SEOUL/TOKYO -- South Korean chipmakers and their Japanese suppliers are scrambling to deal with tougher export controls of semiconductor-related materials by Tokyo that went into effect Thursday, trying to weather the blow with short-term fixes such as by stockpiling materials.
Japanese Prime Minister Shinzo Abe on Wednesday acknowledged that the decision targeting South Korea's core industry was retaliation for Seoul's inaction on court rulings regarding wartime labor. But the move could ultimately end up squeezing Japanese companies by forcing South Korean companies to cultivate alternative sources for the material.
A smoldering dispute between the two neighboring countries, both allies of the U.S., has now turned into an economic conflict with real consequences. President Donald Trump, who has questioned American troop deployment in both countries, has chosen to stay on the sidelines even though Washington needs both countries to work together for regional security.
Samsung Electronics holds about a month's supply of the three materials subject to the tightened rules, South Korean media report, while a source from SK Hynix put that company's reserve at under three months. Both have rushed to stockpile the materials to keep production going.
"We asked our Japanese suppliers to send us as much inventory as they can by Thursday," an SK Hynix source said.
LG Display usually sources Japanese etching gas through a South Korean intermediary for the production of its liquid crystal displays. It is keeping a close eye at inventories at the intermediary while searching for alternative suppliers.
Effective Thursday, Japan is requiring case-by-case approval for exports to South Korea of resist, a coating substance; etching gas and fluorinated polyimide, used to make flexible organic light-emitting diode displays. Each review is expected to take about 90 days.
South Korea relies on Japan for over 90% of its supply of resist and fluorinated polyimide, as well for a large portion of its etching gas. The country imported $144 million worth of the three materials in the first five months of 2019, according to the Korea International Trade Association.
The South Korean government is promoting domestic production of the materials in case the row continues long-term. In Wednesday's consultations with the ruling Democratic Party of Korea, it said it will allocate 1 trillion won ($857 million) a year to help domestic producers of chipmaking materials and equipment.
Seoul has also begun preparations toward potentially lodging a complaint with the World Trade Organization. "This is obviously a retaliatory measure that is unreasonable and contrary to common sense," Foreign Minister Kang Kyung-wha said at a parliamentary meeting on Wednesday, according to the Yonhap News Agency.
At the center of the dispute are recent rulings by the South Korean Supreme Court ordering multiple Japanese companies to pay South Koreans forced to work for them during World War II. Arguing that any claims arising from the issue were resolved in 1965, Tokyo has been urging Seoul to intervene.
"Both countries gave up claims to damages under our 1965 treaty," Abe said Wednesday at an event hosted by the Japan National Press Club. "This is what happens when promises between countries are not respected."
"We will not grant [South Korea] preferential treatment on trade like we did before while it does not abide by its promises," he added.
But now Japanese suppliers are also grappling with the consequences. Tokyo Ohka Kogyo, which produces resist, is worried that the approval process for exports will become significantly more complicated.
"We will have to consider exporting from our plant in Singapore instead," said Stella Chemifa, an etching gas maker based in Osaka.
Some businesses have received little information on what the tougher screening procedures will entail and are struggling to determine exactly how they will be affected.
Most expect little impact. "There is a big difference in the expertise of Japanese and South Korean companies when it comes to chip-related materials," an industry insider says -- a sentiment shared by both countries.
Even if Japanese products cannot be readily substituted right now, South Korea can bolster its own capabilities with government backing. It is unclear who -- if anyone -- will emerge the winner in the conflict.
Ken Moriyasu in New York contributed to this report.