Assignment # 02

Political Influence on Supply Chain Network Decision

Course Title : Project Supply Chain Management

Course Code : MSP 626

SUBMITTED TO
Ma’am Yasmin Ahmed
SUBMITTED BY
Ammarah Shoaib
ENROLLMENT NO.
02-398191-009
MSP 626 Project Supply Chain Management

Table of Content
1 Introduction 3
1.2 Supply Chain Drivers 3
1.3 Supply Chain Network Design 3
1.3.1 Benefits of Supply Chain Network Design 4
1.3.2 Key Factor that Affect Supply Chain Network Design 4
2 Political Influence and Disruption in Supply Chain Management 4
2.1 Brief History 4
2.2 Causes of Disruption 4
2.3 Enactment of Political Sanctions by Japan 4
2.3.1 Analysis of South Korean Imports 5
2.3.2 Short and Long-term Implications of Japan’s export control actions 5
2.3.3 Direct Production and Trade impacts for Korea 5
3 Repercussion of Political Sanctions on Different Sectors of Japan 6
3.1 Japanese Beer 6
3.2 Fashion Industry 6
3.3 Automobile Industry 6
3.4 Tourism 6
4 Alternative Strategies by South Korea 7
5 Conclusion 7

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1. Introduction
Supply chain management, the management of the flow of goods and services, involves the movement
and storage of raw materials, of work in process inventory, and of finished goods from point of origin to
point of consumption.
Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories,
warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right
locations and at the right time, and so as to minimize total system cost subject to satisfying customer service
requirements.
The primary focus is on costs of materials and efficient delivery. Effective supply chain management
reduces costs to the consumer and increases profits for the manufacturer and can be achieved by fulfilling
roles such as:
 Choosing and managing suppliers of components or raw materials.
 Strategic planning for production and delivery to support marketing efforts, special offers and
seasonal demand.
 Monitoring inventory and product flow to avoid supply shortages.

1.1. Supply Chain Drivers

Supply chain drivers are used to improve supply chain performance in terms of responsiveness and
efficiency. Following are the two drivers of SCM,
 Logistical Drivers
 Cross-functional drivers
Logistical Drivers includes facilities, inventory, and transportation. Whereas Cross-functional drivers
includes information, sourcing and pricing.
1.2. Supply Chain Network Design
Supply chain network design (SCND) is the process concerned with determining logistics infrastructure
over an extended planning horizon to provide the most effective strategic solution in terms of cost and/or
service. Number, type, location of plants and warehouses and the sourcing assignments between these
and customers may all be considered.
Supply chain design decision can be broadly categorized into three categories:

Facility
Location

Supply
Chain
Network
Design
Supply and
Capacity
Demand
Allocation Allocation

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1.2.1 Benefits of Supply Chain Network Design

 Reducing overall supply chain costs
 Improving customer service
 Consolidating after mergers or acquisitions
 Performing contingency planning
 Performing what-if scenario analysis
 Optimizing production sourcing decisions
1.2.2 Key Factor that Affect Supply Chain Network Design
Key factors that affect the supply chain network modeling are:
 Government Policies of the Country where plants are to be located.
 Political climate
 Local culture, availability of skilled / unskilled human resources, industrial relations environment,
infrastructural support, energy availability etc.
 Taxation policies, Incentives, Subsidies etc. across proposed plant location as well as tax structures
in different market locations.
 Technology infrastructure status.
 Foreign investment policy, Foreign Exchange and repatriation Policy and regulations.
2. Political Influence and Disruption in Supply Chain Management
Global supply chains are more than simply a function of raw supply and demand. The ability to source raw
materials and components, process them and get products to market is impacted by political risk including
political instability, regulation, protectionism and conflict.
This report focuses on the political sanctions and embargo in between Japan and South Korea (referred as
Korea in this report) that leads to a major disruption in the supply of chemicals required for the
manufacturing of semi-conductors and display screens.
2.1 Brief History
The pressures over Japan's run the show over the Korean Landmass from 1910 until its yield at the
conclusion of the Moment World War in 1945 were an interminable thistle in relations between the two
nations. The two nations normalized relations in 1965 (both nations marked a settlement to reestablish
conciliatory ties) and the Japanese government paid $500 million in help and credits for their wartime
outrages. After the settlement was marked, South Korea has been the biggest exporter of three chemicals
from Japan, with South Korea being the biggest producer of semiconductors and machines.
2.2 Causes of Disruption
This case escalated in October 2018, when the South Korean court ruled that Mitsubishi Heavy Industries
and Nippon Steel & Sumitomo Metal would compensate Koreans who had been forced to work for them
during the Second World War. The court approved seizure of Nippon Steel assets in South Korea, and the
plaintiffs filed a similar lawsuit for Mitsubishi Heavy.
As a result, Japan, South Korea trade war intensifies with supply chains caught in the middle. Japan’s
export control actions and the resulting trade tensions have introduced supply chain risks due to trade
policy. Firms along the semiconductor supply chain may take into account supply chain disruptions due to
unexpected single events (like an earthquake) in their investment and sourcing decisions, but supply chain
disruptions and risks due to trade policy among major producing countries is largely uncharted territory for
the industry.
2.3 Enactment of Political Sanction by Japan
On 1 July 2019, Japan announced that it would restrict exports to Korea of certain key semiconductor
manufacturing materials. These materials includes hydrogen fluoride, fluorinated polyimides, and photo-
resistance/resistance (used in smartphone displays and for the transfer of circuit patterns and etching gas
in chips) and their respective technologies—are important inputs for the Korean semiconductor industry.
The Korea International Trade Association (KITA) estimates that for all three types of semiconductor related
chemicals, Japan is a major or leading supplier of these chemicals for Korea---that South Korean tech
giants Samsung, LG, and SK Hynix rely on.

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2.3.1 Analysis of South Korean Imports

Japan accounts for nearly 90 percent of fluorinated polyimide and photoresist, and about 70 percent of
hydrogen fluoride. This is technically not a blanket export prohibition, but a requirement that Japanese
companies apply for licenses for each of these three chemical materials when they sell to South Korea – a
requirement that gives the Japanese government the bureaucratic room to delay exports for up to 90 days.
However, it can become a defacto embargo if the Japanese government does not grant export permissions.
This restriction affects the global semiconductor industry, and specifically Samsung and SK Hynix within
South Korea. Officially, Japan imposed these export controls as a matter of Japanese national security,
accusing South Korea of not properly controlling these sensitive materials (i.e. implying that Seoul allows
some of these sensitive materials with military applications to reach North Korea). This is the same official
reason that Japan removed South Korea from its “white list” of countries), which hit other whole host of
industries including autos and agriculture.

Sources of Semiconductor Related Chemicals Imports for Korea, by source (percent of total) from January to May 2019
South Korean semiconductor giants Samsung Electronics and SK Hynix supply 60 percent of the world’s
memory chips and have warned that they can’t rule out production disruption if the Japanese export
restrictions remain in place. This could significantly impact large global players such as Apple and Lenovo
that leverage just-in-time delivery principles to minimize costs.

2.3.2 Short and Long-term Implications of Japan’s export control actions

Japan’s export control actions on semiconductor equipment and material have substantial impacts on
Korea’s semiconductor industry in the near and medium term. The degree of the impact partly depends on
the predictability with which the Japanese companies are able to acquire export licenses. The minimal
disruption case is if export licenses are rapidly approved, which will deter production shutdowns. In a
scenario where there are licensing delays and production lines have to temporarily mothballed.
2.3.3 Direct Production and Trade impacts for Korea
The direct impact on Korea’s semiconductor production and exports depends on the length of the potential
shortage of imported chemicals needed for production of semiconductors and display panels. Because a
significant portion of semiconductors products are exported to markets outside of Korea, exports figures
provide adequate approximations of potential sales losses for Korean producers in case of a production
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delays or stoppage. In the past year, Korea recorded monthly exports of approximately $7.7 billion of
integrated circuits, and $0.8 billion in display parts (which accounts for LED and OLED). Together, the
potential short-term upper-bound monthly impact on Korea’s production and exports (assuming a complete
production disruption) is about $8.4 billion.

Korea’s exports of potentially impacted products ($ million)

Even in the best-case scenario with minimal delays, this action will likely spur long-term changes in Korea.
As semiconductors encompass a significant portion of Korean exports (about 19 percent of total Korean
exports), this type of supply chain vulnerability will not be tolerated in the long-term. It is likely that there will
be increased investment in moving or building some of the capacity for these chemicals to Korea (or seek
other import sources) as firms work to ensure they are not in this situation again, although that process
could take years to complete. That would, eventually, lead to a major shift in the supply chain as Korean
firms may be unlikely to switch back to Japanese suppliers if they are forced to look elsewhere for the
necessary products. The Korean government has taken some steps to encourage on-shoring of chemical
manufacturing capacity recently by relaxing regulatory requirements for replacements of previously
imported substances.
3. Repercussion of Political Sanctions on Different Sectors of Japan
A more surprising feature of the trade tensions was the South Korean public’s response in the form of
boycotts on Japanese products and travel to Japan.
3.1. Japanese Beer
Japanese beer has consistently been the most popular imported beer in South Korea and accounted for a
quarter of all South Korean beer imports in 2018. However, as a result of the boycotts, imports of Japanese
beer are down 49.2 percent in 2019 and have essentially stopped since August.
3.2 Fashion Industry
While Japanese fashion retailer Uniqlo has faced boycotts and seen its situation in South Korea continue
to deteriorate, trends in the trade data do not indicate an overall decline in imports of shirts and blouses
from Japan as a result of the boycott. While this may be reflective of China accounting for roughly half of
Uniqlo’s production, there does not seem to be any significant shift in South Korea’s imports of clothing
overall.
3.3 Automobile Industry
Sales of Toyota automobiles were down 36.7 percent for the year, while Nissan saw a decrease of 39.7
percent. Their luxury brands, Lexus and Infiniti, saw declines of less than 10 percent. However, Toyota
sales were already down 23.4 percent through the first half of 2019, while Nissan sales were down 25.4
percent. For Toyota and Nissan the boycotts worsened what was already a declining trend. On the surface,
Honda seems to have avoided the boycott and saw its sales rise by 10 percent last year, but through June
its sales had been up 94.4 percent, suggesting its growth in the second half of the year saw a steep drop-
off.
3.4 Tourism
Tourism has also been impacted. South Korea traditionally has been the second largest source of tourists
for Japan, accounting for nearly a quarter of all visitors to Japan. While full data for 2019 is not yet available,
the number of South Koreans traveling to Japan will likely reveal a decline by at least 50 percent in the
second half of 2019.
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4. Alternative Strategies by South Korea

Due to export restriction from Japan on South Korea, and removal of South Korea from Japan’s white list,
Korea started to look towards different sources along with improvising and establishing local sources.
Korean Manufacturer LG Display started to prepare for the potential impact of a trade dispute between
South Korea and Japan on chemicals used in chip and display manufacturing.
LG Display's CFO Dong-Hee Suh said the company is looking into alternative suppliers for the impacted
chemicals. LG Display have reportedly testing Taiwanese HF as a replacement for Japanese product. At
least one HF producer in Taiwan appears to be affiliated with or is a subsidiary of a Japanese firm, and it
is unclear what the trade restrictions would have on its operations or potential sales to Korea.
Samsung and other companies have begun to look to Korean producers to replace supplies from Japan,
while the South Korean government is investing in the domestic production of semiconductor materials.
Foreign firms are also taking advantage of the dispute. The U.S. chemical firm DuPont expects to invest
$28 million in two existing factories in South Korea and to build a new factory to make photoresists that can
be used in the production of semiconductors.
5. Conclusion
This report have major focus on the enactment of political sanction and after effects in the semi-conductor
industry of South Korea. Furthermore, an insight on the repercussion of political sanctions on different
sectors of Japan have also been discussed. The semiconductor industry of the past three decades has
been characterized by its globalized production processes with fewer firms specialized in their portions of
the supply chain. For the most part, the industry has relied on predictable and low trade costs to maintain
supply chain efficiencies.
It is contended that risks due to export restrictions of specialized and necessary chemicals are likely to
force firms in the industry to make investment and sourcing decisions related to specialized chemicals that
are otherwise counter-intuitive. Japanese manufacturers of the three chemicals have to face risks for losing
customers because of the absence of obvious alternative buyers. On the other hand, Korean Manufacturers
of semiconductors may be forced to capitalize in the domestic sources or to source from alternative sources
that are inferior to their current sources. It is befitting to say that new firms that may enter the market as
alternative chemicals suppliers face uncertain investment decisions in a highly capital intensive industry.
Also, difficulties may arise to catch up to the level of incumbents’ manufacturing efficiency and quality.
Actions due to political sanctions have the potential to originate risk in the semiconductor supply chain for
Japan and Korea, with consequences for the global semiconductor industry, industries that supply to
semiconductor manufacturers, and wider electronics industries that rely on semiconductors as inputs. As
well as due to these supply chain risks curtailing from apparently unsettled and unrelated bilateral political
rigidities, difficult and costly trade and investment results may be inevitable.

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