6.4.

The Korean Catch-up in the

Semiconductor Industry
Initial conditions
(1) Extremely backward, as compared with Japan
(2) Little hard currency and little natural
resources  export promotion
(3) Threat from the North
 need for heavy industrialisation
(4) Political leadership eager to establish
“independent economy”
 substituting (imitative) strategy
The ‘enclave’ development of
the semiconductor industry in the 1960s
 The ‘dual structure’ of the electronics industry
 import-substituting in final consumer electronics items
-radio, TV set …
 export-promoting items without relation with the
domestic market
- electronic calculators, tape recorders, electronic digital
watches
- 51% of consumer electronics products exported in 1972
- electronic parts: 82% exported in 1972
- semiconductors: 100% import & export
eg. Fairchild’s 100% FDI: the first exception to Korea’s FDI
regulation
The enclave development
 MNC’s strategy + ‘extreme backwardness’
- utilising low wages without
transferring technologies
- no capacity to force MNCs to transfer
technologies or to compete directly with
MNCs in this high-tech industry
cf. The Japanese ambitious initiatives for
catch-up in the computer and semiconductor
industry
Transitional period in the 1970s

(1) Successful development of consumer

electronics
 need for ‘capital deepening’
(2) Foreign firms retreating, rather than
upgrading, in the electronics
cf. upgrading in Taiwan and Singapore
(3) The chaebols
- producing semiconductors for internal
consumption of their consumer electronics
divisions
Transitional period in the 1970s

(4) The leading role by the state

- KIET (Korea Institute of Electronics
Technology)
- maintaining ‘pilot production facilities’ of
semiconductors and computers
- outpost at Silicon Valley
A full-fledged catch-up from
the 1980s
 Following the Japanese dynamic catch-
up strategy
- simultaneous catch-up
- focus on DRAMs and process
technologies
- utilizing mass production capability
developed through consumer electronics
Changes in memory market shares by firms
Korea’s Pattern of catching-up
 A more unbalanced growth
→ concentrating on ‘DRAM manufacturing’
- Japan developing its own semiconductor
equipment and materials industries:
equip. import 70-80% in 1976 → 50% in 1980
- Korea entirely relying on imports:
equip. 97%, raw materials 90% in 1989
- higher share of DRAMs in individual companies:
Samsung 67.0% and Hyundai 77.6% in 1990
vs. Japan 26.9% in 1980
Korea’s Pattern of catching-up

 A stronger role of the chaebols

- centralised coordination system
- concentration of resources at the group
level
 Economic conditions that restricted the
role of the state in the 1980s
- The aftermath of the Heavy and Chemical
Industrialization in the 1970s & the global
stagflation
The Case of Samsung Electronics
 A leading chaebol in Korea
 Started from the consumer electronics
 Entered the semiconductor industry in 1974
- Acquisition of Korea Semiconductors
 Foraying into the VLSI manufacturing in 1983
- Starting from 64K DRAM
 #2 electronics company by revenue
 #4 manufacturing company by revenue
Samsung Electronics - Revenue
Samsung Electronics
 Skepticisms from the government and
public research institutes
“.. would be the first failure of Mr Lee Byung
Chul” (a government official)
“A semiconductor industry is possible only
when a nation’s population numbers over a
100 million, GNP per capita exceeds $10,000,
and domestic demand consumes more than
50% of the chip production” (KDI)
Samsung Electronics

 Negative report from Mitsubishi Research

Institute (MRI)
- “Five reasons not to do”
market size, technological level …
 Negative report from internal assessment team
- Even after the top management declared clearly
its intention to develop 64K DRAM
Samsung Electronics

 Entrepreneurial vision
“The Korean electronics industry cannot
survive in the world market if it only
continues assembling parts like today. In
order to stabilize the electronics industry,
the development of a semiconductor industry
is indispensable. Moreover, the
semiconductor industry is the basis of the
every other industry” (Lee Byung-Chul)
Samsung Electronics
 Sending all of those involved in writing
the negative report to the development
team of 16K DRAMs
“It was probably Lee Byung-Chul’ implicit
order that they should devote their energy
and courage to oppose the top management’s
decision to developing DRAMs” (Moon Sang-
Young, quoted in the Chosun Ilbo, 20 Aug.
2015)
Money-devouring machine
in the beginning
 The cumulative deficits
- about US$227 million by 1986
- far more than the whole Samsung Group’s
profit in 1986, $136 million
- impossible to sustain them without intra-
group support
Keeping a high level of
investment
 Maintaining high-level of investment
- over 50% investment-to-sales ratio all
through the 1980s
 The group-level strategic support
“the total sales of Samsung group was $21.1
billion in 1987 (Mody 1990: 295, table 3). And
those of Hitachi and Toshiba were $23. 6
billion and $20.2 billion respectively (KEIPA
1988: 173; 175, $ = 123.5 at the end of 1987).
Dynamic catch-up strategy
 Narrowing the gap as soon as possible
 Employing a dynamic catch-up strategy
- 1.5 years gap in 4M DRAM (1988)
- nearly same in 16M DRAM (1989)
Overtaking in cost and quality
 Aggressive technological choice
Investing in the state-of-the-art technologies with a
long-term future, although they were not mature
and risky
(1) Bigger size wafers
- 6 inch over 5 inch in 64K DRAM
- 8 inch over 6 inch in 4M DRAM in 1989
(2) Trench vs. stack method
- inevitable transition from 16M DRAM
Overtaking in cost and quality
 Establishing ‘ramp-up’ capability
 Inter-generational application of technologies
 Deepening toward higher-end DRAMS
 Diversification and the early lead in mobile
technologies
 The increase in technology standards
→ turning into “first-mover advantages”
Development and ramp-up
 The best competitive strategy in DRAMs?
- Too early development ahead of market is
costly
- Time gap between development and mass
production
- Waiting for the development of the next
generation chip closest to the market creation
and ramping up production as fast as possible
Ramp-up capability
 Samsung official’s comment:
“We estimate that we overtook Toshiba in
ramping-up capability in 16M DRAM in 1991.” (A
Samsung official)
 Further strengthened during the leadership
period
Samsung’s competitive advantage about which
its “competitors feel most curious and are most
inquisitive”
Ramp-up capability
(1) Fuller integration between development and
production
- directing engineers from every stage, from design
to mass-production, to take part in the entire
development process together
- better at problem-solving and information-sharing
(2) “Samsung-style TF(task force)”
- “different from Japanese-style TF”
- mastering ‘parallel problem-solving capability’ as
against ‘serial problem-solving capability
Ramp-up capability
(3) Testing yield rates with pilot production lines
- Solving many potential production problems at the
development stage
- attained a near ‘golden yield rate (80%)’ in the initial
mass production of the 12-inch line in 2001
(4) Intra-firm knowledge transfer system
- a comprehensive database
- an internal practice that about half the engineers
working in a new production line should have worked in
the previous generation production line
- ‘Maintenance Prevention (MP) Information Sharing
Conference
Inter-generational application
of technologies
 Breaking the match between circuit density and
design rule from the early 1990s
- 64M DRAM: 0.35µm → 0.25µm → 0.18µm → 0.13µm
- Shrinking chip size huge reduction in cost and
improvement in stability and quality
eg. 254M DRAM: 0.18µm → 0.13µm (50%) → 0.11µm
(59%/30%)
→ Making DRAMs more easily available for mobile
devices
Inter-generational application
of technologies
 A formidable entry barrier
- Vital to survive the life-cycle downturns
- Japanese competitors considerably
weakened from accumulated losses during
16M & 64M DRAM life cycles while Samsung
maintained positive profits
- Pre-empting new entrants
- Re-enforcing first-mover advantages
Deepening

 Introducing higher-end DRAMs

- SDRAMs, Rambus DRAMs, DDR DRAMs …
 higher selling prices and less affected by
‘commodity trap’ (1980s)
Diversification and
‘economies of scope’
 Mobile-related technologies & products
- “total mobile solution provider”
- Flash memories
- low-voltage DRAMs
 Exploiting “economies of scope”
- Utilizing production lines more extensively
both in DRAMs and Flash memories
Overcoming Toshiba and Intel
in flash memories
 Beating Toshiba in NAND memories
- ramp-up capability
- “Samsung gives out its hands later in
scissors-paper-stone game!”
 The win of NAND over NOR
- Intel pioneered NOR and initially led
the flash memory market with NOR
memories
The increase in
technology standards
 A new first-mover advantage
- about 10 technology standards in the early 1990s
- DDR2 alone requires about 330 standards
- playing as a standard setter
6.5. The Taiwanese catch-up
in the semiconductor industry
 Initial conditions
(1) ‘extreme backwardness’ + the need for export
promotion
(2) entrepreneur class migrated from China
“The first textilers were mostly mainlanders.”
(Wade 1990:79)
(3) threat from China
: the need for heavy industrialisation, but weakened
much earlier than in Korea
(4) heterogeneous society
 social division between mainlanders (15%)
and local Taiwanese (85%)
 ruled under martial law until 1986
 heavy and chemical industrialisation
through public enterprises
 obsession against inflation and big
businesses
 a lesson from Kuomitang’s failure in the
mainland
 promotion of SMEs
Semi-internationalist route
for catching-up
(1) Initially, a hard drive for import substitution
(2) Early shift to forming alliance with MNCs
(3) Nurturing SMEs
SMEs

(1) Growth through increase in number, rather

than in size of firms
cf. Taiwan vs. Korea (Wade 1990: 67)
# of mfg firms # of employee (1966-76)
Taiwan 250% 29%
Korea 10% doubled
SMEs

(2) highly engaged in exports

eg. In 1985, firms with less than 300
employees accounted for 65% of total exports
(Wade 70)
(3) network with overseas Chinese
(4) subcontracting to MNCs
MNCs
20% of export (1974-1982), 16% of employed in
manufacturing (1975)
 MNCs’ role in the electronics sector is more important
- Philips, RCA, Sanyo ...
- initially an ‘enclave development’: a few MNCs
dominated the industry and 80% of production was
exported in 1976 (Wade 1990: 93)
 training ground for local engineers and entrepreneurs
 partners in entering the high-risk industries
The role of public enterprises

 Taking over enterprises established by

Japanese companies
 Prime investors for capital formation
“Fully half of gross capital formation in the
1958-61 period was carried out by government
or public enterprises.” (Wade 1990: 82)
 low cost suppliers for upstream industries
like steels, petrochemicals ...
The ‘orderly spin-off’ model
in the semiconductor industry
(1) the beginning of spill-over and spin-off
- RCA transfers CMOS chip technologies to ERSO
(Electronics Research and Service Organisation) in
1976
 training, design engineering ...:
- ERSO setting up ‘pilot plant’
 later spun off UMC in 1980 (40% govt, 60% private)
(2) arranging joint ventures with MNCs
eg 1. Chung-Hua Picture Tube
- Clinton (1969) and Philips(1971) as fully
foreign-owned subsidiaries
- engineering a joint venture between major
local TV manufacturers and RCA
eg 2. TSMC
- ERSO (48%) + Philips (27%) + local capital (25%)
(3) Spin-offs and concentration on ASICs and
design
* 6 major IC chip companies spun off
: UMC (1982), Advanced (1982), TSMC (1987), Coin
Tek (1988), Winbond (1988), Ten Tech (1989)
* the first IC design house: Syntek 1982  followed
by other design houses by MNCs or alliance with
MNCs
eg. Vitelic, Mosel allied with Oki ...
(4) Full-fledged catching-up through foundry
service
- TSMC, UMC …
The ‘Fabless’ Revolution and Taiwan

 The evolution of the ASICs business

- the early model: Front-end design + back-end design
& manufacturing
- the new model: Design (almost all) + manufacturing
(some designs) → decoupling between design and
manufacturing
- enabling technologies: FPGAs(field programmable
gate arrays), EDA (electronic design automation) …
The ‘fabless’ Revolution and Taiwan

 Xilinx + UMC
- ‘the “virtual IDM” relationship’ in 1995
- two companies under one roof
“Xilinx moved all their new production to UMC …
Xilinx and UMC worked together to develop the
process technology, create test chips, and so on. In
fact, Xilinx had a whole floor of one of UMC’s
buildings for their own employees.” (Nenni &
MacLellan 2019: 60)
- enabling technologies: FPGAs(field programmable
gate arrays), EDA (electronic design automation) …
TSMC and UMC
 Not much demand in the beginning
“There was very little business from fabless companies. In fact, all
the designs from fabless semiconductor companies together could
not have filled a single fab in 1995.”
 The growth with a close connection with the U.S. design houses
- by 1996, handling 40% of the output of the US fabless companies
“Most Taiwanese foundries involve joint ventures with American
fabless firms (Langlois & Steinmueller 1999: 57)
 Morris Chang’s invention?
“Chang wasn’t trying to reinvent the semiconductor industry when
he started TSMC. He did it because government officials in Taiwan
wanted him to start a semiconductor business, and with Taiwan
weak in both design and marketing, he didn’t see any other way.”
(Perry 2011)
TSMC and UMC
 The exponential increase in the cost of fab and the
rapid growth of the fabless-foundry alliance
- The cost of fab: $1bn (1998) → $2bn (2002, Intel) →
$4bn (2006, Samsung) → $10bn (2013, Intel)
- IDM becomes a game among the largest players
“… when a fab cost $3 billion to build, a company would
face a depreciation cost of roughly $1 billion per year,
meaning that they need to have a running semiconductor
business of perhaps $5 billion, around the size of AMD,
who was the only competitor to Intel in the x86
microprocessor business.”
 TSMC and UMC, “pure foundry players” at the right
time of the industry transformation
Symbiosis and competition
between ‘pure players’ and IDMs
 IDMs’ need for moving into the foundry business
- the foundry itself is a profitable business
- an option to increase utilization of their expansive
fabs
TSMC vs. Samsung vs. Intel?