Samsung, SK Hynix Accelerate Supply Chain Reshuffle Amid AI Chip Boom

Samsung Electronics and SK Hynix are achieving record-breaking performance as demand for High Bandwidth Memory (HBM) explodes due to the spread of artificial intelligence (AI) services.

Amidst these changes, the U.S. is treating semiconductors as essential national security infrastructure and implementing various policies to incorporate allied companies into its domestic supply chain. Last August, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) removed Chinese facilities of Korean companies (Samsung Electronics' Xi'an, SK Hynix's Wuxi and Dalian) from the 'Verified End User' (VEU) list. These were subsequently replaced by a 'site license' system, which operates under a policy of limited approval for equipment for advanced process expansion and some production capacity increases. The MATCH Act designates core equipment and components that are difficult for China to acquire as 'chokepoint' technologies and controls the entire production process. If allies do not establish the same technological control system as the U.S., additional measures such as the Foreign Direct Product Rule (FDPR) can be applied unilaterally.

The subsidies provided by the U.S. serve as an incentive but also act as a 'shackle.' Samsung Electronics and SK Hynix have been subject to the CHIPS Act's 'guardrail' provisions after securing subsidies of up to $4.745 billion and $458 million, respectively. The guardrail provisions restrict the expansion of advanced semiconductor manufacturing capacity, process upgrades, or equipment replacement in specific countries like China. While allowing for continued production in China, these provisions are designed to limit the speed of technological upgrades. This means even equipment replacement or process improvement investments in Samsung Electronics' and SK Hynix's Chinese production lines could be affected by interpretations and approval scopes of the regulations.

In exchange for attracting semiconductor companies, the U.S. integrates the companies' long-term global production strategies into the U.S. government's pre-approval system. Controls extend beyond equipment and capital to encompass the 'security' domain of the supply chain. A prime example is the 'Cybersecurity Maturity Model Certification' (CMMC) enforced by the U.S. Department of Defense since November last year for cybersecurity management of the defense industrial supply chain. In the future, if Samsung Electronics or SK Hynix wish to participate in specialized semiconductor projects related to the U.S. Department of Defense, they will need to obtain CMMC certification. This implies a situation where companies must redesign their internal network architecture, data management, and even the security levels of their suppliers to meet U.S. standards.

The investment review system of the Committee on Foreign Investment in the United States (CFIUS) also operates. CFIUS reviews the national security implications of foreign investments or technology cooperation projects, and recently expanded its review scope to include all investments, including non-controlling investments and technology access, in strategic industries such as semiconductors and AI. These changes are highly likely to have a direct impact on Korean companies as well.