Worrisome Technology Transfer to China by Korean LCD Panel Makers and China’s Intentions

I have recently posted several pieces on Korean high-tech firms’ strategic focus change and new investments in the Chinese market.

Samsung and LG Display are the top two LCD panel makers in the global flat-panel display market and are setting up their LCD fabs in China. Their strategic investments looked rather worrisome due to several factors.

For one, there is a concern for Korea’s high-tech knowledge and know-how transfer to China. The Korean LCD panel makers claim that since they are already setting up the next generation fab lines (10th and 11th generations) in Korea, so building 7.5th and 8th generation fabs, respectively in China wouldn’t remain a matter of grave concern. However, some experts worry that sooner or later the Chinese would catch upon on high-tech process technologies, which would lead to other important technologies like solar batteries and OLED.

High-tech manufacturing capacity is one of the strongest competitive edges Korea has had. The two Korean high-tech firms contend that since the global LCD market is maturing and shrinking, they have no choice but to aggressively invest in the growing Chinese consumer market. Yet the question is: Why do they have to build LCD fabs in China? To export LCD panels and LCD TVs to the U.S. and other advanced economies, Korean high-tech firms have manufactured them mostly in Korea.

Again, China is Korea’s largest trading partner. Korean high-tech firms have shifted their strategic focus in China from a base of exports to other countries to the export market itself with enormous market growth potential.

Meanwhile, the Chinese government is reportedly attempting to raise the current tariffs of 3 percent on LCD panels. It has also been asking the two Korean LCD panel makers to invest LCD fabs in China.

China has been accumulating its high tech capacity and building its high-tech infrastructure which can be served as the backbone of further innovation for other high-tech products. Further, it will have the solid skilled people base. All their paths and policy undertaking the Chinese has taken seem to point to the locus of R&D and manufacturing shifting to China.

This move sparks some concerns: for instance, what is the ultimate motive behind China’s intentions to build its high-tech capabilities? Do the Chinese regard them as a means to build wealth for the well-being of the general public, raising standards of living?

Korea has never fully developed such supplier infrastructure as materials, capital goods, and specialty logic chips, while some Korean high-tech forms have become global leaders in several high tech fields like memory chips, LCD panels/TVs, and mobile phones. Its competitive edge lies in the scale-intensive hardware high-tech products. Lacking solid high-tech supplier infrastructure, strong engineering schools and a robust venture capital industry, high-tech manufacturing and R&D capacity is one of a few sources of competitiveness for Korea. Korea still faces a technology deficit problem.

LCD panels and TVs have been the major export items of Korea. By handing over Korea’s technological capacity to China a little by a little and moving its manufacturing operations to China, Korea may lose its path of sustainable growth. The two Harvard professors Pisano and Shih warn of the consequences of the U.S. manufacturing decline. Korea may head for the same fate as I noted in a prior post on the mobile phone business.

Given China’s aggressive technology accumulation drive and its clever technology transfer strategy, acquiring the next generation high-tech process and design technologies seems to be a matter of time. The notion of technonationalism seems to be very much alive in China.

Korea has come a long way to accumulate its high-tech R&D capacity, production process skills, and fab know-how. And yet, the Chinese may soon develop their own indigenous innovation capacity in several high-tech areas which may surpass Korean’s. Where would Korea’s technological competitiveness lie then?