Business | ANALYSIS

Japan's curbs on high-tech materials exports to South Korea could backfire in long run

by Makiko Yamazaki and Heekyong Yang

Reuters

Japan’s curbs on exports of high-tech materials to South Korea could backfire in the long run, eroding its dominance over a key link in the global chip supply chain, suppliers and experts have said.

Japan tightened restrictions last month on exports of three chipmaking materials to South Korea, home to memory chip titans Samsung and SK Hynix. The move threatens to disrupt the global tech supply chain, as Japan provides about 70 percent or more of the restricted products to the world.

While the situation highlights Japan Inc.’s firm place in the industry, even after its once mighty giants like Sony lost out to nimble Chinese and Korean rivals, it has fueled concerns that Japan’s grip on the niche market for fluorinated polyimides, photoresists and hydrogen fluoride could now loosen.

“South Korean companies cite quality and stable supply as reasons for choosing Japanese materials. But this has made them aware of the need for change and they are already taking action,” said a source at a Japanese materials supplier.

“This will hit us like a body blow.”

Samsung, for instance, has stepped up testing of non-Japanese photoresists and hydrogen fluoride, several sources familiar with the chip supply chain said.

Soulbrain, a supplier of hydrogen fluoride to Samsung and Hynix — the world’s No. 1 and No. 3 chip vendors, is aiming to match the purity of Japanese hydrogen fluoride at a plant that is still under construction.

Industry experts note it would take time for South Korean firms to move up the value chain, as the three high-tech materials are not easy to replicate.

Japanese suppliers “have built up their capabilities through decades-long experience of developing products,” said Atsushi Ikeda, a Citigroup analyst.

“The accumulation is just too big for new players.”

Top photoresist supplier Tokyo Ohka Kogyo says it takes up to two years to develop new resists.

From South Korea, the curbs are likely to elicit a response similar to Japan’s during the “rare earth shock” nearly a decade ago, when China’s restriction on exports of rare earth minerals used in electronic devices forced Japan to find alternate supplies, industry participants said.

“Under the circumstances, anyone would do that,” said the source at the Japanese supplier, which was hit by the curbs.

Seoul has already pledged to subsidize the domestic chip supply chain to accelerate the buildup of knowledge needed for firms to catch up in more advanced fields.

A senior executive at Soulbrain said the government had expedited paperwork so its new plant could be completed faster.

Soulbrain is looking to complete construction by the end of September, and run tests to see if it can mass produce high-purity hydrogen fluoride, the executive said.

In photoresists, Samsung is trying to curb its reliance on Japan for advanced materials, although sources say it faces high hurdles. The company, however, already uses material from local supplier Dongjin Semichem for photoresists used in chips with less fine circuit patterns, Japanese supply chain sources said.

Only three Japanese firms — Tokyo Ohka, JSR and Shin-Etsu Chemical — currently supply high-quality materials used globally in the advanced chip production technology known as extreme ultraviolet lithography.

Tokyo Ohka and other materials makers grew hand in hand with electronics conglomerates NEC, Toshiba and Hitachi, the world’s top chipmakers in the late 1980s.

Even after Japanese chipmakers lost ground to South Korea, the suppliers continued to thrive, thanks to early inroads in overseas markets and the strength of their local supply chains.

But in the wake of the latest curbs, prompted by a decades-old row over compensation for Korean forced laborers at Japanese firms during World War II, suppliers in Japan are having to deal with repercussions beyond the three restricted materials, industry sources said.

South Korean chipmakers are now asking Japanese suppliers to front-load shipments of other materials in which Japan has a large market share, from silicon wafers to polishing slurries, for fear of further restrictions, the sources said.

Japanese suppliers have so far refrained from directly commenting on how the curb will impact their businesses, claiming they had no inkling of the government’s decisions beforehand.

“We have very good relations with our Korean clients,” said Hideo Ohhashi, a spokesman for Tokyo Ohka.

“But this is up to politics.”