South Korean companies produce 70% of the world’s DRAM, about a half of 3D NAND, and a significant share of OLED and LCD displays on the planet. Meanwhile, Japanese suppliers make 70% - 90% of three materials crucially required for manufacturing these components. As the two countries have a multi-decade-long dispute over compensation for World War II, Japan recently implemented new export rules that could disrupt supply of the important materials to South Korea, which in turn could hurt supply of DRAM, NAND, and various types of displays.

Japan-based JSR, Showa Denko (SDK), and Shin-Etsu Chemical control 70% - 90% of the global supply of polyimides (used both for LCDs and OLEDs), photoresists, and high-purity hydrogen fluoride (used to make chips, such as LSI, DRAM and NAND devices). Starting July 4, Japanese producers must get approval for individual exports of these chemicals to South Korea. Export reviews may take up to three months, whereas South Korean companies typically only keep one to two months' worth of materials in stock.

If South Korean companies cannot procure enough chemicals from their Japanese partners or their competitors in other countries, they will have to curb production, which will have a drastic effect on global supply of DRAM, 3D NAND, chips by Samsung Foundry, LCDs, and OLEDs.

According to Nikkei and Reuters, SK Hynix only has enough materials to keep production going in the short-term future, or for the next couple of months. Samsung is reportedly trying to deal with the situation, but nothing is clear at this point. Both South Korean giants have manufacturing plants in China, which could partially offset a potential disruption of supplies by domestic fabs. Meanwhile, LG Display and Samsung Display only make their products in South Korea and have to source fluorinated polyamide from Japan (despite the fact that LG controls LG Chem, the largest chemical company in South Korea).

The heart of the conflict itself lies with World War II, where as part of the Japanese occupation of Korea, Japan used forced South Korean labor at many of its factories, with the survivors demanding compensation. Late last year South Korean court ordered Japan’s Nippon Steel & Sumitomo Metal as well as Mitsubishi Heavy Industries to pay compensations to South Korean plaintiffs, verdicts criticized by Japan as ‘unthinkable’ because the issue was settled in 1965.

In addition to new export controls, Japan reportedly plans to exclude South Korea from the whitelist of 27 friendly countries. If this happens, export of all items that can be potentially used for military applications will require appropriate government approvals, which will further slowdown business between the two countries.

Components made in South Korea are then used by various companies across the world, including Apple, Dell, HP, Lenovo, Panasonic, Sony, and so on. As a result, if supply is indeed disrupted, Japanese companies will be hurt too.

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Sources: Nikkei Asian Review, Reuters, OLED-Info

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  • yeeeeman - Friday, July 5, 2019 - link

    Simple solution, they will make stocks for longer periods.
  • basroil - Friday, July 5, 2019 - link

    I don't think you realize just how expensive these things are and how little cash the companies have. A typical fab is cash flow negative for most of the year, and typically only make money at the close of a quarter/ end of year. They can barely afford the next quarter's material costs until they are almost out of material, so the only way for them to stock more is to charge more. Want to have your next CPU cost 20% more?

    Also don't forget that most of this stuff is volatile and has a very short shelf-life before the container introduces enough contaminants to throw off production yields.
  • vanilla_gorilla - Friday, July 5, 2019 - link

    They won't have any problem borrowing the cash. These companies have excellent credit and produce the majority of these products for a world wide market. This is about as safe as investment gets from the lender's perspective.
  • basroil - Friday, July 5, 2019 - link

    Unfortunately they are already very much in debt since systems don't come cheap and even a low end etcher sets you back a million. For example, SK Hynix, which will be thrashed by this new situation, already has total debt to equity of 15.5 and even it's short term liquidity (which would be needed for this type of transaction) is 1.5. And these numbers are better than average since SK Hynix has other assets and industries which keep it more stable. From a bank's perspective it doesn't make sense to invest in an industry that can already barely make debt payments on a regular schedule
  • Azethoth - Saturday, July 6, 2019 - link

    Read his post. Who cares if they can finance and stockpile more if they cannot actually be stockpiled that long.
  • quadibloc - Friday, July 5, 2019 - link

    The United States should simply inform Japan that this defiance of countries against which it committed aggression is unthinkable, suspend the operation of Japan's government, and place it under a joint U.S.-South Korean-Taiwanese occupation. After a few years, when Japan has its independence returned, it will understand that, as a nation that committed a horrible crime of aggression, it has no place to speak against the commands of the democracies among its victims.
  • porcupineLTD - Friday, July 5, 2019 - link

    China should do the same to the US for what they did to them in the second opium war.
  • Sttm - Friday, July 5, 2019 - link

    They can take it off the bill they owe us for ending a war they would have lost against Japanese. Or nation states can stop acting like petty children and dragging up event that had been settled for over 50 years!
  • porcupineLTD - Friday, July 5, 2019 - link

    "Or nation states can stop acting like petty children and dragging up event that had been settled for over 50 years!" This was my point.
  • ballsystemlord - Friday, July 5, 2019 - link

    Never heard of that. Do you have a citation?

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