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[Yoo Choon-sik] Chip exports recovery masks deeper issues

By Korea Herald

Published : March 4, 2024 - 05:29

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South Korea announced robust export figures for February last week, instilling a glimmer of hope that the nation could see an uptick in economic growth this year after enduring one of its lowest rates in modern history. The government emphasized that the surge in semiconductor sales abroad drove the brisk exports in February.

On the surface, February's exports grew by just 4.8 percent from a year ago, according to data from the Ministry of Trade, Industry, and Energy. However, the average daily export value was 12.5 percent higher than a year ago due to the Lunar New Year holidays, which fell in February this year but in January last year.

Exports for the January-February period, a useful gauge to mitigate holiday effects, rose by 11.2 percent from the same period in 2023, according to the ministry data. Semiconductor exports, comprising nearly 20 percent of the total, surged by over 60 percent during the two-month period as prices rebounded while demand remained robust.

The International Monetary Fund projects South Korea’s economic growth to accelerate to 2.3 percent this year from an estimated 1.4 percent in 2023, slightly surpassing the 2.1 percent to 2.2 percent growth forecast by the country’s central bank and government. They all anticipate that exports will drive growth this year as domestic demand is expected to wane.

There is no denying that the long-awaited recovery in semiconductor exports provides significant relief to the country’s economy as a whole. However, it is premature to celebrate given the lingering concerns that the South Korean semiconductor industry has already been losing its global competitiveness amidst China's rise and shifting global supply chains.

In fact, a research report published just days before the release of February's export data cautioned that semiconductor product exports have continued to lose global market share for five consecutive years until 2023, as South Korean firms expanded production overseas while Chinese companies ramped up exports.

The report from the Korea Institute for International Economic Policy stated that South Korea was the largest memory chip supplier globally until 2018, with a market share of 29.1 percent. However, it has since lost the top position, with its market share sharply declining to 18.9 percent in 2022, while China ascended to the top rank.

Furthermore, the share of semiconductor industry exports in South Korea’s total overseas shipments has been declining since peaking at 25.0 percent in 2021. The share remained above 20 percent in recent years but dropped to just 20.7 percent in 2023, according to the institute’s report.

The trade balance recorded by the country’s semiconductor industry has also rapidly shrunk to as low as $25.0 billion in 2023 from $41.1 billion in 2022 and $51.8 billion in 2021, adding pressure on South Korea’s overall trade balance, already strained by the surge in international energy prices and the depreciation of the won currency.

The future appears even bleaker, with the United States maintaining its strategy to reshape supply chains and bolster domestic manufacturing of products critical to national security. Simultaneously, China has been investing heavily in developing key technologies and expanding its presence in the global market.

However, these predominantly geopolitical and inevitable issues are not solely to blame for the semiconductor industry's diminishing global competitiveness in South Korea. The country has made little progress in its years-long efforts to reduce its overwhelming dependence on the memory chip sector, which accounts for only a small part of the global semiconductor market.

In the system chip segment, which constitutes 40.8 percent of global semiconductor trade and leads other segments in the six major categories, South Korea holds only a 4.9 percent share, ranking sixth and significantly lagging behind China’s 21.3 percent, according to the institute.

Heavy reliance on imported materials and equipment is another vulnerability for South Korea, making the country vulnerable to a sudden rise in global prices for these items or disruptions in these items in the case of heightened geopolitical tensions.

Moreover, in addition to -- and more crucially than -- these intra-sectoral issues, South Korea is widely recognized for performing poorly compared to its global peers in acquiring and developing talent in the technology sector. This weakness undermines the country’s overall international competitiveness despite its strong technological and digital foundations.

Misiek Piskorski, dean of the International Institute for Management Development Asia and Oceania, stated at a forum in Seoul last year that South Korean companies need to begin reducing cultural and linguistic barriers to attract more global talent. He noted that South Korea struggles to attract foreign talent, ranking 49th on this metric.

There have been local media reports highlighting experienced staff members leaving South Korean technology companies to join rival companies in countries like China, potentially taking confidential information with them. While those found violating the law should be punished, we should also inquire why they chose not to remain here.

Yoo Choon-sik

Yoo Choon-sik worked as chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. -- Ed.