South Korean Chipmakers Make Rapid Gains in US Market While Reducing Reliance on China

Amid the escalating strategic rivalry between the United States and China, South Korean semiconductor giants are rapidly shifting sales to the U.S. market while reducing dependence on China.

Recent business reports released by Samsung Electronics and SK Hynix showed their sales in China dropped 3.77 percent and 5.39 percent respectively in the third quarter (Q3) compared to the previous quarter (Q2).

The companies’ Q3 sales in China account for 9.64 percent and 25.07 percent of their total, while their Q2 numbers were 13.41 percent and 30.46 percent, respectively.

In terms of dollar amount, Samsung’s Q3 sales in China dropped about $2.2 billion compared to Q2, while SK Hynix’s Q3 in China slumped by about $1.1 billion.

In the three-month period, the total sales of the two companies in China evaporated by about $3.3 billion. While Samsung’s sales include smartphones, home appliances, and other products, semiconductors account for most sales figures.

On the other hand, sales of the two chip giants in the United States have increased significantly. Samsung’s Q3 sales increased by about $1.5 billion, while SK Hynix gained about $700 million compared to Q2.

Contrary to China, the combined sales of the two companies in the United States grew by about $2.2 billion in Q3.

According to the South Korean newspaper Seoul Economic Daily (SED), Samsung and SK Hynix hastily relocated their sales offices from China to the United States in advance “to reduce the dangerous burden brought about by the escalating semiconductor rivalry between the two nations.”

SED added that China’s long-term economic depression was also one of the crucial factors pushing the companies to strategically depart from China.

A man walks past an SK Hynix logo in the lobby of the company’s Bundang office in Seongnam on Jan. 29, 2021. (Jung Yeon-je /AFP via Getty Images)

Sweeping US Chip Ban on China

On Oct. 7, the U.S. Department of Commerce announced sweeping new export controls that will cut China off from cutting-edge chipmaking equipment and certain advanced semiconductor chips made with U.S. technologies, whether the chips were manufactured in the United States or not.

However, on Oct. 12, Samsung and SK Hynix were given a one-year exemption from the controls. The exemption allows the chipmakers to bring chipmaking equipment and other components to China to maintain their chip production in the country. But they will have to apply for U.S. export licenses after the grace period.

The SED article said that both Samsung and SK Hynix are “doing all they can to reduce [chip] export reliance on China within the given grace period.”

Last year, South Korea’s semiconductor exports amassed $128 billion—those that went to China accounted for 39 percent of the total, and those to China and Hong Kong accounted for 60 percent.

In addition, South Korean tech conglomerates Samsung Electronics and S.K. Hynix both have major memory chip production plants in China.

Samsung’s only NAND flash plant is located in Xi’an, and accounts for more than 40 percent of its NAND flash output. S.K. Hynix produces DRAM chips in Wuxi, accounting for 45 percent of its total DRAM chip production and about 15 percent of the world’s DRAM output.

Chip Ban Extended to ‘Talent’ and ‘Foreign Fabs in China’

The sweeping ban also extends to “talent,” effectively prohibiting U.S. persons from supporting the development or production of chips covered by the restrictions.

Under the new rule, U.S. nationals in Chinese chip-related companies will face a choice between losing U.S. citizenship or quitting their jobs in China.

For years, U.S. export controls to China have only been on technologies, products, companies, or organizations. The new ban, however, extends export controls to individual U.S. citizens and green card holders for the first time. It is considered to be the most restrictive ban on China’s semiconductor industry to date.

The measure also restricts the supply of equipment and tools to any factory in China that manufactures or develops DRAM memory chips below 18nm, NAND flash memory chips with 128 layers or more, and logic chips under 16 nm or 14 nm, depending on the architecture. This move applies to the fabs of Samsung and SK Hynix in mainland China.

Although the one-year grace period given to Samsung and SK Hynix makes the production from their fabs in mainland China temporarily unaffected by the ban, it is unclear whether the exemption licenses can still be obtained after one year.

In this regard, Kevin Noh, president and chief marketing officer at SK Hynix, said in late October in a conference call discussing the third-quarter financial report, that “as a contingency plan, [the company] is considering selling fabs, selling equipment, or transferring them to South Korea.”

Noh added that under the new U.S. regulations, SK Hynix’s Wuxi plant operation in China will be subject to many restrictions, and “it cannot be unaffected.”

After the new U.S. export controls were issued, U.S. chipmaking equipment suppliers Applied Materials, Lam Research, and KLA announced that they would stop supplying equipment to China. Dutch supplier ASML also announced the withdrawal of staff dispatched to China.

Risks, New Opportunities, Amid US-China Chip Tensions

According to Taiwan’s DigiTimes, Apple Inc. is looking to replace Chinese memory chip supplier Yangtze Memory Technologies (YMTC) with Samsung.

New Apple iPhone 14s on display at an Apple store on Sept. 16, 2022, in Wuhan. Hubei, China. (Getty Images)

The Nov. 21 report said Apple has quietly suspended plans to purchase 128-layer 3D NAND flash memory from Chinese supplier YMTC for iPhones targeting the Chinese market, suggesting that Samsung will become the alternative supplier starting in 2023.

According to Reuters, China’s top memory chipmaker YMTC and 30 other Chinese companies could be added to a trade blacklist as soon as Dec. 6, citing a U.S. Commerce Department official.

The DigiTimes report said that Apple initially planned to buy 128-layer 3D NAND flash memory from YMTC due to it being about 20 percent cheaper than its competitors. However, Apple gave up its plan to purchase from YMTC due to the recently imposed sanctions aimed at the Chinese chip industry.

The report suggests that Apple now plans to purchase 176-layer NAND flash memory produced by Samsung’s Xi’an plant in China for new products, likely the iPhone 15.

Apple has long obtained DRAM memory chip supply primarily from Samsung, while it has obtained NAND flash memory from Japan’s Kioccia and South Korea’s SK Hynix.

With Washington’s speedy efforts to hamstring China’s semiconductor development, South Korean chipmakers that rely heavily on the Chinese market will inevitably be impacted. However, the increasingly geopolitical nature of the semiconductor industry is widely seen as a risk but also an opportunity for chipmakers.