Diplomatic relations between Japan and South Korea have scarcely been easy, but their current dispute has spilt over into trade, causing strain in global high tech logistics.
These difficulties stem from the harrowing events from Japan’s occupation of the Korean peninsula in World War II. South Korean courts have recently ruled that Japanese companies guilty of forced labour practices during the conflict would have to pay settlements to Korean families affected by the atrocities. Japan claims there is no legal basis for this, since it believes the issue was settled in the 1965 agreement when the countries restored diplomatic relations. However, South Korea has liquified Japanese company shareholdings in order to uphold its legal rulings.
In retaliation, on July 1, Japan announced it would restrict exports to South Korea of three chemicals – fluorinated polyimides, resists and hydrogen fluoride – that are critical components in a range of high tech products, such as semiconductors and TVs. Prime Minister Shinzo Abe has been able to enforce this on so-called “national security grounds”, since the chemicals can also be used in warfare. Tokyo has not substantiated these claims, but its implication has been that the chemicals could somehow be supplied to North Korea.
The restrictions are significant. For example, Japan accounts for around 90% of fluorinated polyimides produced worldwide. Japan accounts for 32.0% of imports used in South Korean manufacturing of semiconductor and chip-making equipment. Sourcing alternatives will not be easy. South Korea is the third largest exporter of electrical machinery and equipment, at $184.6bn. Samsung has reportedly instructed local vendors to stockpile three months’ worth of goods.
The move comes at a challenging time in the high tech sector, where sales of semiconductors and chips have been slowing. The product lifecycles of consumer goods such as smartphones, tablets and laptops have increased significantly, meaning there is less of a need for replenishment which previously drove demand. This has led to a supply-demand imbalance in chips and components, and lower prices overall as a result. Samsung just released Q2 results with operating profit down 56%, partly as a result of these market conditions.
That is not to say that high tech is entering a slump. A new era of innovation, with the growth of cloud computing, 5G and Internet of Things technology should produce positive demand for chips and other electrical components. South Korean manufacturers are likely to play an important part in this global growth, but further difficulties with Japan put their potential for growth at risk.
This has a significant bearing on the 3PL market in Asia. The trade war between the US and China has already led to significant repositioning of regional supply chains, and the effect on Asia has left winners and losers. There is evidence that some South East Asian countries are proving to be viable alternative sourcing locations to China, but it’s incredibly difficult to replace China’s manufacturing expertise and the higher prices resulting from the trade war are stifling manufacturing volumes in peripheral countries.
The situation between Japan and South Korea could get worse before it gets better. Japan could decide to remove South Korea from its ‘white list’ trader status on August 2, which allows for minimum trade restrictions between the countries. PM Shinzo Abe was praised for his role in reviving the Trans-Pacific Partnership, but the moves are evidence that supply chains are increasingly becoming politicised, even outside of the US.
Source: Transport Intelligence, August 1, 2019
Author: Andy Ralls
