Costing the Unthinkable

From shipbuilding to RAM, a nuke strike on North Korea's neighbors would take out huge layers of high-tech production. Luckily, it's unlikely to occur

Now that North Korea has nukes, will it use them? It's clearly unlikely. The North for years has had the capability of incinerating much of South Korea with conventional weapons but hasn't done so. And retaliation would be swift and would certainly topple the Pyongyang government and annihilate much of the country. But North Korean leader Kim Jong Il has long proven to be both unpredictable and belligerent, so it's impossible to entirely rule out a nuclear assault.

If that were to happen, what would be the result? The 12 million residents of Seoul—less than 25 miles south of the border—could well bear the brunt of any attack, and countless numbers would be killed. The rest of Korea and much of Japan are also within range of Pyongyang's missiles, though it's unclear whether the North has a device it could mount on one of them.

And parts of Alaska and the Pacific Northwest might be within reach of a handful of the country's most advanced weapons. "Imagine 9-11 magnified tenfold—that's kind of impact we'd be talking about," says Ted Carpenter, vice-president for defense and foreign policy at the Cato Institute, a Washington think tank.


  While the risk of an attack is minimal, if it were to happen the economic consequences might be felt over an even wider area. South Korea is the world's 11th-largest economy and 7th-largest trading nation, while Japan is the No. 2 economy. And both are home to many cutting-edge technologies vital to global economic health. Even China's factories, while an unlikely target for Kim, could be affected since many of them rely on Japan and Korea for key parts and production equipment.

Any attack, for instance, would surely hobble much of the world's technology industry. That's because Samsung Electronics, headquartered in Seoul, makes nearly half of the global supply of the most commonly used form of flash memory. That would make it tough to find supplies for all the cell phones, MP3 players, and digital cameras consumers covet.

More important in the immediate aftermath of an attack, flash is also used in military communications gear and some medical equipment. Samsung also makes a third of the world's supply of dynamic random access memory, another key component in computers and many tech gadgets.


  "We have the most heavily concentrated semiconductor site in the world," says Samsung Electronics President Hwang Chang Gyu. Microsoft (MSFT), IBM (IBM), Intel (INTC), HP (HPQ), Dell (DELL), Sun Microsystems (SUNW), Nokia (NOK), Motorola (MOT), Sony (SNE), and Apple (AAPL), are all Samsung clients.

The world's No.2 memory chip maker is based in South Korea as well: Hynix Semiconductor. The two companies, together with Japan's Toshiba, dominate the primary flash-memory market with a combined global share of some 80%. Also at risk would be Japan's Renesas Semiconductor and Elpida (ELPDF); both big memory chip makers; and Canon (CAJ) and Nikon (NINOY), which make equipment for etching microscopic circuitry into chips.

"If the production of even one chip factory is hit, shock waves are felt around the world," says Dong Yong Sueng, leader of the Economic Security Team at the Samsung Economic Research Institute. "If Korean and Japanese chipmakers were wiped out, the whole electronics industry could be paralyzed."


  Korea and Japan are also home to much of the world's cell phone and flat-screen TV industries. Three of the top five cell phone makers and major rechargeable-battery makers are also based in the two countries. Samsung and LG.Philips LCD—a joint venture between LG Electronics and Philips Electronics—and Japan's Sharp (SHCAY) all operate LCD-panel plants churning out big TV screens.

Matsushita Electric Industrial (MC), LG, and several other Japanese and Korean companies control the market for plasma panels. Again, consumers, manufacturers, and investors would be affected by an interruption of supply, and the screens have also become vital in military applications and medical imaging.

Global shipping would also suffer. Last year, 73% of oceangoing commercial vessels were built in Korea and Japan. Fanuc, Kawasaki Heavy Industries (KWHIY), and Yaskawa Electric keep cutting-edge industrial-robot technology at labs near their headquarters, while Japanese engineers at Mitsubishi Heavy Industries, Fuji Heavy Industries (FUJHY), and Kawasaki hammer out panels of lightweight composite materials for airplane wings and fuselages on Boeing's (BA) planes.


  In July, Pyongyang test-fired seven missiles into the sea between Japan and the Korean peninsula, displaying its capability to control multiple launch pads. The U.S. and Japan have been at work on a $3 billion missile-defense shield, a network of satellites, radar, and missiles that might lock onto North Korea's missiles and pluck them out of the sky before they hit targets. But it won't be up and running until 2014, even if all goes well.

"North Korea has deployed hundreds of Scud and Rodong missiles and they could reach any part of Japan and South Korea," a spokesman for the U.S. military in Seoul says. "The North doesn't even need a nuclear bomb to be a major threat to the region. Its conventional weapons are terrible enough threats."

Indeed, they were a big enough threat to make the U.S. shy away from any preemptive strike aimed at taking out the North's developing nuclear program. After the test, it seems the odds for such an attack are even lower. "This weapon is the ultimate insurance policy," says Jon Wolfsthal, non-proliferation fellow at the Center for Strategic and International Studies, who was an onsite U.S. nuclear inspector at North Korea's Yongbyon nuclear facility in the mid 1990s.


  That partly explains why financial fallout from the North Korean test has been relatively muted. No major credit-rating company has downgraded South Korea despite the rising geopolitical uncertainty. And while shares on the Seoul Stock Exchange fell 2.4% on the day of the test, they have been relatively flat since then.

Also, while South Korea and much of the rest of the world would surely suffer unimaginable damage—both in terms of human life and economic vitality—the cost to the North (and Kim himself) would be far greater. "Retaliation," says John Feffer, director of global affairs at the International Relations Center in New Mexico, "would be devastating."

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