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KDI Economic Outlook 2023-1st Half Semiconductor Market Trends and Macroeconomic Implications May 10, 2023

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KDI Economic Outlook 2023-1st Half Semiconductor Market Trends and Macroeconomic Implications

May 10, 2023

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    JO, Karam
  • profile
    JUNG, Kyuchul
Summary
■ Korea's semiconductor exports have been heavily concentrated in the highly volatile memory sector, making the industry more vulnerable to downturns.

- As of 2022, the proportion of the highly volatile memory semiconductor sector within Korea's semiconductor market was more than twice that of the global market. This discrepancy may have contributed to the 9.5%p decline in semiconductor exports during Q1.

- Despite the growing investment in non-memory semiconductors since 2018, Korea's semiconductor industry continues to exhibit a significant reliance on the memory sector, leading to persistently high levels of volatility in semiconductor exports.

■ The trajectory of the semiconductor industry is shrouded in uncertainty, but certain indicators suggest a potential trough might occur between Q2 and Q3.

- The latest replacement cycles of semiconductor-related products, coupled with the trends in production and inventory cycles, hint that the semiconductor industry may be approaching a trough.

- A deceleration in the semiconductor economy is likely to exert a negative impact not only on exports but also on domestic demand via income channels. This slowdown may lead to deteriorating tax revenue conditions in 2023-2024.

- However, given the relatively modest employment multiplier effect of the semiconductor industry, the repercussions on the labor market are expected to be minimal.

■ Elevating the share of the non-memory sector could contribute to reducing economic fluctuations. In addition, concerted efforts are needed to mitigate the spillover effect of intensifying geopolitical risks in recent times.

- Acknowledging the growing macroeconomic significance of the semiconductor industry, the recent diversification towards increasing the investment in the non-memory sector can be viewed positively from a standpoint of economic stability.

- Conversely, the semiconductor industry's high susceptibility to geopolitical risks, particularly in the context of the escalating US-China conflict, underscores the critical need to strengthen industrial, trade, and diplomatic leadership strategies to mitigate uncertainties in associated sectors.
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|   Related information   |
S Electronics, one of Korea's largest companies, recently announced that its operating profit in the first quarter of this year reached 600 billion won, or -95.8% compared to the same period last year. Considering that the usual operating profit was several trillion won a quarter, it can be said to be a dismal performance, and the semiconductor business is the main factor. KDI investigated why semiconductors, which are profitable exports, are in this situation and when the low point of the semiconductor business will be.
|   Script   |
South Korea's semiconductor exports, a key component of the nation's economy, have taken a noticeable hit over the last few years.
 
However, South Korea’s semiconductor exports decreased by 40% in the first quarter of 2023 compared to a year ago, making up 60% of the total drop in exports.
 
Accompanying this, there's been a 32% drop in semiconductor prices and an 11% fall in trade volume.
 
To make sense of these changes, we'll delve into the inner workings of the semiconductor industry.
 
Semiconductors can be classified into memory and non-memory types based on their applications.
 
Non-memory semiconductors, responsible for data computation and control and custom-built for specific needs, making them less vulnerable to economic swings.
 
On the other hand, memory semiconductors, used for data storage, are standardized and mass-produced, making them more sensitive to economic and price changes.
 
In fact, the global market shows that memory semiconductors' price volatility is more than quadruple that of non-memory ones.

In terms of market size, non-memory semiconductors dominate, being three times the size of their memory counterparts and showing stable growth.
 
Interestingly, South Korea's semiconductor market leans heavily towards memory semiconductors.

If the share of memory semiconductor reflected the global average, the Q1 export drop would've been 31%, not 41%.

One may wonder if this decline in production and exports has affected investment.

In an unexpected twist, semiconductor investment has grown during the pandemic and remains steady.

It seems like we have such a stable equipment investment because it is primarily driven by anticipated technological shifts and demand in recent years. Also, a steady increase in investment in non-memory semiconductors that has risen from 5% to 36% over the past five years have contributed to this stability.

Looking ahead, semiconductor demand follows the computer and mobile device replacement cycles.
 
Given their replacement cycles of 4-5 and 2-3 years respectively, a recent dip in demand indicates the industry may hit a low between Q2 and Q3 this year.

By studying semiconductor inventory and production trends over 20 years, we predict this year's production pattern.
 
Usually, production hits a low up to six months after inventory peaks.
 
With March data indicating a dip in inventories compared to February, it is forecasted that production will likely bottom out between Q2 and Q3, matching demand trends.
 
We've also considered the potential impact of the semiconductor downturn on Korea's GDP.
 
We studied a hypothetical scenario where export volume falls by 10% and export prices by 20%, which reflects the uncertain market. The result indicates a 0.78% GDP decrease due to the export volume drop.
 
Also, the price decline would lower GDI, affecting private consumption and leading to a 0.15% GDP drop.

(Interviewee: Karam Jo, Fellow at KDI)
The semiconductor industry's macroeconomic significance continues to grow. Industry diversification through increased investment in non-memory semiconductors could be a strategic move for ensuring economic stability.
However, the escalating US-China trade conflict presents geopolitical risks for the industry.
It's crucial to harness industrial, trade, and diplomatic leadership to manage uncertainty in these interconnected industries.
 
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