How a Major Conflict in Korea Could Ripple Through Mobile Industry

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Disruption in Korean Production Could Have Catastrophic Impact
A Pantech Co. employee works on the production line manufacturing mobile phones at the company's factory in Gimpo, South Korea. Photographer: SeongJoon Cho/Bloomberg

Each time North Korean leader Kim Jong Un threatens warfare on his neighbor to the south, the consumer-electronics industry should take a deep breath. South Korea has become so integral to the production of smartphones, tablets and other devices that a disruption there could have a major impact on the manufacturing of new gadgets, Mike Howard, an analyst at supplier-research firm IHS ISuppli, said in an interview.

It's not just Galaxy and Optimus phones from Samsung Electronics and LG Electronics that come from South Korea. Last year, the country accounted for two-thirds of the world's revenue from dynamic random-access memory, according to data from IHS. That's up from 58 percent in 2010. DRAM is a standard storage type found in many computing devices.

South Korea also had nearly half of the world's NAND flash-memory revenue last year, IHS said. That type of memory is faster than a hard drive, and is typically found in smartphones and tablets, as well as in high-end laptops. Oh, and 70 percent of screens for tablets shipped globally come from South Korea, IHS said.

The threat from North Korea and its unpredictable dictator is real. Kim has demonstrated that he can't separate politics from business. The monthlong friction at the Gaeseong industrial complex, a manufacturing zone jointly run by North and South Korea, is evidence of that. Kim's regime had denied 50 South Koreans working there from returning home. Some were being held under demands they pay wages owed to North Korean workers, an official with the South Korean ministry told Bloomberg News . The remaining seven were finally released last week.

The 2011 earthquake and tsunami in Japan rippled through the electronics supply chain and highlighted the need for companies to have contingency plans. Right now, there aren't many other places to go outside of Korea for these crucial components.

With Micron Technology's planned acquisition of Japanese chipmaker Elpida Memory, more share in the DRAM market could be up for grabs, Howard said. Korea's Samsung and SK Hynix are in a pretty good position to take it.

Virtually all of South Korea's DRAM manufacturing facilities are located within 100 kilometers (about 62 miles) from the northern border, Howard said. Keeping every piece of that supply chain close together makes sense for efficiency and likely contributed to Korea's manufacturing dominance, he said.

"It's dangerous for the overall electronics supply chain for so much of one critical component to be manufactured in one location," Howard said. "Tablets, smartphones, the Internet -- without DRAM, none of those things operate."

This story was first published in Bloomberg's Global Tech Today newsletter. To get an early jump on the top tech news from around the world, sign up for the free weekday report.