Will the Japan-South Korea ban on "hydrogen fluoride" affect Huawei's production?

On July 1, 2019, Japan's Ministry of Economy, Trade and Industry announced that it would strengthen export controls to South Korea on semiconductor materials such as "fluorinated polyimide" used in the manufacture of OLED screens in smartphones and televisions, "photoresist" and "high-purity hydrogen fluoride" that are essential in the semiconductor manufacturing process. The measures will be officially implemented on July 4.

About three weeks have passed since the implementation of export controls. During this period, the most attention-grabbing issue was not the photoresist and fluorinated PI materials that Japan almost monopolized, but high-purity hydrogen fluoride.

The Hankook Ilbo reported on July 12 that a South Korean government official said on the 11th that Russia recently expressed to the South Korean government through diplomatic channels that it is interested in supplying domestically produced hydrogen fluoride to South Korean companies.

On July 16, according to Korean media reports, in order to cope with Japan's export restrictions on semiconductor materials to South Korea, SK Hynix has begun testing the import of hydrogen fluoride raw materials from China, while Samsung has recently purchased high-purity hydrogen fluoride on a large scale from Xi'an.

——Why is it “hydrogen fluoride”?

Hydrogen fluoride is a colorless, transparent liquid with a strong pungent odor under standard conditions. It easily evaporates into white smoke at room temperature and pressure. It can react with general metals, metal oxides and hydroxides. It is extremely corrosive and can corrode glass and silicates to produce silicon tetrafluoride. It is easily soluble in water and alcohol, but difficult to dissolve in organic solvents.

Hydrogen fluoride has a wide range of uses. High-purity hydrogen fluoride plays an indispensable role in the production of semiconductor materials and can be used for etching and cleaning of large-scale integrated circuits in the electronics industry.

The high-purity hydrogen fluoride used in semiconductor manufacturing has extremely strict requirements on the mass fraction of all individual metal impurities. When high-purity hydrofluoric acid has not reached the actual acid concentration required during the production process, it needs to be stored in special equipment to adjust the acid concentration to prepare the product. Due to the extremely stringent requirements on the impurity content, how to avoid secondary contamination during the storage process is an important problem. At present, the international use of high-purity polytetrafluoroethylene and other materials as equipment linings, pipelines and valve materials can more effectively preserve high-purity hydrofluoric acid, but the storage time cannot be too long. Therefore, wafer fabs often purchase raw materials for electronic-grade hydrogen fluoride or hydrofluoric acid in small batches and use them immediately after purchase.

Therefore, after July 4, the inventory of high-purity hydrogen fluoride used by Samsung and SK Hynix wafer fabs became quite tight, and it was urgent to quickly find alternative suppliers.

—— Samsung and Hynix seek alternative suppliers, and Chinese companies play an important role

On July 16, Fast Technology reported that SK Hynix has begun testing high-purity hydrogen fluoride materials supplied by South Korea's SoulBrain, and Samsung is reported to have also applied SoulBrain's hydrogen fluoride materials in its semiconductor manufacturing plants.

Xiubo Ruiyin (Xi'an) Electronic Materials Co., Ltd. is a subsidiary of SoulBrain in China. According to official information from Dofluoro, Dofluoro currently has a 10,000-ton electronic-grade hydrofluoric acid production line, which is an alternative imported product for UPSS-grade hydrofluoric acid, and Xiubo Ruiyin is one of Dofluoro's customers!

On July 17, The Paper revealed that Samsung and SK Hynix of South Korea asked a local supplier to increase the supply of key chemicals needed for chip manufacturing to prevent production from being hindered. Foosung executives said, "They (referring to Samsung and Hynix) are checking almost every day to get more supply.

According to the prospectus of Sanmei Co., Ltd., Foosung Group was the largest customer of the company's hydrogen fluoride products in 2017 and 2018. In addition, Sanmei Co., Ltd. and Morita Chemical Industry, Samsung's previous high-purity hydrogen fluoride supplier, jointly established "Morimi Chemical" to sell anhydrous hydrogen fluoride, fluorine compound products and by-products.

In addition, Lianchuang Co., Ltd. recently revealed that its holding subsidiary Shandong Hua'an New Materials Co., Ltd.'s business scope includes hydrofluoric acid products and has always been a high-quality supplier of South Korea's Foosung Group.

The Electronic Chemical New Materials Industry Alliance reported on July 16 that Binhua Group's electronic-grade hydrofluoric acid has successfully received bulk orders from some Korean semiconductor manufacturers.

It is reported that South Korea is looking for diversified markets while investing in domestic technology research and development. After multiple batches of sample testing and small-batch trials, Binhua Group finally established a formal partnership with a South Korean company. It is reported that South Korean companies have placed batch orders with Binhua Group.

——Japan and South Korea’s ban on hydrogen fluoride may affect Chinese companies including Huawei in the short term

According to Japanese media analysis, Japan's export control on South Korea may affect China. Japanese trade statistics show that Japan exported about 36,800 tons of hydrogen fluoride to South Korea in 2018. The largest importer of hydrogen fluoride in South Korea is China, but if it is limited to ultra-high purity products used for semiconductor wafer cleaning, Japan's StellaChemifa and Morita Chemical Industry hold about 90% of the market share. Imports from China are considered low-purity products with different uses.

According to data from the Korea Trade Association, South Korea exported 4,050 tons of hydrogen fluoride to China in 2018. A person from the Ministry of Trade, Industry and Energy of South Korea said: The hydrogen fluoride imported from Japan is processed in South Korea and used by Samsung Electronics and SK Hynix's semiconductor factories in South Korea, and part of it is exported to the Chinese factories of the two companies. He also emphasized that strict management is carried out: when exporting hydrogen fluoride to China, the government requires suppliers to sign a guarantee letter stating the end user and strictly comply with it. A system has been formed to hold legal responsibility if it is sold to a third party or false declaration is discovered.

It is reported that although procedures are required, South Korea can smoothly export materials imported from Japan to China under relaxed conditions because the Japanese government has included South Korea in the "white list" of countries that are trustworthy as export destinations. If it is removed from the white list, the review and procedures may become more stringent, requiring complicated procedures.

The report quoted Chinese customs statistics showing that the import volume of high-purity hydrogen fluoride from South Korea was about 4,000 tons in 2018. Most of it was made in Japan and exported to China via South Korea. In terms of export destinations, about 70% was from Shaanxi Province and about 30% was from Jiangsu Province. Xi'an, Shaanxi Province has Samsung Electronics' NAND flash memory factory, while Wuxi, Jiangsu Province has SK Hynix's DRAM factory.

Samsung and SK Hynix hold a combined 50% to 70% of the global semiconductor memory market. South Korean analysts believe that Samsung produces 25% of NAND flash memory in China, while SK Hynix produces 40% of DRAM in China. If Japan's tightening of export controls leads to a stagnation of hydrogen fluoride exports to South Korea, South Korea's exports to China will also stagnate, and the semiconductor production of the two companies may be affected. The report quoted an analyst from a Chinese securities company who is familiar with the semiconductor industry as saying that it is expected to have a significant impact on companies such as Huawei Technologies, and may also have an impact on manufacturers such as personal computers and servers.

With South Korean manufacturers reducing semiconductor production, it is difficult for China to make up for it through domestic production. China has designated semiconductors as a key area in its high-tech industry cultivation policy "Made in China 2025", striving to increase its self-sufficiency rate to 40% by 2020. China's current semiconductor self-sufficiency rate is believed to be a little over 10%. Although China has vigorously promoted the localization of semiconductors, companies in the United States, Japan and the Netherlands still monopolize the market for most advanced devices. In China's semiconductor industry, many people believe that "the higher the performance of the semiconductor, the more difficult it is to achieve localization, and it will take several years", and currently it still has to rely on imports.

The Nihon Keizai Shimbun reported that Samsung and other Korean companies have begun looking for alternative materials, but the situation is not optimistic. Showa Denko has only one production base for hydrogen fluoride used in cleaning semiconductor substrates and circuit grooving, namely the Kawasaki Plant (Kawasaki City). Although Stella Chemifa of Japan also produces hydrogen fluoride in Singapore, a Japanese analyst said that Korean manufacturers only choose Japanese etching gas for semiconductor production in China, proving that Japanese etching gas is difficult to replace in terms of purity and other quality. In the future, it is also likely that a new supply chain will be formed in which Japanese companies will directly export to China.