman Sachs said that the import curb would cost South Korea's machinery and electronics industries $20 billion annually, largely in relation to semiconductor production.

"Dependence on Japan imports is high for certain industries, and it is unclear to what extent and how rapidly [South] Korea would be able to substitute away from Japanese materials if the need were to arise, given limited non-Japan supply in select industries and the varying quality of non-Japan materials," said Irene Choi, an analyst at Goldman Sachs.

Analysts say that airline and semiconductor industries are bearing the brunt of the economic impact, but that the impact will spread to automobile, food and beverage and retail sectors.

"Hyundai Motor is importing chemical material for its hydrogen vehicle from Japan, while SsangYong Motor and Renault Samsung are buying transmissions from the country. If those parts are under sanctions, that will be negative to the companies," said Kim Jin-woo, an analyst at Korea Investment & Securities.

Japanese chemical powerhouse Toray supplies carbon fibers to Iljin Composites, a South Korean company that produces fuel tanks for Hyundai's hydrogen vehicles. This means the export curb could also hurt South Korean President Moon Jae-in's economic strategy, as he has promoted hydrogen vehicles as one of the country’s next growth engines along with logic chips and biopharmaceutical products.

A spokesperson for Japanese auto parts maker Denso said that its South Korean subsidiary sources "most" of its materials locally. A South Korean semiconductor company that supplies this subsidiary, however, is "stocking up on inventory so that there is no impact" from the potential curb, the spokesperson said.

Many companies are taking a wait-and-see approach. Japanese electronics company Ibiden, a supplier for Samsung smartphones, said it is investigating the possible impact, while Sony and Mitsui Chemicals said they are "carefully watching the situation." Sony supplies camera image sensors to LG Innotek, which produces camera module for Apple's iPhones. Mitsui supplies carbon fibers for Hyundai's hydrogen cars.

Japan's trade ministry already imposed tighter controls on semiconductor-related materials on July 4. Affected material manufacturers can still apply for a permission to export, but have to halt shipment until they get the approval, which could take three months or longer.

JSR, one of the companies affected, said the actual extent of the restriction "will only be clear when it comes to getting the approval."

The white list, meanwhile, applies to hundreds of products and technologies that could be used for military purposes, though South Korea's removal from that list would not necessarily mean trade requirements would change for all of the items covered.

"It is not yet decided which products would require what approval requirements," the Japanese trade ministry official said.

South Korea is currently the only Asian member on the 27-member list, which includes Australia, the U.S. and the U.K. Removing a country from the list requires a cabinet decision.

Experts expect the trade spat to drag on until next year, as Tokyo is likely to remove South Korea from its white list.

"The Japan-South Korea trade dispute remains likely to extend into 2020, with U.S. efforts to lower and contain tensions between its two allies expected to be only partially effective," said Scott Seaman, a director at Eurasia Group, a U.S.-based think tank.

"Japan will probably remove South Korea from its 'white country' list next month unless there is a breakthrough that prompts Japan to delay or abandon that plan, which is unlikely."

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