The economic model of Korea is built around heavy dependence on exports of oil and natural gas, and agriculture has been the primary stay of the national economy for over a decade. While agriculture makes up only a small portion of the overall economy, the services sectors dominate the economy. As with many of the nations in Asia, the distribution channels are skewed towards private sector and the government has become more efficient at promoting the sale of state owned assets. The private sector, particularly entrepreneurs, have also begun to take advantage of technology advances to develop new industries within the country. While this has diversified the industrial structure of Korea, the basic economic model continues to be based on rice and tobacco products that account for about two-thirds of the nation’s total exports.
While this remains a strong majority of exports, the recent slowdown in the Asian growth markets combined with the glut of new goods in the marketplace has resulted in a slowdown in the Korean semiconductor market. While there is still an overabundance of semiconductors due to the high price relative to other resources in the United States, the pricing pressure has resulted in the production of more high end specialty semiconductors coming from Russia and the semiconductor fabrication centers of Japan and Taiwan. In response to the rising supply of these higher priced services, Korean manufacturers are looking for new ways to keep costs down and create a competitive edge. By outsourcing some or all of their semiconductor fabrication to Asia, they can realize significant cost savings.
A Comparison of Korean and Russian semiconductors The common thread running through most of the current outsourcing models is that either the client company in Russia or the client in Taiwan will contract with a middleman to act as a kind of middleman between the parent company in Korea and the assemblers in either China or the Philippines. Often, the actual location of the client’s assembly line is not far away from where the actual semiconductor fabrication takes place in either China or the Philippines. The logic being that since the logic is on a different continent, it needs to be manufactured there. This is the most logical explanation for why a large volume of Chinese and Japanese semiconductors are available for the United States based service provider market.
Over the last two years, we have seen the prices of certain key semiconductors in both China and Russia tumble. As we have noted before, the reason for this is primarily due to the new global economics that are affecting all aspects of business. While the logic behind this is beyond the scope of this article, suffice to say that a large portion of logic chips that power computers are made in the semiconductor factories of China and Russia. As a result of these factory located Asian nations, there has been a nearly ten percent increase in facility investment in these countries over the last two years alone. As the logic moves from the U.S. to Asia, the same effects will occur on the pricing of semiconductors.
There are a number of reasons that you may use to predict a rise in the pricing of semiconductors from Korea to the U.S. over the next few years. Perhaps the largest factor will be supply and demand. In terms of supply, Korea has become a major supplier of logic chips due to their recent experience in dealing with small to medium sized businesses in terms of facility investment and manufacturing capacity. Due to their experience, many Korean companies have experienced growth in their operation capacity as well as their ability to meet the demands of customers around the globe. By using logic chips manufactured in Korea to power your computer or other device, you will almost certainly find your pricing in line with that of the rest of the world.
Another driver of price change will be the current supply situation for semiconductors. As we noted above, South Korea is currently the largest manufacturer of logic chips. However, they are experiencing a severe shortage in some key elements of their manufacturing process. Right now, they cannot make the amount of chips that they need to satisfy their customers. If this continues, they could experience a significant loss in revenue and sales as a result.
The last two years Korea has enjoyed a growth in their mobile application and telecommunication applications, to name a few. This growth has translated into a tremendous rise in their automotive sector, which now accounts for around five percent of their entire chip market. If Korea can successfully overcome these obstacles and secure more cell phone and auto industry customers, the sky is truly the limit for their growth as a nation.
In summary, we project an increase in pricing for semiconductors from Korea in the next few years due to an increase in raw material consumption. Our also project that this trend will continue into the following decade due to an increase in semiconductor production capacity. This will impact the auto industry in many different ways including pricing and supply chains. These changes will occur at a rapid pace due to the global chip shortage. It’s a good time to invest in Korean semiconductors.