South Korea, explained.
A SK Hynix memory module (SeongJoon Cho/Bloomberg via Getty Images)
South Korea rides the AI boom – unevenly
The economy has become more dependent on a handful of chipmakers, not less.
South Korea, explained.
A SK Hynix memory module (SeongJoon Cho/Bloomberg via Getty Images)
The economy has become more dependent on a handful of chipmakers, not less.
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South Korea rides the AI boom – unevenlySouth Korea rides the AI boom – unevenly
South Korea has been one of the clearest winners from the data centre and artificial intelligence related boom that is driving growth on both sides of the Pacific.
South Korean chaebols (conglomerates) Samsung and SK Hynix have long been the world’s leading producers of memory chips. These traditionally unglamorous semiconductors, which have become steadily commoditised, provide the storage (NAND) and working memory (DRAM) that consumer electronics need to handle data.
This all changed relatively recently, when a vital use case was found for High Bandwidth Memory (Opens in new window) (HBM), which essentially consists of multiple DRAM chips stacked vertically and interconnected. The logic chips used to train and operate large-language models require vast amounts of data to be delivered quickly, making HBM essential to their performance.
SK Hynix, which pioneered HBM, controls more than 70% (Opens in new window) of the global market for HBM alongside compatriot Samsung. The AI goldrush has diverted DRAM chips away from the consumer electronics market, leading to steady “chipflation (Opens in new window)”.
Samsung has historically accounted for around 20% (Opens in new window) of Korean exports. The AI boom has increased this economic concentration by an order of magnitude.
The greater risk may be that the focus on AI and enabling sectors diverts capital, talent and policy attention from traditional industries which are far larger employers.
In August this year, semiconductors comprised nearly 50% (Opens in new window) of Korean exports, with the value of shipments tripling (Opens in new window) to nearly US$47 billion – driven almost entirely by price increases rather than volume.
The Korean stock market index, KOSPI, whose exponential growth created a luminous backdrop for President Lee Jae Myung’s first year in office, is more reliant than ever on the fortunes of a select group of chaebols.
SK Hynix and Samsung have consistently accounted (Opens in new window) for more than 50% of the KOSPI’s value.
These developments have led to the rather surreal spectacle of Samsung and SK Hynix’s semiconductor workforce successfully securing a gargantuan US$400,000 annual bonus (Opens in new window). Less than 1% (Opens in new window) of Korea’s workforce works in the chip sector.
The size and speed of this wealth influx is unsurprisingly reshaping Korean society. It has exacerbated housing unaffordability (Opens in new window) in the Seoul megalopolis and led to a proliferation of so-called chipmaking “cram schools (Opens in new window)”.
It is also leading to resentment in a country where average wages (which are slowing outside the chip sector) still hover around US$34,000 (Opens in new window), adding another potential fissure to South Korea’s already highly polarised (Opens in new window) society.
These problems have led to introspection from some corners of the government. In May, a close adviser to Lee made an interesting, albeit rather nebulous, call for a “citizen dividend (Opens in new window)” funded by AI wealth.
In most other respects, however, Korea is redoubling its focus on AI and adjacent sectors.
President Lee Jae Myung in Seoul (Korea Net/Flickr)
In June, Lee promulgated his “Three Mega Projects for the Great Leap Forward (Opens in new window)” industrial policy agenda, which is built on semiconductors, data centres and physical AI (technologies like humanoid robots which interact with the physical world). The overarching and lofty objective is for Korea to become the world’s number three AI power.
As part of Lee’s policy announcement, SK Hynix and Samsung pledged to spend US$520 billion (Opens in new window) to build four huge chip fabrication facilities in southwestern Korea.
The 2027 budget has followed up with over US$15 billion worth (Opens in new window) of supporting initiatives, mostly focused on building the requisite power and infrastructure for these colossal fabs.
Southwestern Korea, a traditional stronghold of progressive parties, is located far away from Korea’s current chipmaking hubs, prompting allegations (Opens in new window) of pork-barrelling.
Aside from potential political motivations, a much more fundamental question is whether demand for HBM will continue to grow at such a rapid clip.
The growing calls emanating from frontier US AI labs for a deceleration in the AI development race, caused a frisson of anxiety (Opens in new window) on the KOSPI.
Another fear is that China will replicate its success in eroding Korean market share, which it has already done across (Opens in new window) major export categories including automobiles, shipbuilding, consumer electronics and petrochemicals. Surging exports of semiconductors have reversed Korea’s historic trade deficit (Opens in new window) with China.
China’s national champion for DRAM and HBM, ChangXin Memory Technologies (CXMT) has now become China’s most valuable (Opens in new window) listed company.
Its global market share for DRAM is increasing rapidly, having reached 10% (Opens in new window), up from 4% last year. With SK Hynix, Samsung and Micron prioritising HBM development, US companies including Apple (Opens in new window) are testing CXMT’s chips for usage in iPhones – causing consternation (Opens in new window) among US senators.
Mid-September reports (Opens in new window) from the Korea Semiconductor Industry Association suggest that Korea’s lead over CXMT in HBM has narrowed from five years to three years. It remains to be seen, however, whether CXMT will be able to close this gap without access to the most advanced lithography machines, which Dutch company ASML is prohibited from shipping to China.
Korea’s instinct to protect its golden goose is eminently understandable and sensible.
The greater risk may be that the focus on AI and enabling sectors diverts capital, talent and policy attention from traditional industries which are far larger employers.
In sectors such as shipbuilding (Opens in new window) and electric vehicle batteries (Opens in new window), Korea has adroitly carved out a niche as the main global ex-China supplier despite its broader loss of market share. Even these competitive redoubts, however, are under threat (Opens in new window).
About the author
Henry Storey
Henry Storey is Manager - Projects, Research and Analysis at Dragoman with a focus primarily on Asia and the South Pacific.
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