JEAN-FRANÇOIS TREMBLAY , C&EN HONG KONG

Judging from past experience, the entry of South Korean companies into new markets is rarely a minor event. Be it in shipbuilding, petrochemicals, cars, or semiconductors, Korean firms have proved adept at claiming market share from competitors within a few years of their entering an industry.

Now that they have become heavyweights in consumer electronics and electronic components, these Korean chaebols--centrally coordinated groups of companies--like Samsung and LG are striving to establish themselves as suppliers of electronic materials. Smaller companies like process chemicals manufacturer Techno Semichem are also building up their capabilities.

Dong
PHOTO BY JEAN-FRANÇOIS TREMBLAY

Back when Korean electronics manufacturers followed the path laid by Japan, they were content to use the same components and materials that the Japanese companies used. But this has become increasingly untenable, because relying on components designed abroad limits Korea to follower status in the electronics industry. "You need new materials in order to come up with new devices," says Hyun-Soo Dong, a vice president with Cheil Industries who heads the electronic chemical materials division.

Korean manufacturers continue to focus on price as much as they do on function. Electronic materials are expensive, Dong says. They add up to nearly 40% of the cost of making thin-film transistor liquid-crystal displays (TFT-LCDs). Samsung Electronics, a sister company of Cheil, says it is the world's largest memory chip and TFT-LCD manufacturer. Other than developing materials that pave the way for innovative products, Korean firms seek materials that hold down production costs.

One additional motivator for Korean companies to develop their own source of electronic materials is a desire to keep their cards close to their chests. According to a senior manager at an electronic materials firm, it is unwise to collaborate with Japanese materials suppliers because doing so reveals too much information about the Korean manufacturers' plans. Japanese materials suppliers maintain close relationships with Japanese electronic component companies that compete directly with Korean firms, the manager says.

BUT KOREAN COMPANIES cannot switch to Korean materials overnight. In many cases, there is still no alternative to the materials provided by Japanese or American companies. This means that South Korea remains an alluring market for foreign producers of electronic materials.

Yang

PHOTO BY JEAN-FRANÇOIS TREMBLAY

Shipley, a subsidiary of Rohm and Haas, manufactures semiconductor and LCD materials such as photoresists and antireflective coatings at a factory in Chonan, South Korea. Dominic Yang, Shipley's Seoul-based manager for the Asia-Pacific region, points out that even though the price of memory chips is relatively low, the number of silicon wafers processed for memory chips worldwide is significant.

It is important for Shipley to have a presence in or next to South Korea because most of the memory device makers are in that country and Taiwan. "Since these few manufacturers produce a large number of industry-standardized memory devices, they each tend to consume large amounts of a small number of products," he says. Their requirements also differ in that memory chip producers are extremely cost-sensitive and demand materials, cheap or not, that lower their total production cost.

Yang says it is also important to be located in Korea because local manufacturers are developing new products and manufacturing processes at the same time as their competitors abroad. For example, semiconductor manufacturers in Korea are now somewhere "between R&D and setting up the pilot-production line" as they gear up to mass produce the next generation of memory chips designed with 65-nm circuitry, Yang says. Shipley's manufacturing presence in Korea helps the company to better support its customers' product development efforts.

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Similarly, Sumitomo Chemical and its Korean electronic chemicals subsidiary Dong Woo Fine-Chem (C&EN, Aug. 6, 2001, page 15) are adding capacity in Korea. Sumitomo is investing more than $250 million to increase capacity for LCD materials such as color filters and polarizers that are used by South Korean flat-screen producers. The new capacity will enable Sumitomo to ride on Korean companies' vast expansion in TFT-LCD capacity--like Samsung Electronics, which announced in early June that it would build a new $17 billion LCD plant in South Korea to increase its share of the fast-growing market.

ELECTRONIC CHEMICALS

Cheil, which mostly produces textiles and clothing, has set ambitious targets in the area of electronic materials. Before 1997, Cheil's main exposure to electronics was in the production of flame-resistant acrylonitrile-butadiene-styrene used to make computer monitor housing. Cheil is the world's largest producer of such material, Dong says. It began moving into electronic chemicals in 1997, and in 2000 Cheil bought the R&D operations of Samsung General Chemicals.

Cheil plans to more than triple its sales of electronic materials to $335 million by 2005. It expects to capture between 8% and 10% of the global market for chemical mechanical planarization slurries, 36% of the market for electrolytes used in lithium-ion batteries, and 25% of the market for pastes used in the manufacturing of plasma panel displays. As part of this plan, Cheil is building a new plant in Gumi, a city located in Kyunsang province, in the center of the Korean peninsula. The company's strategy is to use the profits from clothes and textiles to finance its expansion in electronic materials.

Kim

LG CHEM PHOTO

LG CHEM IS CLAIMING a place in the electronic materials business with similar panache. Jong-Pal Kim, the executive vice president in charge of the company's information and electronic materials business, says LG began focusing on electronic materials less than five years ago. Since then, however, it has invested about half of its R&D resources and capital expenditures budget into expanding the business.

The results are impressive. LG Chem reckons it holds a 20% share of the market for polarizers used in TFT-LCDs, a business in which it became only the fourth producer to enter the market. LG expects to own one-third of the market within three years and to have powered ahead of Japan's Nitto Denko to become the new market leader.

In lithium-ion batteries, LG's global market share is 8%, and the company is in sixth position, Kim says. But he expects LG to climb to the number two spot in 2005, by which time its market share will be 25%. LG is investing about $850 million in the construction of a massive electronic materials plant in Oh-Chang that will cover 330,000 m² and is due to go on-line in October.

LG is not adding capacity in the simple expectation that increased market share will magically follow, Kim insists. The main customers for the lithium-ion batteries--mobile phone makers like LG Electronics, Motorola, and Ericsson--have already been lined up. LG Chem is now able to come out with new generations of batteries several months ahead of its Japanese competitors, Kim claims. The manager lines up LG batteries against Sony's on a display in his office to be reminded of his competition.

As for the polarizers, TFT-LCD manufacturer LG.Philips--one of the world's largest and a natural customer for LG Chem's polarizers--is building a new plant in Korea that will cover an area of 1.5 million m². LCD growth is notoriously volatile but overall averages 23% per year, Kim says.

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Cheil and LG were able to break into the electronic materials business so quickly because the sister companies that buy their products give them second chances. "If our product doesn't at first perform like we promised, Samsung [Electronics] may be willing to test it a second time," Dong says. Such a failure might not be tolerated if Cheil weren't part of Samsung. But this relationship only goes so far. "In order to supply Samsung companies, we have to meet the same quality and cost objectives as other suppliers."

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Even competitors agree there is little chance that the know-how of a foreign electronic materials supplier could flow from Samsung Electronics to Cheil. Korean producers "know that if they do not respect their intellectual property or confidentiality agreements in a global marketplace, they may not have access in the future to the best materials or be able to freely sell their products," Shipley's Yang says. He adds that building up a chemical subsidiary is much less important to a semiconductor manufacturer than securing the materials from the marketplace that will enable the highest possible yields and output.

LG Chem also can tap into large R&D resources. Kim says there are more than 1,000 researchers within the LG group who are looking only at ways of making better mobile phones. He adds that LG Chem alone employs a total of 1,000 researchers, 600 of whom are developing electronic materials. Kim notes that such R&D resources are essential because electronic components are often upgraded, changing or improving every few months.

The large Korean business groups and universities work well together. Samsung and LG are both financing electronics research at universities or institutions such as the Korea Research Institute of Chemical Technology and the Korea Institute of Science & Technology. The projects yield valuable researchers who are often recruited by the chaebols. Dong, who obtained a Ph.D. in polymer science from the University of North Carolina, says he sits on a committee that coordinates the R&D initiatives of government, academia, and the private sector.

Shipley's Yang says the company hires researchers from Korea, then sends them to the U.S. and Japan for further training in the labs where Shipley's main research tools are located. "It's important to have people familiar with the latest applications knowledge who can also talk directly with our customers' R&D people," he says.

Yang notes that the development of advanced materials such as semiconductor photoresists requires large R&D investments. One essential piece of equipment may cost as much as $10 million, and the investment has to be repeated every few years as the equipment becomes obsolete.

According to Kim, developing LG's electronic materials business has been a challenge precisely because LG Chem--which is mainly a producer of industrial chemicals and plastics--has a "chemical culture." He believes that chemical companies are typically not customer focused and are not used to introducing new products every few months, as is the norm in the electronics industry. He says he had to change the mind-set of his employees when he became the leader of the electronic materials division.

PHOTODISC

HISTORICALLY, when entering new businesses, Koreans have been their own worst enemies as the rivalry between the chaebols has led to overinvestment. Following Korean entry, the global steel, automobile, semiconductor, and petrochemical industries all experienced periods of oversupply. The markets for electronic materials are relatively small. Global sales of semiconductor photoresists, for example, are less than $700 million. Dong admits that overinvestment is one of the risks Cheil faces.

But for the time being, prospects are encouraging for the Korean electronic chemicals industry. The market is growing as Korean manufacturers of mobile phones, flat screens, and semiconductors continue to invest in new capacity. Moreover, Korean electronic material suppliers have met with some success in reducing Korea's reliance on imports, particularly in the area of rechargeable batteries and LCD materials. And if they meet the standards of Korea's electronic devices and components manufacturers, Korean materials may find buyers overseas as well.