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In mini trade war between Japan and South Korea, China may be the winner

Tim Culpan | Bloomberg/ 10 Jul 19 | 08:46 AM

If there was ever a time for Japan and South Korea to engage in a supply-chain spat, this isn’t it.

Last week, Japan moved to restrict exports of materials used to make semiconductors and smartphone screens to its North Asian neighbor, citing grievances between the two countries dating back seven decades. The curbs threaten the flow of components that feeds the world's hunger for technology hardware. It may also hand Beijing a victory.

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A US-China trade war and the concurrent technology cold war means that companies have started figuring out new ways to source production materials. We already know that manufacturers – not just American ones – are looking to dilute their China presence by taking an ABC (anywhere but China) policy to new facilities.

If you’re the CEO of a Japanese chemical company, your first thought may be: This is a good thing. You’re facing steepening competition from Chinese upstarts for business from that South Korean semiconductor manufacturer you count among major clients. Korean firms looking to shrink their China footprint is a step in the right direction.

But now that Japan is restricting certain exports, South Korean manufacturers may be looking to source even more from China – or Taiwan, Europe and elsewhere. Even those firms expanding beyond the mainland may try to mollify Beijing by agreeing to buy more materials from China.

The U.S.-China trade war has given firms an excuse to rethink their exposure along the supply chain and diversify. Indeed, some companies may be feeling their sourcing is too concentrated. Samsung Electronics Co., for example, puts 92% of its procurement spending into just 34% of its suppliers. The company has 10 production sites in China, six in South Korea and zero in Japan.

With the technology cold war now underway, new revenue sources are starting to appear on the radar in China. These semiconductor, display and electronics companies are flush with cash and ambition, making it likely they’ll provide growth that staid North Asian incumbents can’t offer.

The silver lining to Japan and South Korea’s latest feud is that the current slump in global demand is likely to minimize any impact. But even then, the third quarter is an inopportune time to crimp supply: It's right when firms build ahead of year-end hardware demand.

However you look at it, old-guard technology suppliers and buyers aren’t likely beneficiaries from any interruption in the status quo. As leaders of both North Asian countries consider their next steps, they need to remember that anything driving a wedge between Tokyo and Seoul can only help Beijing. They may have leftover and justified grievances from a war 74 years ago, but there’s a potentially bigger battle ahead.

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