(EDITORIAL from Korea Times on Feb. 22)

Korea's chip dilemma Korean firms should acquire AI tech companies Has Korea become too dependent on semiconductors, its main economic engine? It has been known for the last few years that Korea's chip industry, which accounts for as much as a fifth of the country's exports, faces two main challenges. The first priority is to shift its focus from memory chips to more advanced ones that offer higher profit margins. The other is to reduce its dependence on the Chinese market due to U.S. efforts to restrict technology its main competitor's access to advanced technology. The last couple of years have been tough for Korea's semiconductor sector. Weak global demand has resulted in chip exports falling since August 2022. Korea's total exports decreased by 7.4 percent in 2023 due to the sluggish export performance of chips, which fell by 24 percent to $99 billion. The operating profit of Samsung Electronics, the world's biggest producer of memory chips, fell to $5 billion last year, its worst result since 2008, a s its memory chip division suffered large losses. The good news is that chip exports recovered towards the end of 2023. This should give time to plot a future strategy for the semiconductor industry. Analysts are more optimistic about the prospects for the chip industry this year due to increased corporate investments in the artificial intelligence (AI) sector as well as the release of new electronic products. The AI boom, however, could prove to be a double-edged sword for Korean chipmakers. AI-related devices will need more memory storage provided by the chips. But Korea is absent when it comes to producing the much more expensive chips that power generative AI. This sector is dominated by several U.S. chipmakers, including Nvidia, AMD and Intel. Korea is in danger of being marginalized or even shut out in the future AI chip industry. OpenAI CEO Sam Altman, for example, is seeking a massive investment of up to $7 trillion to expand the global semiconductor industry's capacity to produce AI chips. What s hould worry Korea is that Altman is reportedly talking with Masayoshi Son, the head of the Japanese technology investment firm SoftBank, and officials from Taiwan Semiconductor Manufacturing Company (TSMC), Samsung's chief semiconductor rival, to finance and operate the new AI venture. Funding could also come from the United Arab Emirates, which might host some of the AI chip plants. The project would dominate global AI chip production and dwarf the size of the current global semiconductor industry, whose revenues amounted to $527 billion last year. The Yoon Suk Yeol government has made it clear that it wants to help the Korean chip industry stay competitive in the global market given its economic importance to the nation. With the U.S., China, Taiwan and Japan acting more aggressively to help their chip industries by offering tax breaks and improved infrastructure, Seoul has no other choice but to do the same if it wants Korea to produce cutting-edge chips. One plan, unveiled last month, is to build what i s billed as the world's largest chipmaking cluster at a cost of $470 billion over the next two decades. Samsung Electronics and SK Hynix would help finance the project, supported by tax breaks from the government. It is envisioned that 13 new chip plants and three research facilities would be built between Pyeongtaek and Yongin. The project is important for two reasons. One is that Samsung wants to focus on boosting the manufacturing of more advanced and custom-designed semiconductors, such as logic chips that process information instead of memory chips that store it. This has been the biggest strength of arch-rival TSMC. Korea's goal is to increase its market share of global logic chip production to 10 percent by 2030 from 3 percent now as it works to also develop AI chips. The project would also reduce the exposure of Korea's chip industry to the Chinese market. This is in response to U.S. efforts to reduce Beijing's access to global semiconductor technology by imposing stringent export controls. Both Sa msung Electronics and SK hynix produce chips in China as well as selling them there. They faced the threat last year of the U.S. sanctioning them for upgrading their chipmaking machinery in these plants, although Washington later decided to grant an indefinite exemption. But the U.S. warning is likely to restrict their future production in China. As a result, the creation of a new semiconductor hub in the Pyeongtaek-Yongin corridor represents an onshoring move similar to the U.S. efforts to boost its domestic chip manufacturing by encouraging investment in the sector by both domestic and foreign companies. Another important next step is that infrastructure expansion at home should be matched by the Korean chipmakers using some of their large cash reserves to acquire AI technology companies to maintain their competitiveness. Source: Yonhap News Agency