With Chips on the Brain, the Netherlands are looking for an ally in South Korea – The Diplomat

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Feeling increasingly pressured by the “extreme competition” between the United States and China, the Netherlands has turned to South Korea to help mitigate some of the fallout.

Though they share some of the same concerns about Xi’s China, neither wants to be drawn into the US fight to maintain liberal primacy as a fully aligned participant.

A joint report by the Dutch intelligence services at the end of November issued urgent warnings about China’s asymmetrical challenge. The report identified China as the “biggest threat to Dutch knowledge security” and stated: “Dutch companies, knowledge institutions and scientists are under attack from various (digital) attack campaigns trying to capture high-value technology.”

Ten days earlier, however, the Dutch foreign trade minister issued a bold statement to the United States that the Netherlands would limit exports of ASML, the world leader in lithography systems, to China to ” [its] own terms.”

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In 2019, after strong pressure from the Trump administration, the Netherlands banned ASML from exporting its extreme ultraviolet (EUV) lithography systems to China. These machines can make the most advanced chips needed for things like artificial intelligence. EUV sales account for half of ASML’s revenue.

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These two competing burdens are a testament to the predicament in which the Netherlands finds itself. The international system is going through a profound structural change, which affects the semiconductor sector in particular. Taiwan Semiconductor Manufacturing Company founder Morris Chang recently lamented that globalization and free trade are “almost dead.”

As is usual in times of great transformation, smaller states seek new adjustments to address vulnerabilities beyond their control. In the emerging new Cold War, these efforts are about creating supply lines that are more resilient to the vagaries of geopolitics.

In this regard, South Korean President Yoon Suk-yeol and Dutch Prime Minister Mark Rutte issued a joint statement in Seoul on November 17, establishing a strategic partnership.

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At the heart of the statement is a call for greater collaboration between the public and private sectors of both countries to “collectively protect and promote critical and emerging technologies.”

Looking at the time frame, the impetus to improve bilateral relations is evident.

The US Bureau of Industry and Security in October granted Samsung and SK hynix a one-year license waiver to export chips to China. The two South Korean conglomerates operate high-end factories in China that use US chip equipment and designs, putting them under US export controls. One estimate puts the proportion of Samsung’s chip sales generated in China at 25 percent; at SK hynix, this proportion is estimated at 40 percent.

Earlier in September, South Korea was not involved in a US-proposed coordination platform dubbed the “Chips 4 Alliance” with Japan and Taiwan over fears of Chinese retaliation.

In fact, it is not in South Korea’s interest to disrupt the current optimal ecosystem, which was echoed in November by Dutch NXP and other European chipmakers with mature nodes. China is a crucial center for manufacturing this type of semiconductors, which are used in automobiles and home appliances, as well as for the manufacture of vital parts and materials.

Of course, it was the shortage of this segment of chips in 2020 that caused existing supply lines to be reconsidered in the first place. However, full reshoring or “friend-shoring” of production capacity utilizing larger, older nodes is not economically feasible.

In view of the EU’s quest for “digital sovereignty”, a logical next step in the new Dutch-South Korean partnership could be a high-end South Korean factory in Brainport Eindhoven.

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In return, as a technology hub less than three miles from ASML, the facility could receive preferential access to host ASML’s latest EUV systems. Samsung could skip the currently most advanced 7-nanometer process and start producing the latest 2-nanometer-based chips in Eindhoven. The $21 billion Dutch National Growth Fund could facilitate this initiative.

For both countries, competition in the semiconductor sector is fierce. Taiwan’s TSMC has already been persuaded to build chip fabs in southwestern Japan (with the Japanese government investing in a 50 percent stake) and in Arizona. Echoing the US CHIPS and Science Act, which offers huge subsidies, TSMC announced in December it was building a second plant there, increasing its commitment to $40 billion.

Industrial policy is back and at the heart of today’s geopolitics. For the Netherlands, which has an open economy closely intertwined with German manufacturing, a South Korean plant would go a long way in reducing supply insecurity. Besides the machines that make the chips, South Korea could diversify its exports and gain closer access to the EU, the world’s largest single market.