South Korean Chip Manufacturers Face Steep Decline in Production, Government Introduces Tax Incentives to Boost Investment

According to data from the South Korean National Statistical Office, chip production by Korean chip manufacturers in February decreased by 41.8% compared to the same period last year, with a decrease in production not seen since the 2008 financial crisis. This indicates that the decline in semiconductor demand may be deeper and more lasting than anticipated.

Bloomberg reported that chip production in Korea fell 33.9% year-on-year in January and then hit a new low in February with a 41.8% decline. In February, inventory increased by 33.5%, while factory shipments dropped 41.6%.

Chip manufacturing is an important part of Korea's trade dependence, accounting for around 12% of total exports in February. The worsening global demand for chips has increased the economic challenges for the country, whose economy has already declined in the previous quarter compared to the previous reporting period.

Korean policymakers hope for a rebound in the second half of the year and will continue to use semiconductor investment as the main engine of economic growth. On Thursday, the Korean parliament approved tax breaks for companies to stimulate investment in the semiconductor industry. Under the new rules, the investment tax credit rate for small and medium-sized enterprises will increase from the current 16% to 25%, and for medium and large companies, from 8% to 15%. An additional 10% credit will be provided for investment amounts exceeding the average of the past three years, but only for this year. As a result, large companies and medium-sized backbone enterprises and small and medium-sized enterprises will enjoy investment tax credits of 25% and 35%, respectively.

According to data from the Semiconductor Equipment and Materials International (SEMI), it is expected that Korea's spending on advanced chip manufacturing equipment will increase by 41.5% to $21 billion next year, surpassing China, which will grow by 2% to $16.6 billion.