| June semiconductor exports down 1/4 year-on-year
| Global Semiconductor, Non-Memory and Memory Both Demand Weak
| Government to invest 7.8 trillion won in materials, components, and equipment industry

The atmosphere surrounding the semiconductor industry in South Korea is unusual.

According to the monthly ICT industry trends announced by the Institute for Information and Communications Technology Planning and Evaluation (IITP) on July 31, semiconductor exports in June recorded a double-digit decline for the sixth consecutive month as memory and system semiconductor exports decreased simultaneously. Exports amounted to $8.41 billion, a 25.3% decrease from the same month last year.

In the case of memory semiconductors, memory MCP increased, but most items, including DRAM, MCOs (multi-component integrated circuits), and NAND flash, decreased due to decreased demand from upstream industries such as servers and smartphones, leading to a decline for the 8th consecutive month. In the case of system semiconductors, a decline was seen for the 9th consecutive month due to a decrease in packaging, foundry, and fabless volume.


Causes of the global semiconductor market downturn
The semiconductor market enjoyed a boom for two years until 2018, driven by increased demand in the server and mobile sectors. However, growth in 2019 began to decline as semiconductor demand was expected to be sluggish due to increased supply in the memory market, stagnant demand, and the US-China trade dispute starting in the second half of 2018.

Gartner predicted in June that the semiconductor market in 2019 would see a simultaneous decline in both non-memory and memory, resulting in a negative growth of $429.2 billion overall.

Memory is expected to show a double-digit decline overall, as demand for major items such as DRAM and NAND flash is expected to be weak due to the base effect of the previous year's high growth, the US-China trade dispute including US sanctions on Huawei, and slowing growth in upstream markets. Non-memory is also declining due to the sluggishness of upstream industries despite new demand such as 5G, AI, IoT, and autonomous vehicles.


The unfavorable state of the domestic semiconductor market
Domestic companies' performance continues to be sluggish as prices fall due to slowing demand for memory.

Samsung Electronics' semiconductor operating profit is estimated to have fallen for the third consecutive quarter to 3.3 trillion won, and SK Hynix also recorded its lowest operating profit in 11 quarters at 637.6 billion won.

In recent years, as companies have expanded their production capacity in the booming semiconductor market, demand for memory has decreased due to delays in data center investment, stagnation in the growth of upstream industries such as smartphones, and increased uncertainty caused by trade friction. It is analyzed that the poor performance was due to the price decline starting in the fourth quarter of last year.

DRAM prices fell to the $1 range as demand for server and PC products decreased due to seasonal off-season effects, high inventory levels resulting from sluggish demand in the upstream industries, and increased risks resulting from the US-China trade dispute. NAND flash prices fell slightly compared to the previous month due to supply and demand imbalances, but unit prices are expected to rise in the future as supply slows down due to factors such as the Toshiba power outage on June 15 and inventory depletion caused by export sanctions on materials made in Japan.


Japan and Korea aim for industrial center
The Japanese government is threatening the domestic semiconductor industry by enforcing regulations, such as strengthening export procedures for materials that domestic semiconductor companies are highly dependent on.

On July 1, Japan's Ministry of Economy, Trade and Industry announced that it would change export regulations and procedures for strategic materials and technologies exported to South Korea in retaliation for the South Korean Supreme Court's ruling ordering compensation for damages suffered by Japan's forced labor during the Japanese colonial period.

In relation to this, starting July 4, the government strengthened procedures by changing the export permit requirements for three items, including etching gas (high-purity hydrogen fluoride), photoresist, and fluorine polyimide, from those subject to special export review to those subject to individual export review, thereby implementing full-scale export regulations related to semiconductor materials.

Since individual reviews can take up to 90 days, there are concerns that domestic semiconductor and display production may be disrupted if replacement quantities cannot be secured.

Etching gas is used for semiconductor cleaning, photoresist is used as a photosensitizer in the production of semiconductor substrates, and fluorine polyimide is used for OLED. Some are raising concerns that there could be additional regulations on semiconductor-related materials that are highly dependent on Japan, such as ICs, exposure equipment, CVD, ion implanters, wafers, and blank masks.

In addition, on July 12, Japan announced that it would exclude Korea from the whitelist, a list of countries that receive preferential treatment in exporting strategic materials, and passed the decision in a cabinet meeting on the 2nd.


What will be the impact on Korean semiconductors?
In terms of export volume alone, Korea is expected to be hit harder than Japan.

As of May 2019, the cumulative import volume of three items from Japan was 166 billion won, while the export volume of semiconductors was 45.2 trillion won. If semiconductor production is halted, the damage to the Korean industry will be greater than that to the Japanese industry.

The main target of Japan's regulations is resist for next-generation exposure equipment EUV, which is different from the products currently used by domestic companies, so the short-term impact is expected to be limited. There are concerns that if the sanctions continue for a long time, it may delay the introduction of EUV processes by domestic companies.

In the case of etching gas, some domestic companies are producing it, but it is difficult to replace Japanese products with the ultra-high purity required for the process, so if the material runs out, production disruptions are inevitable.

Samsung Electronics and SK Hynix are understood to have enough inventory of key materials for product production to last at least one quarter. Therefore, the possibility of damage occurring in the short term is low, but if it continues in the long term, an alternative is needed.

Semiconductor-related items in which Japan is securing competitiveness include semiconductor wafers and blank masks that are essential for production, so if these items are subject to additional regulations, production is expected to be disrupted.

As purchasing blank masks from Japan's Hoya is essential for preparing for Samsung Electronics' 7nm EUV process, which will be mass-produced in the second half of 2019, any disruption in the import of blank masks is expected to hinder the growth of the non-memory sector.


To turn a crisis into an opportunity
Companies and the government are seeking multifaceted measures to secure materials, and there are also predictions that this will promote the development of the domestic materials industry.

Domestic semiconductor companies such as Samsung Electronics and SK Hynix are focusing on securing supply chains, such as through indirect imports through overseas factories and finding alternative import sources, in response to Japan's export control measures.

In addition, we are strengthening research and development to localize materials that are highly dependent on Japan with domestic companies as a mid- to long-term response measure, such as completing tests on domestically produced hydrogen fluoride and recently introducing it into DRAM production lines.

SK Materials began preparations for hydrogen fluoride production on July 24, aiming to supply samples within the year, and expects full-scale mass production in the first half of 2020.

Our government has decided to respond with a clear stance on the WTO complaint, etc., and to invest a total of 6 trillion won, 1 trillion won per year starting next year, in the development of core materials, parts, and equipment such as semiconductor intermediate goods.

This regulatory situation in Japan will serve as a catalyst to further increase the domestic production rate of semiconductor materials, which is currently at a mere 15%, and will significantly increase the mid- to long-term growth potential of related companies. Expectations are at work. Of course, you can use it as an opportunity, but on the contrary, it can collapse. You always have to be alert and prepared.