[News Focus] Korean tech firms seek localization, diversification amid escalating trade row

To combat growing trade risks with Japan, South Korean chip and display makers are seeking ways to localize key materials and diversify supply sources, although it appears difficult in the short term.

On July 1, the Japanese government tightened its export procedures to Korea of three classes of hi-tech materials crucial to the production of chips and display panels. They include fluorinated polyimide, photoresist and hydrogen fluoride, used mostly by Samsung Electronics, SK hynix, Samsung Display and LG Display.

Since the export curbs were announced, the Korean tech giants -- alerted by the restrictions that may disrupt their plant operations -- have been busy seeking alternatives at home and abroad. And the moves have raised the stock prices of local firms with a connection to the materials.

One Korean hydrogen fluoride producer, which wished to remain low-profile when contacted by The Korea Herald for fear of reprisals from Japan, saw its share price soar 40 percent on Tuesday compared to June 28, a day before the export curbs were announced.

Shares of other hydrogen fluoride producers -- Foosung Chem and Ram Technology -- also surged. Foosung shares rose 78 percent from 6,790 won ($5.75) to 12,100 won and Ram saw its stock price increase 79 percent from 3,775 won to 6,790 won during the same period.

The tech giants, meanwhile, are reportedly testing whether hydrogen fluoride produced by the Korean companies can be applied for their production process. The Korean tech firms have been relying on Japanese firms Stella Chemifa and Morita Chemical for most of their supplies.

As for another key material photoresist, there are some local producers although none of them are known to produce high-end products for the extreme ultraviolet lithography chipmaking, the supply of which is dominated by Japanese firms JSR Corp. and Shin-Etsu Chemical.

The high-end photoresists made in Japan are currently used by Samsung, which began to use them in its EUV chipmaking process late last year. Used for next-generation products, they are very difficult to replace because of the advanced level of technology required to produce them, according to industry watchers.

Still, the anticipation of localization has lifted the stock price of local firms that produce photoresist. For instance, Dongjin Semichem shares rose 63 percent to 16,450 won on Tuesday from 10,050 won on July 28. The company said it had not yet started testing its products with Samsung.

Another photoresist maker, Kumho Petrochemical, said it had been passive in investing in high-end photoresist because of market uncertainty.

“We may consider investing in the products if the supply can be guaranteed by the government, Samsung or SK hynix to some extent,” a company official said.

The official still believed the use of high-end photoresist would ultimately rise as chipmaking continues to advance.

As for fluorinated polyimide, a material used for foldable display panels, Samsung has been working with Japanese firm Sumitomo Chemical for its upcoming Galaxy Fold.

There are a handful of Korean companies, including Kolon Industries, SKC Kolon PI and SK Innovation, that produce fluorinated polyimide. But, as the development of Samsung’s Galaxy Fold has been optimized with Sumitomo’s materials, it may take a few months for it to complete tests even if it finds alternatives, according to an insider.

“All the three materials that Japan has restricted are not widely used. So, even if Samsung finds alternatives here or overseas, it has to go through monthslong tests with the suppliers,” said an industry insider, adding that is what Japan aimed for when it imposed restrictions.

“We are seeking diverse possibilities,” Samsung officials said, without commenting further due to the sensitivity of the issue. But, an anonymous source said it does not want to stimulate Japanese firms officially because it knows finding alternatives is not an easy job for the time being.

Despite the dilemma, the Korean tech giants may have to opt for localization or diversification if the trade tension continues.

Upon returning from Japan last week without much progress, Samsung Vice Chairman Lee Jae-yong is reported to have discussed supply diversification to China, Taiwan and Russia with top executives.

LG Display Chief Technical Officer Kang In-byung recently told reporters, “Hydrogen fluoride is also available in China and Taiwan. We will prepare measures by accurately figuring out our inventory.”

Recently, there were media reports that Russia may provide hydrogen fluoride to Korea although the companies still have to test the materials to be adequate replacements for Japanese products.

The Korean government also plans to finance the development of hi-tech materials to ease its dependency on Japanese firms. Last week, the Industry Ministry said it plans to set aside 1 trillion won per year to support diversification and localization of key materials. 

By Shin Ji-hye (shinjh@heraldcorp.com)