A deepening trade quarrel between Japan and South Korea is rattling smartphone makers

Intertwined relationship.
Intertwined relationship.
Image: REUTERS/Kim Hong-Ji
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The world’s other trade spat—the escalating row between Japan and South Korea, the United States’ closest allies in Asia—is intensifying, and smartphone makers and their customers are likely to be among the first batch of victims.

Japan’s decision to drop South Korea from a list of favored economic partners goes into effect Wednesday (Aug. 28), after which Japanese companies will have to go through additional procedures to export more than 800 “strategic materials” to South Korea, potentially delaying such exports by weeks or even months. These include integrated circuits, capacitors, computers, robots and telecoms transmission equipment, all important for its neighbor’s high-tech economy.

The move marks an escalation of trade tensions that began when Japan in July restricted exports to Korea of three chemicals crucial for producing memory chips and displays for consumer electronic devices—among South Korea’s top exports—citing national security concerns. In retaliation, South Korea last week ended an intelligence-sharing agreement with Japan, which could jeopardize US strategy in the region. Relations between the two countries began deteriorating last year, when a Korean court ordered Nippon Steel, Japan’s largest steelmaker, to pay compensation for World War II forced labor to a surviving worker, and to the families of three other Koreans, a ruling Japan has disputed.

Japan’s moves could bring serious disruption to the supply chains of some of corporate Korea’s crown jewels including Samsung, the world’s largest smartphone maker, and other electronics firms such as SK Hynix—as well as the companies that rely on them, which include Apple and Huawei. Samsung and SK supplied over 60% of memory chips globally (paywall) in 2018, while South Korean firms also supplied over 90% of smartphone screens. Slower production of these components could make them pricier.

“Ultimately, some of the extra cost phone makers have to pay for components will be passed on to consumers, but the biggest losers are certainly Korean companies, especially Samsung,” said Bryan Mercurio, an expert on international trade law at the Chinese University of Hong Kong. “Overall, the row is a negative for the world economy, which is already slowing down.”

Unequal relationship 

Japan occupied the Korean Peninsula from 1910-1945, and its colonial legacy included wartime oppression that forced Koreans into prostitution and to work in factories in Japan. The two countries normalized their relationship with a 1965 treaty that saw Japan give hundreds of millions of dollars in loan and aid to its neighbor. Since then, South Korea has built up a large trade deficit with Japan—it reached $24 billion last year, with high-tech products driving the imbalance.

The unequal trade relationship between the two nations is probably best illustrated in the smartphone industry. Around 90% of the world’s supply of fluorinated polyimide and resists, and about 70% of hydrogen fluoride—the three chemicals affected by the July restrictions—are produced by Japan, making it extremely difficult for South Korean companies to find alternative suppliers for these materials.

“Japan’s dominant position in supplying these chemical products globally means in the near term, it’ll be hard for Korean companies to find other sources for these highly specialized materials. Over time, they might be able to find other suppliers, but that could take three to four years,” said Rajiv Biswas, Asia Pacific chief economist at research firm IHS Markit.

The likely options for alternative suppliers could be from places like the US, Taiwan, the European Union, China and Canada, which have some sophisticated manufacturers of such components, he said. Already, there have been reports that Samsung is looking at sourcing supplies from Belgium and China.

“In the next five years, Korean companies will try to reduce their purchasing of Japanese products because of this new situation,” said Biswas.

The restrictions come at a particular bad time for South Korea, whose exports have been declining for eight straight months amid a US-China trade war. The most recent data show exports fell 13% during the first 20 days of August, with semiconductor sales plunging by 30%, according to the Korea Customs Service.

Bad timing for Samsung

In September, Samsung plans to launch the Galaxy Fold, heralded as the world’s first mass-market foldable phone—the rollout was delayed from April after reviewers experienced problems with the screen. Japan’s moves have raised questions about whether the Galaxy Fold will be affected.

Samsung’s mobile division chief told Korean media it doesn’t anticipate a disruption to the launch of the Galaxy Fold, or to another new model, the Galaxy Note 10, as the company has stockpiled materials and parts for up to four months, but added that Samsung would be affected by a long dispute. The company is also reportedly trying to adjust the manufacturing timeline for a component for the Note 10. Samsung didn’t reply to questions from Quartz for this story.

In terms of the impact on other firms, Samsung is the largest supplier in the semiconductor industry—and memory sales contribute 90% of its revenues, according to research from Gartner. In 2018 it accounted for 44% and 35%, respectively of the global sales of dynamic random-access memory chips (DRAM) and NAND flash, two of the most commonly used chips for smartphones, followed by players like Intel,  SK Hynix, and Micron Technology. Apple buys OLED displays, NAND flash, and DRAM from Samsung, as it’s one of the few suppliers that can manufacture the components in the large quantities required for iPhones.

Approvals under the new restrictions are slowly starting to happen. Two weeks ago, Japan approved the first shipment of chemicals  after the new restrictions to Samsung Electronics for use in making processors for other companies, Nikkei reported, with another batch approved last week. But it’s unclear how long batches will typically take to be cleared going forward.

SK Hynix declined to comment.

Global impact

The influence of the trade row goes far beyond Korean tech companies, of course. South Korean Moon Jae-in’s ruling Democratic Party called Japan’s removal of Korea from the white list a “full-scale economic war on our country” in a tweet in early August.

South Koreans have vowed to boycott a range of Japanese goods ranging from Hello Kitty dolls (paywall) to cat food, advocating for a replacement of the products with Korean ones. In addition, the number of Korean tourists to Japan also fell to the lowest point in nearly a year in July. Seoul is also considering putting export restrictions on its neighbor for “sensitive strategic goods,” such as those related to making weapons or key machinery.

For other economies, this new trade tiff is also a headache. It comes at a time when the ongoing trade war between China and the US, which saw the US slap tariffs on hundreds of billions of dollars of Chinese goods starting last year, shows every sign of escalating. The IMF warned in May that the impact on global trade, with China retaliating with its own tariffs, could subtract about 0.3 percent of global GDP in the short term.

While the US has said it would not mediate in the dispute between its two closest allies in Asia, China tried to play the role of middleman recently. Last Wednesday (Aug. 21), China’s Foreign Minister Wang Yi hosted his counterparts from Tokyo and Seoul, urging them to solve their problems through dialogue while offering China’s help as a mediator.

But like the US-China trade war, this one also appears likely to drag on, given that South Korea’s rancor over the Japanese occupation remains deep, while Japan’s stance is that the wartime issues were largely addressed when relations were normalized.

“What Japan wants is probably for Korea to backtrack on its courts’ decisions,” said Mercurio, of the Chinese University of Hong Kong. “But the Korean government is unlikely to make that move as it needs popularity at home. So this row might drag on for a while.”