Top Stories
Top Stories

China's tech ambitions puts South Korea on alert

China's tech ambitions threaten South Korea

China's push to become a world leader in high-tech industries has one neighbor particularly worried about new competition on the block: South Korea.

In the mainland's new economic blueprint unveiled on Saturday, known as the Five-Year Plan, Chinese Communist Party officials identified semiconductors as a potential tech sector to dominate. That has raised an alarm in South Korea's semiconductor industry, the world's largest after the U.S. with an 18 percent global market share.

At present, China commands just 3 percent of the global semiconductor market share but Beijing is hoping to increase that figure as part of its plan for new services industries, dubbed "New China," to bolster gross domestic product (GDP). Aside from semiconductors, "New China" sectors also include chip materials, robotics, aviation equipment and satellites.

Officials intend to achieve that goal by increasing the share of spending on research and development (R&D) to 2.5 percent of GDP for the 2016-2020 period, from 2.1 percent in 2011-2015, according to the new Five-Year Plan.

"China's announcement has of course not remained unnoticed, especially by large players in high-tech industries," economists at investment bank Natixis remarked in a report on Tuesday.

"Its aggressive push is worrying for [South] Korea's industrial giants. If we consider that Korea's major global comparative advantage is high-tech electronics, such threat becomes a systemic threat for the country's economic future."

A 'bottom-down' model

South Korea's semiconductor industry is certainly paying attention. A day after the new Five-Year Plan was announced, Korea's Semiconductor Industry Association (KSIA) urged President Park Geun-Hye's government to counter the new market threat.

"I thought that China had attempted to invest only in the semiconductor industry but it seems that China has gone a step further," KSIA Chairman Park Sung-wook was quoted as saying on Sunday, referring to Beijing's aspirations to become a major semiconductor maker.

Leading Korean producers such as Samsung and SK Hynix should be worried, Natixis argues, citing three key factors.

Heavy consumption

China is already the largest consumer of semiconductors globally, which should support its domestic producers, Natixis explained.

"This is particularly relevant for Korean firms since they serve the Chinese market in quite a massive way."

After Intel, Samsung and SK Hynix are the biggest semiconductor suppliers in the Chinese market.

The mainland is South Korea largest trading partner and the exchange of goods between the two nations is set to ramp up in the wake of last year's Korea-China Free Trade Agreement.

This is the big concern for South Korea: FinMin
A ‘bottom-down’ model

Beijing has also unveiled new steps that demonstrate its commitment to becoming a semiconductor superpower.

China has strived to become a global player for a decade now but it hasn't achieved success thus far due to its insistence on a state-led centralized approach to industrial development, Natixis said. Now, officials are embracing a more market-oriented method that encourages competition and allows companies to tap public funds to buy expertise abroad.

For example, China created the National Integrated Circuit Industry Equity Investment Fund in 2014, endowing it with $18.4 billion. Moreover, the Ministry of Industry and Information Technology intends to spend $153 billion over the next decade to support the semiconductor sector-the bulk of which will be spent on buying expertise from foreign competitors, according to Natixis.

"This obviously increases China's competitive threat [to Korea] in as far as they are able to execute appropriate merger & acquisition (M&A) deals in this sector."

Chinese investors have already started snapping up semiconductor assets. Last year, a consortium of mainland private equity firms snapped up U.S. firm Omnivisions Technologies for $1.9 billion in cash while a separate group of Chinese investors bought Nasdaq-listed Integrated Silicon Solution for $640 million.

Shift to mobile

Lastly, Korean semiconductor manufacturers tend to focus more on computers rather than mobile handsets, demand for which is growing at a faster clip. Because China dominates mobile demand, it is ideally placed to profit from semiconductor growth.

Samsung Electronics and SK Hynix are the world leaders in DRAM chips, key for personal computers, so as demand for those chips decline, semiconductor profits at both firms have slowed in recent quarters, Natixis said.

"Samsung and other Korean firms will need to push to achieve competitiveness in a higher tech level due to the changing nature of demand for chips as well as China's push for technology gains."

Asia's second-biggest player, Taiwan, isn't as impacted as South Korea since it only has about 7 percent of global market share, the French bank noted.

—Follow CNBC International on and Facebook.