South Korea’s semiconductor industry is stirring up. Samsung Electronics, the world’s largest supplier of memory chips, announced that its new semiconductor fabrication line in Pyeongtaek, South Korea, has begun mass production. SK Hynix, the developer of the NAND flash memory technology, has joined a consortium to bid for the memory unit of Japan’s Toshiba. Lee In-cheol (이인철), Head of Real Good Economic Institute, joins us today to assess the future of the country’s semiconductor industry. First, let’s talk about the significance of Samsung Electronics’ new semiconductor plant in Pyeongtaek, which began its operations on July 4.

According to data by IT market research company DRAMeXchange, Samsung Electronics’ NAND flash market share stood at 35.4% in the first quarter. The figure is large as it is, but the addition of the semiconductor plant in Pyeongtaek will only widen the gap between Samsung and its rivals. The V-NAND technology increases the storage capacity by stacking the cells vertically. While conventional semiconductors are two-dimensional, the newly developed semiconductors are three-dimensional. Currently, Samsung Electronics is the only company in the world that mass produces the 64-layer V-NAND flash chips. The demand for NAND flash memory chips is expected to skyrocket due to their uses in fields like cloud services, augmented reality technology, and self-driving vehicles. It seems that Samsung Electronics is determined to stay a step ahead of its rivals in laying the foundations in this market in order to become the uncontested top global IT firm.

Samsung Electronics invested 15.6 trillion won into the new plant in Pyeongtaek. At 2.89 million square meters, or about the size of 400 soccer fields, the Pyeongtaek semiconductor plant is the largest individual factory in the world. The factory manufactures the state-of-the-art 64-layer 3D NAND flash semiconductors. Samsung Electronics aims to further solidify its position in the semiconductor memory sector by mass producing the key component of the 4th industrial revolution. The firm is gearing up for the future semiconductor market by making large-scale investments, including injecting an additional 14.4 trillion won into the Pyeongtaek plant by 2021 to add more semiconductor manufacturing lines. Meanwhile, SK Hynix is looking to increase its market share by taking over Japan’s Toshiba.

Toshiba is one of the original developers of NAND flash memory and is currently the second largest maker in the market. Toshiba suffered huge losses after investing in nuclear power plants, and so decided to sell off its semiconductor unit. An international consortium consisting of companies from the US, Japan, and South Korea including SK Hynix, decided to buy the unit for 20 trillion won. SK Hynix is the 4th largest NAND flash memory maker at present, while Toshiba is the 2nd largest. So SK Hynix is hoping to take over Toshiba’s spot. If Toshiba and SK Hynix are able to build a cooperative system, South Korean companies will be the leaders in the NAND flash memory sector. The expectation is that this would allow Korea to further solidify its presence in the semiconductor market.

On June 21, Toshiba selected a consortium consisting of companies from the US, Japan, and South Korea, including SK Hynix, as the preferred bidder for the company’s memory business. If the deal goes through, SK Hynix will be given a big push in the market. It’s also positive that other bidders from Taiwan and China were thwarted, as it means that a technology leak to China has been prevented, as was a potential price drop due to mass production. The Korean semiconductor makers’ advancement is not only leading the country’s exports, but also raising its status in the industry as well.

Korea’s exports rose by more than 15% in the first half of this year, and the biggest driver in this was demand for semiconductors. If it wasn’t for the semiconductor sales, exports as a whole would not have been so positive. What’s more significant for Samsung Electronics is that it is now poised to overtake Intel as the world’s largest semiconductor manufacturer. Intel was the biggest CPU maker, and all PC’s require Intel’s CPU chips. But according to an analysis by Nomura, Samsung Electronics’ semiconductor sales reached 15.1 billion dollars, while Intel’s sales stood at 14.4 billion dollars in the second quarter. For Samsung Electronics, surpassing Intel for the first time since it jumped into the semiconductor business, is an historic milestone. In addition, Samsung’s quarterly operating profit is expected to reach over 12 billion won, which not only surpasses that of Intel, but of Apple as well.

Korean semiconductor makers’ exports set a record in June, with sales reaching over 8 billion dollars in a single month. In the second quarter, Samsung Electronics recorded sales of 60 trillion won and operating profit of 14 trillion won. According to market watchers, this means that Samsung’s second quarter sales will surpass that of Intel, and that its operating profit will be bigger than that of Apple’s. Since reaching the top of the semiconductor market with the release of the Pentium CPU for PCs in 1993, Intel has been the leader in the industry for 24 years. Samsung Electronics’ takeover of this position would not only be historic for the company, but for the country as well. However, there’s no time to relax.

China is trying hard to close its technological gap with Korea by using its enormous capital strength and acquiring global semiconductor companies via mergers and acquisitions. In fact, the Chinese government has recently been aggressively backing up the industry. Tsinghua Unigroup, China's top state chip manufacturer, announced plans to invest about 70 billion dollars to build three new semiconductor plants. Of that, 24 billion dollars will go to the 3D NAND flash chip factory currently under construction in Wuhan. This is a bigger investment than that of Samsung Electronics. Production is scheduled to begin in 2018.

South Korea’s semiconductor industry may be enjoying a boom right now, but China is closing in fast in the race. In China, the government is now at the helm of the semiconductor market, with aims to reduce the massive import costs reaching 300 trillion won per year, and also to stabilize the political situation with job security. The Chinese government also announced plans to invest up to 1 trillion yuan until 2025 so that the ratio of semiconductor chips produced by Chinese companies reaches at least 70%. With the competition heating up, Korea needs more investments and technology to secure its status at the top. At the same time, the industry’s dependence on memory chips must also be resolved.

Korea may be at the top in terms of memory chips, but in the non-memory, or system IC sector, the country’s market share is under 5%. Experts agree that if Korea wants to continue to grow in the semiconductor industry, it must place more emphasis on the system semiconductor industry. System semiconductors are far more widely applicable in 4th industry products, such as Internet of Things, artificial intelligence, and virtual reality devices, as well as self-driving cars. Global semiconductor firms based in advanced nations such as Intel and Qualcomm, for example, have their places carved out in the field. So for Korean companies to become globally competitive, more investments should be made in the industry.

The history of South Korea’s semiconductor industry began in 1965. Starting out with semiconductor assembly, Korea became the 3rd country in the world after the US and Japan to develop the 64K DRAM in 1983, and reached the top of the DRAM market in 1992. In 2013, Korea became the first in the world to commercialize the 3D V-NAND flash memory. With such innovative and bold moves, South Korea should preserve its status as the leader of the semiconductor industry.