Japan tightened restrictions last month on exports of three chipmaking materials to South Korea, home to memory chip titans Samsung and SK Hynix, threatening to disrupt the global tech supply chain as it provides about 70% or more of the restricted products to the world.
While the move highlights Japan Inc's firm place in the industry even after its once mighty giants like Sony lost out to nimble Chinese and Korean rivals, it has fueled concerns that its grip on the niche market for fluorinated polyimides, photoresists and hydrogen fluoride could loosen.
"South Korean companies cite quality and stable supply as reasons for choosing Japanese materials. But this has made them aware of the need for change and they are already taking action," a source at a Japanese materials supplier said.
"This will hit us like a body blow."
Samsung, for instance, has stepped up testing of non-Japanese photoresists and hydrogen fluoride, several sources familiar with the chip supply chain said.
Soulbrain, a supplier of hydrogen fluoride to the Samsung and Hynix - the world's No.1 and No.3 chip vendor, is aiming to match the purity of Japanese hydrogen fluoride at a plant that is still under construction.
Industry experts, however, note it would take time for South Korean firms to move up the value chain as the three high-tech materials are not easy to replicate.
Japanese suppliers "have built up their capabilities through decades-long experience of developing products", Atsushi Ikeda, Citigroup analyst, said.
"The accumulation is just too big for new players."
Top photoresist supplier Tokyo Ohka Kogyo says it takes up to two years to develop new resists.
'RARE EARTH SHOCK'
From South Korea, the curbs are likely to elicit a response similar to Japan's during the "rare earth shock" nearly a decade ago, when China's restriction on exports of rare-earth minerals used in electronic devices forced Japan Inc to find alternate supplies, industry participants said.
"Under the circumstances, anyone would do that," said the source at the Japanese supplier that has been hit by the curbs.
Seoul has already pledged to subsidizes the domestic chip supply chain to accelerate the buildup of knowledge needed for firms to catch up in more advanced fields.
A senior executive at Soulbrain said the government had expedited paperwork so its new plant could be completed faster.
Soulbrain is looking to complete the construction by end-September and run tests to see if it can mass produce high-purity hydrogen fluoride, the executive said.
In photoresists, Samsung is trying to curb its reliance on Japan for advanced material, although sources say it faces high hurdles. The company, however, uses material from local supplier Dongjin Semichem for photoresists used in chips with less finer circuit patterns, Japanese supply chain sources said.
Only three Japanese firms, Tokyo Ohka, JSR and Shin-Etsu Chemical, currently supply high-quality materials used in advanced chip production technology known as extreme ultraviolet lithography globally.
Tokyo Ohka and other materials makers grew hand in hand with electronics conglomerates NEC, Toshiba and Hitachi, the world's top chipmakers in the late 1980s.
Even after Japanese chipmakers lost ground to South Korea, the suppliers continued to thrive, thanks to early inroads in overseas markets and the strength of their local supply chains.
But in the wake of the latest curbs, prompted by a decades-old row between the Asian nations over compensations for forced South Korean laborers at Japanese firms during World War Two, suppliers in Japan are having to deal with repercussions beyond the three restricted materials, industry sources said.
Korean chipmakers are now asking Japanese suppliers to front-load shipments of materials Japan has large market shares of, from silicon wafers to polishing slurries, for fear of further restrictions, the sources said.
Japanese suppliers have so far refrained from directly commenting on how the curb will impact their business, claiming they had no inkling of the government's decisions beforehand.
"We have very good relations with our Korean clients," said Hideo Ohhashi, a spokesman for Tokyo Ohka.
"But this is up to politics."
(Reporting by Makiko Yamazaki and Heekyong Yang; Additional reporting by Linda Sieg in TOKYO and Ju-min Park in SEOUL; Writing by David Dolan; Editing by Miyoung Kim and Himani Sarkar)
By Makiko Yamazaki and Heekyong Yang