South Korea's Chip Sector Swaps Japanese Reliance for Chinese Raw Material Risk
Industry leaders warn that 'half-localization' of semiconductor materials has left the nation vulnerable to Beijing's export controls.
South Korea's semiconductor industry has inadvertently traded one strategic vulnerability for another, shifting its dependence from Japan to China. Despite years of aggressive efforts to localize critical materials, the sector remains precariously reliant on Chinese raw materials for essential chip production.
Industry leaders are now sounding the alarm over what they term "half-localization." While South Korean firms have successfully developed the ability to refine high-purity materials domestically, they continue to import the base raw materials from China. Soulbrain CEO Park Young-soo noted that while high-purity hydrofluoric acid has been localized, 97% of its raw material, anhydrous hydrofluoric acid, is still imported from China. Park described this dynamic as a risk at the national security level, stating that the last five years of localization merely shifted reliance from Japan to China.
The Strategic Bottleneck
The dependence is most acute in minerals with no known substitutes. South Korea relies on Chinese imports for over 90% of its tungsten, a critical component used to create electrical signal pathways (WF6) in semiconductors. Beyond tungsten, the industry is absolutely dependent on Chinese supplies of critical rare earths, including dysprosium for thin-film deposition and yttrium used in the coating of etching equipment.
China has already begun leveraging this dominance through a dual pricing structure for tungsten, charging Korean and Japanese companies significantly higher prices than those offered to domestic Chinese firms. Furthermore, Beijing has implemented export permit systems for these critical minerals, leading to supply delays and increased costs for Korean manufacturers.
The Cost of Security
This shift follows a period of intense localization efforts triggered by Japan's 2019 export restrictions. However, the current crisis highlights a systemic "price trap." Domestic alternatives for raw materials, such as anhydrous hydrofluoric acid, are estimated to be 30% to 50% more expensive than Chinese imports due to higher labor and environmental costs. This price gap discourages companies from diversifying their supply chains organically, making the industry susceptible to geopolitical volatility.
Because semiconductors are the cornerstone of the South Korean economy, absolute dependence on a geopolitical competitor for non-substitutable materials means that political disputes could lead to immediate industrial halts. The current vulnerability is exacerbated by China's broader trend of expanding export controls on minerals like gallium, germanium, and graphite in response to U.S.-led semiconductor restrictions.
Future Outlook
To mitigate these risks, industry experts suggest that the government and corporations may need to provide strategic subsidies to offset the higher cost of non-Chinese raw materials. The focus is now shifting toward finding entirely new sources of supply or investing in the expensive infrastructure required for full-cycle domestic production. Until these alternatives are established, the South Korean chip sector remains exposed to the whims of Beijing's trade policy.