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Sorry, However Japan's Materials Embargo Received't Assist Micron Know-how – jj
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Sorry, However Japan's Materials Embargo Received't Assist Micron Know-how

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In response to South Korean courts ordering Japanese firms to compensate people forced into wartime labor during Tokyo’s brutal 1910-45 colonial rule over the Korean peninsula, Japan said, on July 1, it will tighten regulations on the export to South Korea of several chemicals used in chip and smartphone production.

The export restrictions cover fluorinated polyimides, which are used in organic light-emitting diode (OLED) screens for TVs and smartphones, and photoresist and hydrogen fluoride, used for making semiconductors.

According to the Korean International Trade Association, South Korea imports 91.9% of its resist, 43.9% of its etching gas, and 93.7% of its polyimides from Japan, meaning that these trade restrictions could force Korean tech manufacturing firms to make major shifts in their supply chain to keep production running.

Chart 1 illustrates these statistics, showing that Japan purchased $103.52 million in photoresist, $44 million in etching gas, and $12.14 million in fluorinated polyimide in 2019 through May.

Chart 1 – Source: Korean International Trade Association

When the news of the embargo was published, a knee-jerk reaction by the investor community caused shares in Japanese resist makers to nosedive, in some cases more than 3%, despite a rally on the market overall. The news also sent Samsung Electronics (OTC:SSNLF) down 0.74% by midmorning, with LG Electronics (LPL) plunging 2.52%.

There has also been speculation on Micron Technology (MU) threads that curtailing shipments of the critically-needed photoresist to Korea’s Samsung Electronics and SK Hynix (OTC:HXSCL) would impact the production of DRAM and NAND chips, thereby enabling MU to sell more chips and minimize its inventory overhang. Cutbacks in production by Korean memory companies would also stop the continuing drop in average selling prices (ASPs) which have hurt operating margins at MU.

This article will show that the embargo of photoresist will have no impact on memory chips. Nor will it have an impact on the display market used to make smartphones and TVs.

Photoresist – No Impact on Memory Chip Production

The key factor that investors need to recognize is that these news articles, written primarily by non-scientist journalists, do not differentiate between the various types of photoresists used in semiconductor production.

Photoresists are light-sensitive polymers that are coated on a silicon wafer and patterned with a lithography system (light source) through a photomask to form specific structures that make up an integrated circuit.

I discussed lithography in semiconductor manufacturing in a March 19, 2019, Seeking Alpha article entitled “Canon’s Nanoimprint Lithography: A Chink In ASML Holding’s Armor.”

An important chart in the article, which I upgrade here as Chart 2, illustrates that different types of lithography systems operate at different wavelengths and, as a result, are used to pattern different linewidth sizes. Each of these different systems is used in current semiconductor manufacturing.

Most importantly, photoresists are optimized to provide best results for each wavelength of light from the lithography source. Thus, an i-line resist (365nm and optimized at 150 nm linewidths), for a variety of reasons, will not enable the production of 38nm linewidths achievable with an ArF immersion lithography system, according to our report entitled “Sub-100nm Lithography: Market Analysis and Strategic Issues.”

Chart 2 – Source: The Information Network

As shown in Chart 2, EUV uses a light source of the extremely short wavelength of 13.5 nm. This is critical because news articles on the embargo neglect to note that the Japanese embargo of photoresist only covers EUV. ArF lithography, however, is used by Samsung, SK Hynix, and Micron (and all the other memory manufacturers), but that is a different resist and not covered by the embargo.

According to the Ministry of Economy, Trade and Industry’s (METI) ministerial ordinance Article 6, Item 19, the embargoed photoresist is defined as follows:

(1) that are positive resists optimized for use of light wavelengths less than 193nm and greater than 15nm

(2) resists optimized for use of light wavelengths less than 15nm and over 1nm

Referring back to Chart 2, EUV is (2) less than 193nm (ArF immersion) and (2) less than 15nm and greater than 1nm. Thus, the embargoed resist is for EUV lithography, not mainstream 193 immersion DUV lithography.

Chart 3 illustrates ASML’s (ASML) insertion of EUV into various IC devices. NAND will not use EUV because its dimensions are too large (hence the move from 2D NAND to 3D NAND) and not cost effective. DRAM is another matter, and efforts are just beginning at Samsung and SK Hynix to explore the use of EUV.

Chart 3

The EUV resist embargo will, however, impact Samsung’s foundry business. In October 2018, Samsung issued a press release noting:

“it has completed all process technology development and has started wafer production of its revolutionary process node, 7LPP, the 7-nanometer (nm) LPP (Low Power Plus) with extreme ultraviolet (EUV) lithography technology. The introduction of 7LPP is a clear demonstration of Samsung Foundry’s technology roadmap evolution and provides customers with a definite path to 3nm.”

Companies that stand to lose by this embargo are Japan’s Tokyo Ohka Kogyo, Shin-Etsu Chemical (OTCPK:SHECY) and JSR.

Etching Gas – Minimal Impact on Memory Chip Production

Hydrogen fluoride is primarily used as a cleaning gas for removing unnecessary chemical substances that stick to the inside of chemical vapor deposition furnace after film deposition. It is also used in plasma etching equipment to etch fine grooves or holes following the patterning of a photoresist, as mentioned above.

Japan’s Stella Chemifa and Morita Chemical supply Samsung and SK Hynix with high-purity hydrogen fluoride. There are possible ways to get around this embargo. For example, Stella Chemifa has a facility near Taiwan’s chip foundry company TSMC (TSM).

Korean suppliers of hydrogen fluoride include Soulbrain and ENF Technology, which owns a 46% stake in Fem Technology, a JV with Morita Chemical.

Both Samsung and SK Hynix are evaluating Chinese products to replace Japanese suppliers, particularly with purity. As noted in Chart 1, China supplies 46.3% of etching gas to Korea.

Fluorinated Polyimide – Minimal Impact on Samsung’s Galaxy Fold

Transparent polyimide (PI) film is the most popular cover material for foldable OLEDs. The polymide film is soft, so a hard coating is applied to the top and bottom to compensate. This structure replaces the tempered glass cover (such as Corning Gorilla Glass) of traditional non-foldable LCD and OLED smartphones.

Samsung Electronics has selected Japan’s Sumitomo Chemical as a transparent polyimide supplier for foldable smartphones. Korea’s Dongwoo Fine-Chem, a 100% subsidiary of Sumitomo, applies the hard-coating to Sumitomo’s PI films. Initially in contention for winning the Samsung foldable phone business is Korea’s Kolon Industries.

Any trade restriction from Japan will have minimal impact on Samsung for three reasons:

  1. Samsung has an alternative source in Kolon, which had been vying for the business.
  2. Delays in Samsung’s introduction of the Fold smartphone will give the company time to evaluate alternative sources. Samsung’s April 2019 launch of the Fold was a failure. Now, the company is working on re-introducing the phone, with probable introduction in 4Q 2019. Chart 4 presents my forecast for foldable smartphones, which should reach only 1 million units in 2019 and 4.8 million in 2020.
  3. Alternatives for PI are under evaluation. This includes Corning (GLW) and Asahi Glass. I discussed this issue in an April 25, 2019, Seeking Alpha article entitled “Corning: Displays Helped By Tailwinds In 2019.”

Chart 4

Investor Takeaway

The Japan-Korea trade dispute has continued to be a concern for investors, but a deeper analysis shows that these fears will have little or no impact on the industries that the three products sell into.

Micron’s stock price has risen continuously since the company’s earnings report on June 25. An 18.1% rise from June 25 to June 28, prior to the announcement of the Japan-Korea trade issue on July 1, another 7.2% between July 1 to July 9 prior to the announcement of Senior Notes on July 10, and 7.6% to market close on July 12 (the time of this writing). This step-wise growth is shown in Chart 5.

Chart 5

Each of these three steps has contributed to the 32.7% increase in MU’s stock price since the market closed prior to its earnings call. As I noted in a September 1, 2018, Seeking Alpha article entitled “Why Is The Stock Market So Smitten With Micron’s Announced $3 Billion Chip Plant?” there has been a direct correlation between MU’s stock price and DRAM ASP. I refer readers to Chart 2 of that article, which shows data from January 2015 and May 2018.

In Chart 6, I extended that analysis through June 2019, and again we see a correlation between DRAM ASP and stock price.

Chart 6 – Source: The Information Network

New data suggest that this correlation is continuing into July, and the increase in MU’s stock price once again correlations with DRAM ASP. Chart 7 shows DRAMeXchange’s DXI index, which incorporates prices for 1, 2, and 4Gb DDR3 and 4, 8Gb DDR4. The turnaround according to the chart, occurred 14 days after June 24 on the axis. So, the upturn in DXI came about July 8.

Chart 7

Each of these three steps in Chart 5 has contributed to the 32.7% increase in MU’s stock price since the market closed prior to its earnings call. How much of a contribution to stock price the misconception that the Japan-Korea trade embargo has beyond the July 1 step is unclear. What is clear is that the drop in MU (stock price and ASPs) may have reached a bottom.

I expect two more knee-jerk reactions when Samsung and SK Hynix announce Q2 earnings releases on July 31 and July 25, respectively.

There is one caveat to my analysis that MU would not benefit from this trade war. The restrictions put on Korea can backfire on Japan. Countermeasures could be initiated by Korea by increasing prices or tariffs on the sale of memory chips to Japan, benefiting MU as well as the nascent Chinese memory market.

A Wakeup Call to Korea

This trade war serves as a warning call to the Koreans. They have a minimal home-grown supply chain. When the U.S. created a semiconductor industry decades ago, along with it giants in the equipment and materials supply chain sprang up. As the semiconductor industry production industry subsequently moved to Japan to meet Japanese company’s horizontally integrated demand (e.g., Sony made TVs, but also made chips for their products), they too initiated a supply chain of equipment and materials suppliers that grew to become giants in the industry. Taiwan next became a manufacturing powerhouse with foundry production of ICs, but they have essentially no supply chain of equipment and materials suppliers. Next came the migration to Korea in memory chips. A small but growing supply chain of Korean equipment suppliers, primarily deposition, has been established for memory and display production. Their materials supply chain, as I discussed above, has come about largely from joint ventures with non-Korean suppliers. Now that China is becoming a powerhouse in ICs and display, they are building infrastructure and have an extensive supply chain of small but growing equipment and materials companies. This is detailed in our report entitled “Mainland China’s Semiconductor and Equipment Markets: Analysis and Manufacturing Trends.”

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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