Japan strictly controls three key raw materials, and Korean chip makers are eager to find new sources of supply

12 Jul 2019

On July 9th, according to Reuters, industry executives said that due to the sudden escalation of diplomatic disputes between Japan and South Korea, Korean electronic equipment China chip makers and Japanese chemical suppliers are busy circumventing export controls imposed by the Japanese government.

Japan said last week that it would stop exporting preferential electronic equipment China treatment for three raw materials to South Korea and require exporters to obtain permits every time they want to ship. This process takes about 90 days.

This limitation applies to three materials that dominate the market in Japan: photoresist for transferring circuit patterns onto electronic equipment China semiconductor wafers; hydrogen fluoride used as an etching gas in chip manufacturing; and fluorine for smartphone displays Polyimide.

Park Jea-gun, president of the Korea Semiconductor and Display Technology Association, said Samsung Electronics and SK Hynix are seeking to buy more of these materials from Taiwan or mainland China. He added that this includes electronic equipment China companies exploring countries where there may be excess stocks of these materials outside of Japan.

SK Securities analyst Kim Young-woo said that various electronic equipment China chip makers have sent sales teams to factories or joint ventures operated by suppliers outside Japan to obtain stocks of Japanese restricted exports.

Samsung said it is evaluating a series of measures to minimize the impact of Japan's restrictions. According to a Samsung spokesman, Li Zaiyu, the company's vice chairman, went to Tokyo on Sunday. The spokesperson declined to provide further details on what the company is doing.

SK hynix declined to comment.

Although it is unclear to what extent the Japanese side will slow down the export approval process, or whether it will turn to the ban, Korean chip makers worry that this situation may turn into a full-blown crisis.

A source from a Korean chip maker said: "These materials, we can't find them quickly and can't buy them elsewhere." The source declined to be named because of the electronic equipment China sensitivity of the matter. “Even if we find alternatives outside of Japan, we must test them to ensure that the quality is good enough to produce high-yield chips.”

For either of these materials, reserves are not a viable option. Hydrogen fluoride is highly toxic, and photoresists quickly deteriorate.

Most of the Korean chip makers rely on Japan for their materials, but they also import some hydrogen fluoride from China. Experts say that for some of these materials, they have a maximum of four months of stock.

Supplier effort

The dispute stemmed from the Japanese government’s disappointment with the South Korean government’s refusal of a ruling by its court last October that required Japanese metal company Nippon Steel to compensate workers who were forced to work. These two neighboring countries have a painful history dating back to Japan’s colonial rule on the Korean peninsula from 1910 to 1945. During this period, Japanese companies forced the use of labor in the local area to force comfort women.

The Japanese side said that the issue of forced labor had been completely resolved in 1965 when the two countries resumed diplomatic relations.

There is also no sign of a easing of disputes between the two sides. Last week, Japan threatened to remove South Korea from the “white list” of the lowest trade-restricted countries, which could lead to export restrictions on a wider range of materials suitable for weapons production.

A spokesperson for JSR Corp said that among Japanese suppliers, JSR believes it can supply some photoresist from its Belgian factory.

A Tokyo-based Tokyo Ohka Kogyo spokesperson said that the electronic equipment China company has a factory in South Korea that can "temporarily" supply photoresist to Korean customers. But the factory has to source some materials from Japan to produce photoresist, so once the current stock is used up, export restrictions will slow down the supply.

Stella Chemifa has a joint venture plant in South Korea that can supply hydrogen fluoride to Korean customers, but the company declined to comment on how many customers the joint venture can meet. According to the company's estimates, it currently controls 70% of the high-purity hydrogen fluoride market.

According to Japanese media electronic equipment China reports, the fluorine-containing polyimide produced in Japan accounts for about 90% of the world's total production. According to a government report, the country also accounts for approximately 90% of global photoresist production. South Korea's industrial data shows that in the first five months of this year, South Korea imported $144 million in photoresist, hydrogen fluoride and fluorine-containing polyimide from Japan.

Japan's export restrictions on photoresists are only applicable to photoresists used in the production of electronic equipment China chips based on an advanced technology called extreme ultraviolet lithography or EUV lithography. But analysts say this could hinder Samsung’s efforts to use this technology to catch up with rival TSMC.

South Korea plans to invest in its own industry and develop the above electronic equipment China materials on its own, but in the short term, in addition to the Japanese supply, it is not easy to find alternatives.

Nomura analyst Shigeki Ozaki said: "For these high-tech materials, you need to accumulate knowledge in selecting raw materials, combining them properly, and controlling temperature."

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