Exterior the city of Yongin, 40 kilometres south of Seoul, a military of diggers is getting ready for what South Korea’s president has described as a worldwide “semiconductor struggle”.
The diggers are transferring 40,000 cubic metres of earth a day, slicing a mountain in half as they lay the foundations for a brand new cluster of chipmaking services that can embody the world’s largest three-storey fabrication plant.
The 1,000-acre web site, a $91bn funding by chipmaker SK Hynix, will itself solely be one a part of a $471bn “mega cluster” at Yongin that can embody an funding of 300tn gained ($220bn) by Samsung Electronics. The event is being overseen by the federal government amid rising anxiousness that the nation’s main export business will probably be usurped by rivals throughout Asia and the west.
“We’ll present full help, along with SK Hynix, to make sure that our corporations gained’t fall behind within the international chip cluster race,” South Korea’s business minister Ahn Duk-geun informed SK Hynix executives throughout a gathering on the Yongin web site final month.
Most business consultants agree the investments at Yongin are required for South Korean chipmakers to keep up their technological lead in innovative reminiscence chips, in addition to to satisfy booming future demand for AI-related {hardware}.
However economists fear that the federal government’s dedication to double down on South Korea’s conventional progress drivers of producing and enormous conglomerates betrays an unwillingness or incapability to reform a mannequin that’s displaying indicators of operating out of steam.
Having grown at a mean of 6.4 per cent between 1970 and 2022, the Financial institution of Korea warned final yr that annual progress is on target to sluggish to a mean of two.1 per cent within the 2020s, 0.6 per cent within the 2030s, and to begin to shrink by 0.1 per cent a yr by the 2040s.
Pillars of the previous mannequin, similar to low cost power and labour, are creaking. Kepco, the state-owned power monopoly that gives Korean producers with closely subsidised industrial tariffs, has amassed liabilities of $150bn. Of the opposite 37 OECD member nations, solely Greece, Chile, Mexico and Colombia have decrease workforce productiveness.
Park Sangin, professor of economics on the graduate faculty of public administration at Seoul Nationwide College, notes that South Korea’s weak point in creating new “underlying applied sciences” — versus its energy in commercialising applied sciences like chips and lithium-ion batteries invented within the US and Japan respectively — is being uncovered as Chinese language rivals shut the innovation hole.
“Wanting from the surface, you’d assume that South Korea is extraordinarily dynamic,” says Park. “However our financial construction, which relies on catching up with the developed world via imitation, hasn’t essentially modified because the Seventies.”
Worries about future progress have been exacerbated by an impending demographic disaster. Based on the Korea Institute of Well being and Social Affairs, the nation’s gross home product will probably be 28 per cent decrease in 2050 than it was in 2022, because the working age inhabitants shrinks by virtually 35 per cent.
“The Korean economic system will face large challenges if we stick with the previous progress mannequin,” finance minister Choi Sang-mok informed the Monetary Occasions earlier this month.
Some hope that the anticipated international growth in AI will rescue the Korean semiconductor business, and maybe even the Korean economic system at giant, by providing options to the nation’s productiveness and demographic issues.
However sceptics level to the nation’s poor file in addressing challenges starting from its plummeting fertility charge to its outdated power sector to its underperforming capital markets.
That’s unlikely to enhance within the close to future. Political management is break up between a leftwing-controlled legislature and an unpopular conservative presidential administration, with the victory of leftwing events in parliamentary elections earlier this month elevating the prospect of greater than three years of gridlock till the following presidential election in 2027.
“Korean business is struggling to maneuver on from the previous mannequin,” says Yeo Han-koo, a former South Korean commerce minister now on the Peterson Institute for Worldwide Economics. “It hasn’t labored out what comes subsequent.”
One of many explanation why it’s proving so exhausting to reform the “previous mannequin”, say economists, is as a result of it has been so profitable.
The achievements of South Korea’s state-guided capitalism, which took it from an impoverished agrarian society to a technological powerhouse in lower than half a century, have come to be referred to as the “miracle on the Han River”. In 2018, South Korea’s GDP per capita measured at buying energy parity surpassed that of its former colonial occupier, Japan.
Seungheon Tune, managing companion of consultancy McKinsey’s follow in Seoul, notes that South Korea made two nice leaps — one between the Nineteen Sixties and the Nineteen Eighties, when the nation moved from primary items to petrochemicals and heavy business, and the second between the Nineteen Eighties and 2000s, when it moved to high-tech manufacturing.
Between 2005 and 2022, nonetheless, just one new sector — shows — entered the nation’s listing of prime ten export merchandise. In the meantime, South Korea’s lead in a variety of vital applied sciences has dwindled. Having led the world in 36 of 120 precedence applied sciences recognized by the Korean authorities in 2012, by 2020 that quantity had dropped to simply 4.
Park says the nation’s main conglomerates, or chaebol, lots of which at the moment are overseen by the third era of their founding households, have drifted from a “progress mindset” born of starvation in the direction of an “incumbent mindset” born of complacency.
He argues that the current mannequin reached its apogee in 2011, after a decade throughout which Korean tech exports had been pushed by the associated twin demand shocks of the rise of China and the worldwide know-how growth, in addition to by large investments by Samsung and LG to grab management of the worldwide show business from their Japanese counterparts.
Since then, nonetheless, Chinese language tech corporations have caught up with their Korean rivals in virtually each space besides essentially the most superior semiconductors, which means that Chinese language corporations that had been as soon as clients or suppliers have change into rivals. Samsung and LG are preventing for survival within the international show business they dominated only a few years in the past.
Park provides that most of the headline-grabbing good points made by the main conglomerates have come on the expense of their home suppliers, who’re subjected to cost squeezing via unique contractual relationships.
The result’s that small and medium enterprises, which make use of greater than 80 per cent of the South Korean labour drive, have much less cash to put money into their staff or infrastructure, exacerbating low productiveness, slowing innovation and stifling progress within the companies sector.
“The rationale was once that the chaebol ought to be sheltered from disruption at house to allow them to deal with disrupting rivals overseas,” says Park. “However now they’re the incumbents, they’re each stifling innovation at house and extremely weak to disruption themselves.”
The nation’s two-tier economic system, wherein in accordance with Park virtually half of the nation’s GDP was delivered by conglomerates that employed simply 6 per cent of South Koreans in 2021, additionally feeds social and regional inequalities, which in flip feeds spiralling competitors amongst younger South Koreans for a small variety of elite college locations and high-paying jobs in and round Seoul.
That competitors helps drive down the nation’s fertility charge even additional as younger Koreans wrestle with mounting educational, monetary and social burdens. The nation has the widest gender pay hole and the best suicide charge within the OECD.
South Korea additionally has one of many highest charges of family debt as a proportion of GDP within the developed world, in accordance with the Institute of Worldwide Finance. The common newly-wed couple in South Korea has mixed money owed of $124,000.
Whereas South Korea’s authorities debt to GDP is comparatively low by western requirements, at 57.5 per cent, the IMF forecasts that it’s going to triple over the following 50 years within the absence of drastic pension reforms. Forty-six per cent of South Koreans are projected to be over the age of 65 by 2070, and the nation already has the best charge of aged poverty within the developed world.
“Slowing progress has fed the declining delivery charge, which can result in even slower progress,” says Tune of McKinsey. “We’re at risk of getting caught in a vicious circle.”
The Yongin mega cluster illustrates South Korea’s problem in sustaining an financial mannequin that was first developed at a time when the nation was a lot poorer and fewer democratic.
The challenge was introduced in 2019, however was delayed for a number of years as a consequence of wrangles over building permits and the location’s water provide. As soon as the primary cluster is accomplished in 2027 — extra are deliberate for later — it’s going to face a scarcity of certified labour. With out a adequate provide of renewable power, and and not using a bipartisan consensus on constructing new nuclear energy vegetation, it’s unclear how the cluster will probably be powered.
Regardless of the uncertainties that encompass it, the plan displays confidence that an anticipated growth in demand for AI-related {hardware}, together with the Dram reminiscence chips wanted for giant language fashions, will justify the titanic investments. Shares in SK Hynix have greater than doubled over the previous yr amid investor pleasure over its “excessive bandwidth reminiscence” chips used with Nvidia’s innovative processors.
Ahn Ki-hyun, govt director of the Korea Semiconductor Business Affiliation, says the nation must press on with the Yongin challenge as potential rivals are making their very own giant investments.
He singles out the US and Japan’s efforts to revive their very own chipmaking capabilities with beneficiant subsidies. “We may lose our standing as a chipmaking powerhouse if our corporations proceed to construct vegetation overseas, but when services are concentrated in our personal nation, our competitiveness will improve,” he says.
Final week, Samsung introduced a $45bn funding in Texas to satisfy anticipated AI-related chip demand, whereas SK Hynix is constructing a excessive bandwidth reminiscence facility in Indiana.
In the long run, nonetheless, executives fear about US rivals absorbing Korean knowhow, in addition to the danger that the proliferation of chip clusters all over the world will result in continual oversupply and inefficiencies that would additional undermine profitability.
Samsung’s Texan investments, which have benefited from as much as $6.4bn in federal subsidies from Washington, additionally spotlight how the Korean authorities is struggling to match the incentives on provide in different nations.
Some see within the coming AI period a chance for South Korea to carry its sights past manufacturing and the preservation of its largest gamers.
Sunghyun Park, chief govt of AI chip design start-up Rebellions, notes the nation already has capabilities in three of the 4 pillars wanted for AI — logic, reminiscence, and cloud service suppliers — and now has the chance to safe reciprocal entry to the world’s most refined AI algorithms, the fourth pillar.
“Our energy in {hardware} is essential, but when we’re to progress we have to transfer up the worth chain into design and software program,” says Park. “Which means investing our cash in strategic partnerships with the makers of the world’s main giant language fashions.”
Park’s argument resonates with those that fear that South Korea’s continued emphasis on manufacturing and {hardware} — each within the chip sector and past — will show unsustainable as prices proceed to rise.
However Inseong Jeong, a former SK Hynix engineer and creator of The Way forward for Semiconductor Empires, a e book concerning the Korean chip business, says the nation ought to deal with its present strengths. “The world will at all times want {hardware}, and the world will at all times want chips.”
He provides that by remaining on the slicing fringe of chip manufacturing, Korean corporations will probably be extra prone to profit from future breakthroughs in AI.
“The moat between {hardware} and software program is tough to cross, however it works each methods,” says Jeong. “For instance, our reminiscence chip corporations could be the primary beneficiaries of a breakthrough whereby AI chips would extra intently resemble the workings of a human mind. There aren’t any ensures that AI will run on Nvidia GPUs eternally.”
Some observers regard warnings about South Korea’s financial future as overblown, noting that many western nations bitterly remorse abandoning the form of superior manufacturing base that Seoul has managed to protect.
The “tech struggle” between the US and China, they argue, is enjoying into Korean palms as Chinese language rivals within the chip, battery and biotech sectors are restricted or barred from entry into rising western markets, whereas concern about Taiwan’s safety feeds demand for Korean alternate options.
South Korean corporations in areas starting from defence and building to prescription drugs, electrical autos and leisure, have proven themselves to be more proficient than lots of their western counterparts in decreasing their publicity to the Chinese language market and searching for out progress in south-east Asia, India, the Center East, Africa and Latin America.
The Financial institution of Korea has additionally stated that essentially the most doom-laden situations relating to the nation’s demographic disaster and progress prospects could be alleviated by bringing the nation as much as the OECD common on a variety of metrics, together with city inhabitants focus and youth employment.
However others argue that whereas there may be a lot that South Korea may and may do to alleviate its issues, its file on reform is poor.
Spending on non-public tuition continues to climb as competitors for college locations grows fiercer, whereas the fertility charge continues to fall. Pension, housing and medical sector reforms have stalled, whereas long-standing campaigns to curb the nation’s dependence on the conglomerates, enhance renewables, increase company valuations, shut the gender pay hole, and make Seoul a number one Asian monetary centre have all made little headway.
However finance minister Choi retains his religion that the nation’s economic system could be reformed, insisting that “dynamism is embedded within the Korean DNA”.
“We have to redesign insurance policies to unleash that financial dynamism once more,” says Choi. “However the miracle isn’t over.”
Further reporting by Tune Jung-a
Information visualisation by Keith Fray
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