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Samsung’s Japanese suppliers committed to keeping ties

Political discord risks future of Samsung's semiconductor coalition

Samsung Electronics is still sourcing Japanese high-tech materials, even if Japanese and South Korean companies are engaged in tighter export controls.

Samsung–a world market leader in the development of state-of-the-art semiconductors, relies on Japanese materials, and Japanese firms have no reason to drop their high-quality customers. In other words, there remain uncertainties about the future of the so-called Japan-South Korea semiconductor coalition, as Samsung’s dependence on Japan is underlined in political conflict.

On 1 July, the Japanese government announced that it would tighten export controls on materials needed to produce semiconductors and displays in South Korea. Vendors from the manufacturers of such materials and other suppliers were flooded with questions from Samsung’s procurement department on the same day.

The South Korean tech giant wanted to know whether Japan was prohibiting exports and what the Japanese government was thinking.

“We’re very interested in what the government of Abe will do next,” said a senior Samsung officer who asked not to be appointed. The Japanese manufacturers-who had been informed in advance by the Ministry of Commerce, Trade and Industry-told Samsung that the Ministry will issue permits, as long as documents are available and that they will not suspend Samsung’s operations.

However, Samsung sent the procurement team from the headquarters to Japan to visit individual suppliers and check the volumes of production and inventories.

Samsung relies heavily on Japanese manufacturers to obtain materials used to manufacture chips. Of its top 100 suppliers, 23 are Japanese companies and only the second to 39 in South Korea.

Including Sumitomo Chemical, SUMCO, Taiyo Nippon Sanso and production equipment manufacturers such as Tokyo Electron, Canon and Ulvac are the 23 companies.

South Korean suppliers, amongst other items, offer semiconductor substrate packages, microcontroller units and blank masks.

“Samsung is well aware of the risk of changing suppliers,” said a managing director of a Japanese chip manufacturer. Semiconductor production takes between two and three months and involves thousands of steps. Subtle “properties” of the same materials differ for each manufacturer. Changing suppliers may lead to lower rates of return.

Japanese companies are also significant suppliers of core display and battery materials.

“It’s not easy for Samsung to switch materials,” said Yutaka Shibata, Japanese chemical maker vice-presidential executive officer Asahi Kasei.

“We continue to cooperate with our suppliers to minimise production problems,” said Samsung Electronics spokesman to Nikkei on Friday. Japanese semi-conductive suppliers have insisted that Samsung’s leaders are committed to supplying Japanese materials.

Even though South Korean conglomerates ‘ senior management was called together by President Moon Jae-in for a hastily arranged meeting on 10 July, Samsung Electronics Vice President Lee Jae-yong was going on business visits to Japan. He met with managers of equipment and materials to call for cooperation between Japanese and South Korean enterprises even in the context of political conflicts.

In areas like TV, mobile phone, semiconductor and display, Samsung has overtaken Japanese electronics manufacturers. In its effort to grow, the South Korean giant has strictly adopted a management policy to “Learn from Japan.”

Lee Byung-chul Founder, Lee Kun-Hee his son, and Lee Jae-yong his grandson all studied in Japan. The three “snaps contracts with Japanese companies,” said a former manager of an electronics company from Japan.

Following the establishment of a black and white television company with Japan’s Sanyo Electric in 1969, Samsung moved from sugar manufacturing to electronics. Since then, it has become a haunt, working with Japanese manufacturers such as NEC, Toshiba, Toray Industries, Sony and Sumitomo Chemical. The South Korean company wishes to thank Sanyo at its headquarters in Suwon, south of Seoul, at the Samsung Innovation Museum.

“It is difficult for South Korean companies, which tend to seek short-term results, to conduct fundamental research in the long run,” a Japanese engineer who works in Samsung said. It is also cheaper for Samsung to purchase materials than to develop them on its own, which has improved its procurement capacity.

Japanese suppliers also have strong reasons for putting Samsung first. With Japanese electronics manufacturing companies either stopped or declined, Samsung saw it as an opportunity to become the world’s largest equipment manufacturer, generating 8 trillion yen ($74 billion) in semi-conductor sales and 3 trillion yen in displays.

“Samsung has thus become the largest customer for Japanese suppliers,” said an official from a Japanese equipment manufacturer.

For hard parts and materials, Samsung depends on outside sources, whereas Japanese suppliers do not want to lose their biggest customer. Thus, at least for now, the interdependence between Samsung and Japanese suppliers is healthy.

The Japanese government’s tighter export controls reacted sharply from the government of South Korea and the population that criticised the move as’ economic retaliation’ because of the strong perception that Japan’s high reliance on delicate parts and materials poses a risk to South Korea. Samsung, however, has no choice but to explore alternative suppliers ‘ procurement.

Last month, the Japanese government began issuing export permits for three items subject to stricter export controls.

However, no progress has been made towards improving strong relations between the two countries. South Korea recently decided to withdraw an intelligence-sharing deal from the bilateral General Security of the Military Information Agreement, or GSOMIA.

The lack of intergovernmental dialogue, business circles in neighbouring countries have been tightly lifted. However, even the division of labour that was built by Samsung and Japanese suppliers for coexistence and co-prosperity could crumble if excessive provocative actions continue.

Japanese Trade Minister Isshu Sugawara said on Friday that Tokyo would hold discussions in South Korea with Seoul about the move by Japan to enhance export controls, agreeing to Seoul’s application for consultations as part of the World Trade Organization dispute settlement process. However, the talks are unlikely to solve the problem and will be prolonged.

The political confrontation between Japan and South Korea, especially in the semiconductor industry, will likely benefit China on the economic front.

With the China objective of supremacy in high-tech industries, including semiconductors, Samsung appears to be a goal for China’s companies sooner or later to overtake.

And Samsung can’t afford to stand temporarily in the face of a Chinese rival’s assault–a few trillion yen annually–on the initiative of the Chinese administration.

The “China shift” is now underway among manufacturers of chipmaking equipment. Semiconductor building projects requiring capital investments of approximately 1 billion yen are emerging in China one after the next, making the country a promising equipment manufacturer’s market.

Japanese companies also “send hundreds of sales staff to China to continue business discussions in various parts of the country on their long-term business trips,” said the Tokyo Electron official.

Chinese manufacturers will probably need some time to produce advanced semiconductors stably. But there is no doubt that in the future, Japanese manufacturers of components and materials will also make “a shift in China.”

Chinese firms have overtaken their South Korean competitors in terms of capacity for liquid crystal panels. Many industry officials say that the semiconductor industry will have the same thing.

“When barriers emerge between Japan and South Korea, China’s semiconductor industry, whose aim is to achieve supremacy in every sector of materials, equipment and final goods, is benefiting,” warned Ahn Ki-hyun, the senior official in the Korea Semiconductor Industry Association. But South Korean companies are becoming increasingly susceptible to being overwhelmed by Chinese competitors.

Samsung accounts for 20% of the overall exports of South Korea. It also accounts for 20 per cent of the country’s total market capitalisation. Its decline would mean the global downturn of the economy of South Korea.

The South Korean government, now worried by its economic downturn, is also unlikely to allow political confrontation to continue.

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