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The Other Trade Dispute Disrupting Samsung’s Supply Chain

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While the trade war between the U.S. and China continues to put pressure on some of the largest multinational conglomerates and their supply chains, it’s not the only geopolitical dispute forcing changes in buyer-supplier relationships.

Reuters reported Monday (July 8) that a sudden escalation in a diplomatic disagreement between South Korea and Japan has rattled the South Korean chipmaker market.

Industry executives told the publication that technology giants including Samsung Electronics Co. Ltd. and SK Hynix are working to adjust their supply chain routes and procure materials from markets beyond Japan, instead eyeing vendors in Taiwan and China, according to Park Jea-gun, head of the Korean Society of Semiconductor & Display Technology.

The supply chain disruptions come as Japan announced last it week it would end preferential treatment for exports of photoresists, hydrogen fluoride, and fluorinated polymides to South Korea. Japan will now require exporters to obtain permission whenever they want to initiate a shipment, a process reports said takes about 90 days. Japan remains the global leader in the three materials, reports added, which are used in the semiconductor, chipmaking and smartphone manufacturing process.

Japan exported $144 million worth of the materials to South Korea in the first five months of 2019, reports said.

Samsung Vice Chairman Jay Y. Lee reportedly visited Tokyo over the weekend to discuss how the company could mitigate as much disruption from Japan’s decision as possible, reports said, citing an unnamed Samsung official. SK Hynix declined to comment on the matter.

“These materials, they are not something that we can find at another store or buy quickly,“ one unnamed source at a South Korean chipmaker said. “Even if we find alternatives to Japan, we have to conduct tests to make sure the quality is good enough to make chips at a high yield.”

Due to the volatility of the materials affected, reports noted that stockpiling is not a viable option for the firms. South Korean chipmakers are reportedly worried that Japan could initiate an outright ban on exports.

Tokyo has also reportedly threatened to remove South Korea from its “white list,“ a list of countries that enjoy minimum trade restrictions, according to reports.

Chipmakers have several options to manage the disruption. Reports said one Japanese supplier, JSR Corp., is said to be exploring supplying South Korean customers from its Belgium plant. Tokyo Ohka Kogyo operates a plant in South Korea, though a spokesperson for the supplier said that the plant itself must source materials from Japan.

South Korean firms are also exploring suppliers in other markets as well as investments in domestic production of the raw materials, though in the near-term, analysts warned that there is no easy solution considering the complexity of the market.

The Japan-South Korea dispute is only the latest in a long line of sweeping changes to global trade relationships that are forcing businesses to explore new vendors and routes of obtaining what they need.

Earlier this year a report from S&P Global Market Intelligence’s trade data unit Panjiva highlighted the drop in Chinese imports among some of the largest U.S. retailers including Home Depot, Target and IKEA, with companies turning to other markets to fulfill orders on goods like refrigerators.

“A major factor in that shift has been a rearrangement in supply chains by Samsung Electronics and LG Electronics,” Panjiva’s report said, noting that Chinese refrigerator imports dropped by more than 24 percent in the first quarter of the year, while imports from South Korea and Mexico increased by more than 30 percent.

The auto industry has also been adjusting its buyer-supplier relationships with tire imports shifting from China to Vietnam and South Korea.

The “new normal” of supply chain uncertainty, as Harvard Business School Professor Willy Shih wrote in a Forbes article earlier in the year, is “driving a major rethink of global supply chains.”

Regardless of any resolution between the U.S. and China, “some major changes are already afoot, and … these promise to change the shape of trade between the two countries,” he wrote.

As South Korea’s Samsung Electronics knows, the U.S.-China dispute is not the only trade disagreement creating these long-lasting changes, with global traders all over the globe being warned to keep on their toes and be ready for more geopolitical disruption.

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