Huge demand for the components that power artificial intelligence presents South Korea with an opportunity to bolster its chip industry against rivals such as China, analysts say.

Seoul announced on Monday massive investments, including for new semiconductor factories and AI data centres, led by South Korean chipmakers.

AFP looks at what has driven South Korea’s AI boom, and where it could be heading:

Sky-high profits

Three companies dominate the global market for producing advanced memory chips that help power AI systems: US giant Micron, and South Korea’s Samsung Electronics and SK hynix.

Their profits and share prices have soared to dizzying heights, as governments and tech companies plough hundreds of billions of dollars into training and running AI tools.

“AI has not only provided big demand, it has also created shortages, and that has driven price escalation,” Jim Handy, semiconductor expert at Objective Analysis, told AFP.

Spiralling prices for memory and storage chips are being passed on to consumers — with Apple this month hiking the cost of MacBooks and iPads.

The boom has also fuelled worker demands over pay packages, with Samsung averting a major strike in May by agreeing a deal on bonuses with its largest union.

Chinese competition

South Korea has pledged to triple spending on AI this year, aiming to join the United States and China as one of the world’s top AI powers.

With China in particular racing to develop its tech industry, Seoul sees the boom period as a “one-time opportunity” to close the gap, said Lian Jye Su, a chief analyst at Omdia.

“It’s the perfect time” for South Korea to leverage its strategic advantage and make investments as “the AI boom might die down” and demand could regress, he told AFP.

Financial Times reported on Saturday that Apple is seeking to buy memory chips from Chinese manufacturer CXMT — a company poised to benefit from shortages, along with Taiwanese rivals.

AFP has approached Apple and CXMT for comment.

Although Chinese firms benefit from lower labour costs and big domestic demand, there could be limits to the country’s tech growth, Su said.

“People are less keen to… (become) overly reliant” on Chinese silicon, a factor that Korean vendors like Samsung now want to “double down on”.

Innovation imperative

Established Asian chipmakers can capitalise on the AI boom, partly because they remain innovative, Handy said.

“This gives them profitability that helps to produce a moat between them and smaller firms” who cannot maintain the same level of spending and research investment, he said.

With Monday’s announcements, South Korean chipmakers want to use their current abundant cash to help diversify their offerings, Su added.

That can help them avoid becoming too dependent on the current hot sector — memory chips — in what economists call a “Dutch disease”, referring to the negative effect of a temporary upswing in the price of one commodity.

Boom or bubble?

The head-spinning speed of growth in the sector — Samsung’s share price has risen more than 430 per cent over the past year, with SK hynix’s up 770 pc — has raised concern over how long the AI boom can last.

Some analysts such as Su are optimistic that demand will stay buoyant, given the deepening integration of AI tools into business operations.

For memory chips, “there’s little to stop price rises until they impact end markets,” Handy said.

“If prices rise too high then markets move to another technology or disappear altogether,” he explained.

“We’re not there yet.”