South Korea's semiconductor inventories fell last month at the fastest pace since 2009, pointing to continued growth in demand for high-performance memory chips used in artificial intelligence development.

01 Statistics Korea data

Inventories fell 42.6% from a year earlier, faster than the 34.3% drop in July, Statistics Korea data showed on Monday. Output and shipments rose 10.3% and 16.1%, respectively, the data showed, further suggesting the boom cycle lasted for much of the third quarter.

The latest data may support the view that the chip rally that has driven South Korea's economic growth this year still has room to grow. Memory chips are the biggest driver of South Korea's trade-reliant economy, with Samsung Electronics Co. and SK Hynix Co. among them.

South Korea will release September export data on Tuesday, including semiconductor shipments. Chip export growth has been slowing since May, raising questions about the extent of the chip export boom.

Meanwhile, South Korea's total industrial output rose more than economists expected in August, up 3.8% from a year earlier, compared with expectations for a 1.9% increase.

02 South Korea invests heavily to become global chip leader

South Korea plans to build the world's largest semiconductor cluster over the next 23 years by investing about $470 billion (€430 billion) in a large production park in Gyeonggi Province in partnership with major electronics companies Samsung Electronics and SK Hynix.

To support the plan, the government has proposed measures including investment tax incentives and initiatives to boost competitiveness. South Korea aims to increase its self-sufficiency in materials, components and equipment needed for chip production to 50% by 2030.

Currently, South Korea dominates the production of DRAM and NAND memory chips, which are used to manage and store data on devices such as personal computers, smartphones and SD cards, with a global market share of more than 60%. South Korea aims to increase its share in other chip and processor sectors.

Samsung is also trying to surpass Taiwan Semiconductor Manufacturing Co. (TSMC) in the production of wafers, which are thin disks made of semiconductor materials (mainly silicon) and are the first layer in manufacturing semiconductor components. The Taiwanese company has a global market leading position in the foundry business by contracting to manufacture processors for other companies.

South Korean President Yoon Seok-yeol said the ambitious "mega-cluster" is expected to create nearly 3.5 million jobs. To achieve this goal, he stressed the need to expand nuclear power to meet the semiconductor industry's energy needs.

A semiconductor "cluster" refers to a group of facilities that conduct semiconductor research and all production steps in a single area. South Korea's cluster includes various industrial estates in Gyeonggi Province, covering a total area of 21,000 hectares (52,000 acres), or 21 million square meters, equivalent to the area of nearly 30,000 football fields.

By 2047, 16 more production facilities are planned to be added to the existing 19. Of these, three factories and two research plants are scheduled to be completed in 2027.

Samsung and SK Hynix plan to produce 7.1 million wafers per month there by 2030, according to the South Korean Ministry of Industry.

South Korea's Minister of Trade and Industry Ahn Deok-geun said: "If we complete the construction of the semiconductor mega cluster as soon as possible, we will achieve world-leading competitiveness in the chip field and provide high-quality jobs for the younger generation."

Samsung Electronics will invest 500 trillion won (375 billion U.S. dollars) in the project, of which 360 trillion won will be used to build six new production facilities in Yongin, 33 kilometers (20 miles) south of Seoul.

In addition, 120 trillion won will be invested in the construction of three new factories in the Pyeongtaek production complex, 54 kilometers south of Seoul, and three research factories in Giheung.

03 SK Hynix

SK Hynix, the second-largest chipmaker, will invest 122 trillion won to build four new plants in Yongin, official data show.

South Korea is responding to changes in the semiconductor industry with a long-term cluster plan.

South Korea believes that its chip industry is at risk of losing importance in the power struggle between China and the United States. In 2022, South Korea's semiconductor product exports reached $129 billion, accounting for about 19% of the country's exports.

Reduced domestic production will hit the Korean economy hard. "South Korea is at the forefront of the semiconductor industry, which creates economic opportunities but also leaves companies vulnerable," said Troy Stangarone of the Korea Economic Research Institute in Washington.

The United States is subsidizing $52.7 billion through the Chips and Science Act to promote the establishment of semiconductor production facilities. Samsung is spending $17 billion to build a chip factory in Texas, USA.

Meanwhile, China is promoting the development of its domestic semiconductor industry after the United States severely restricted semiconductor exports.

Meanwhile, a new cluster of TSMC and Sony processor factories is under construction on the main island of Kyushu, Japan. Meanwhile, OpenAI boss Sam Altmann is looking for chip producers for the development and application of artificial intelligence.

Thanks to an indefinite special license, South Korean manufacturers have so far been exempt from US restrictions and are allowed to export equipment and machinery to China. Samsung's NAND memory chip plant in Xi'an and SK Hynix's NAND plant in Dalian have both benefited from this.

However, South Korea's doubts about production in China are growing. On January 24, SK Hynix had to deny again that it planned to sell the Dalian plant, which the company took over from Intel for $9 billion in December 2020.

According to research by market research firm Bloomberg, the United States controls five of the ten stages of the chip supply and production chain, including etching, coating and doping, while Japan and the Netherlands control the remaining areas such as wafer cleaning and lithography.

Therefore, South Korea's key position as a chip manufacturing country relies on technology, materials and expertise that mainly belong to the United States and its allies. Therefore, South Korean manufacturers are committed to cooperation with American companies to strengthen their localization.

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