Does the AI Boom Help South Korea Survive the Hormuz Crisis?

South Korea’s economy faced major pressure from the Hormuz crisis, with disruptions hitting energy imports, petrochemicals, jet fuel, and semiconductor supply chains. But the AI boom also gave Korea a major lift, thanks to its central role in producing memory chips and inputs for AI data centers. Host and TAG Senior Advisor Mira Rapp-Hooper speaks with TAG Partner Jennifer Lee about this split-screen moment: how South Korea's chip sector helped support growth, while other industries faced higher costs and supply risks. They also explore Korea-Japan cooperation, U.S.-Korea trade and investment, shipbuilding, and South Korea’s nuclear submarine ambitions.

What Comes Next with Mira Rapp-Hooper is produced by Rivan Dwiastono, executive produced by Lauren Dueck, with editorial input from Prashant Jha. It contains music by Cody Martin via Soundstripe. 

What Comes Next is a production of The Asia Group, and is powered by TAG AI, TAG's geopolitical decision engine for businesses.

Transcript

SPEAKER_01 0:00

The fact that everyone is asking about the state of the alliance tells you something where um it is not it is not in a in the best place, let's put it that way. To be very frank, um the South Korea and the United States have a very different concept in terms of what needs to be done for South Korea to have a nuclear submarine.

SPEAKER_00 0:24

Our next conversation is an opportunity to understand how the Straits of Hormuz crisis has reverberated through one of Asia's leading economies in the Republic of Korea. My next guest is Jennifer Lee, a partner here at the Asia Group, where she leads the firm's Korea practice across Washington and Seoul. Jen is a trained economist and an Asia specialist who's been advising Fortune 500 companies for many years. I'm looking forward to diving in with her today. Jennifer Lee, thanks so much for joining us on What Comes Next. Thank you for having me, Mira. Jen, I've been looking forward to this conversation with you because it's really a great opportunity to dig into the question of how the Republic of Korea, South Korea, has coped with the crisis that we've seen unfold over the course of the last few months in the Strait of Hormuz and all the disruptions that that has caused to the global economy and particularly in the Indo-Pacific. You played a role in TAG's recent great report on the regional disruptions caused by the Strait of Hormuz. And one of the case studies we looked in that report was South Korea, which on the one hand managed this crisis, I think, quite competently due to its reserves, a lot of strong government intervention, I think a fair amount of public support for strenuous measures, but you'll comment on all of that. But nevertheless, took a hit across multiple sectors that were relevant simultaneously. It saw supply issues in jet fuel. There were effects in the semiconductors industry, the petrochemical industry, and of course, LNG. So I'd love to just ask you to start by giving us a recap of how the South Korean government dealt with this crisis and how these disruptions reverberated into that economy specifically. As we observed in our Strait of Hormuz report, this crisis played out differently in every Indo-Pacific economy. And Korea being so high-tech and having an economic model that's really driven by a lot of these key industries meant that it had uh very specific effects that it felt. And of course, this is all relevant, is because uh as we sit here, we're seeing the ceasefire um in the Strait of Hormuz be tested and a risk that there will be continued disruptions again. So the shock waves that South Korea had felt in the last few months may not indeed be fully behind us. Jen, over to you.

SPEAKER_01 2:53

So, yes, it has been a very challenging few months after the Hormuz crisis, especially because not many anticipated it and um it hit an area where nobody thought that the Hormuz Strait would be closed and blocked like that ever. So South Korea initially did have a challenging days because um, as you mentioned, South Korea is a very import, uh energy import-dependent country, and it also depends a lot on its exports, which comes from the manufacturing done in South Korea. So initially, like we even saw the COSB plummet in record amount, and then also the ones, South Korean one, hit a 17-year low right after the hormone straight blockage. However, um, as you mentioned, I do believe that the government, um, I give um credit to the government for intervening very quickly, and also the um private sector cooperating with that and being able to diversify its sourcing as well. So there is definitely some um merit to that. And to be honest, um like this whole event, like it hit a lot of areas, as you mentioned, the LNG, the crude oil, the petrochemical industry, the refining industry, and all of its like even because a petrochemical um goes into industries such as autos, um, plastic uh manufacturing, and also advanced manufacturing, shipbuilding, even semiconductors. So it across a lot of, it hit a lot of the sectors across the economy. Um and this was a sort of like an eye-opening event, um, kind of similar to the 2019, for example, export control measures by Japan after the TiferTat kind of um on the wartime force labor, where we find out all of these components that we never really think about usually in our day-to-day lives. And we um it's almost ironic that we spent the 1980s and 1990s integrating ourselves into the global supply chain, and we're finding all of those areas as vulnerabilities and also choke points between the economies. Um, luckily um for South Korea, this all came um at a very strange moment where the AI boom and also the AA data center craze is happening at the same time. So there was a huge lift in the economy um stemmed stemming from the semiconductor exports. And now we're facing a bifurfrication of the economy where you have these very, very strong industries and industries that benefited from the hormone straight, whereas the other industries are being hurt significantly. Um it is a very interesting stage where um South Korea's petrochemical um industry basically were undergoing a structural um sort of restructuring led by the government right before this because of Chinese competition. And these companies were actually they had redundancy and they were able to cope uh really fast by um get leaning on their strategic reserves of crude oil and kind of manufacturing really quickly. And to be honest, um, some of the companies actually came out ahead just because the um the feedstock and also the end product price went up. So you are seeing a mix of these industries. There's losers and winners, and because of the semiconductor boom, the government is generally able to kind of support um them through subsidies and the public through um some of these um measures as well. So, yes, um, we are seeing a very interesting um landscape happening at the same time.

SPEAKER_00 6:39

That's a fascinating answer, Janet. In particular, I like the way you described the bifurcation of industries. But the fact that nevertheless the boom in the AI industry, the chips industry has kind of subsidized government intervention in the rest of the RK, right? Which is um which is a fascinating story. I want to sort of uh drill down a little bit on Korea's tech industry, because of course, as you already mentioned, Korea sits at the center of the global semiconductor supply chain. And the Hormuz disruption really uh exposed how dependent that industry was on Gulf sourced helium and as well as some of those petrochemical inputs. So, what are the downstream consequences for the global tech and AI industries that depend on Korean chips? And specifically, walk us through how companies like Samsung or SK Heinex have been navigating the supply crunch that they've been facing and how you think they might continue to do so if we have these episodic bursts of disruption in this rate of hormones that continue to punctuate this very fragile ceasefire that we've seen concluded a few weeks ago.

SPEAKER_01 7:48

Um, Mira, that is a very important question, I believe. Um, South Korea is responsible for about 80% of the HBM, the AI chips that go into the AI data centers, and also 70% of the DRAM. So it is a very, very important market for the global supply chain, especially now during this AI boom, where all of the countries are seeking to create some um establish an ecosystem of their own. And um helium is another component that we never really think about in our day-to-day lives, but it came up because although value-wise, it is just a fraction of the entire semiconductor, um, sort of like one chip, basically. But at the same time, it is an a component that is used to cool the wafers in the semiconductor production, and it doesn't have a viable alternative. So um, luckily, Samsung and SK Heinex had about six months stock of helium. But because we didn't know like how long this hormouth straight situation would last, um, there was a frantic um sort of effort to diversify because South Korea relies, uh, I think 75%, almost no, 68% of its um helium import is from Qatar. And while Qatar is not at the center of the um action in Iran, because everything is shipped through the Hormuz Strait, it was affected. So um, what South Korea did was try to work with Qatar to reroute the shipping um around the Cape of Good Hope. And then also because 28% of its helium import is from the United States, it tried to expand that as well. Um, so that is ongoing. Helium is a very unique component where after about six weeks in um the liquid helium, it starts evaporating. So the volume decreases if it is rerouted and it takes a long time to get to South Korea. So we did see a spike. Um, the pure um helium that is used for a semiconductor, the price basically doubled in a few weeks' time. So we um South Korea, SK Heinrikson, Samsung, and all the other um sort of the middlemen, like the industrial gas operators, basically had to pay the premium to get that to South Korea as well. So I do believe that um South Korea will continue to stockpile its helium resources just because it's a huge choke point and for a very, very important industry, not just for Korea, but the globalist supply chain. And we will continue to see South Korea invest in the recycling technology that TSMC has in Taiwan.

SPEAKER_00 10:28

Fascinating. Um, that that's a really uh interesting and useful answer. I'd love to also take us to the other side of the bifurcation, however, Jen, and ask you to opine on kind of how beyond the semiconductor industry, Korean businesses across aviation, manufacturing, and other sectors have been absorbing higher energy and input costs simultaneously. What does it look like for them to manage those pressures? And does anything about the incredible successes of the semiconductor industry ease that burden for them?

SPEAKER_01 11:01

Um, definitely so I believe that this is again a mixed picture. And uh, because if you are a refiner of petrochemical and you do it's a matter of price, not like availability, availability at the moment, because um it's like less than six months in. So they did have the crude oil to manufacture all of these middle petrochemical product byproducts. But um, because you are, even if you're paying more for the crude oil and the feedstock, if you are selling it at a higher price, then some of these refiners will come out ahead. So that's some of the picture. But at the same time, the prices passed through, some of it at least, to the consumers and the end users. So that is where um a lot of the um attention has been given to by the government, where um there will be subsidies and other efforts to manage this um situation. Also, as I mentioned, while the economy is doing well, um the projected growth rate for this year is supposed to be about 2.6%, which is much higher, it was about 1% last year. So it is pretty impressive. And the cost be basically doubled in a few months just because of the AI boom. But at the same time, you're seeing like huge inflationary pressures about of about 3.2%, which is way above the 2.5% um target that government has for the people. So there will be a lot of efforts to kind of address the challenges of the general public and also the SMEs and other consumer retail other industries that have been impacted by the overall um situation from the hormuz. Um, when it comes to um so we do anticipate um further diversification by the industries, and um we will continue to see a huge government intervention to kind of streamline this um situation at the moment.

SPEAKER_00 12:59

I I'd love to dig in a little bit more to the question of how the Hormuz crisis has pushed Korea to diversify its political and diplomatic relationships. Obviously, in the wake of this crisis, um, a lot of countries in the Indo-Pacific are thinking about how to diversify within industries, diversify their energy flows, et cetera, to reduce dependencies on Hormuz. But some are also thinking about how to reduce dependencies on the United States or at least to build resilience around their dependencies on the United States. Um, one issue that I follow quite closely, um, I know you do too, is the relationship between the ROK and Japan, um, which has been quite strong in the last year plus, um, both since uh President Lee was elected and then Prime Minister Takeichi was elected, despite the fact that their prior political backgrounds might have suggested otherwise. Um, but it seems like in this case, there's a really strong strategic rationale for Korea and Japan really hugging each other close, which is to say that in an increasingly fraught geopolitical environment, where China clearly poses risks, you know, the DPRK is not going anywhere anytime soon, and the United States is increasingly unpredictable, their strategic interests seem more and more aligned. Talk to me about what that meant during the Strait of Hormoose crisis, how much conversation, sort of uh lessons learned sharing was going on between the ROK and Japan, and in general, how the ROK is thinking about diversifying its political posture in this new world where it has to manage all of these dependencies while keeping the alliance intact and nevertheless wants to be a more resilient nation.

SPEAKER_01 14:48

Yeah, um, I, Mira, I agree with you that on all of the stuff that you laid out. But um, and so it's not just South Korea, right? Like it and it's not just the hormost trade. Hormostrait was definitely a push factor for Japan and South Korea to get closer. But I do believe that um this is a building on the foundation that um the Biden administration worked with um, you know, Kishida and also Yun administration, despite all of its flaws. Um there was a trilateral effort to work together um to overcome some of the historical grievances. And while there are a lot of things to be done on the his historical side, I do believe that there were some push factors. Well, the foundation majority, the Biden administration, and then the Trump's um US policy sort of and the whole US-China dynamics generally pushed all of these um quote unquote middle powers together just because the name of the game is resilience at the moment. And because they thought that they couldn't rely on just one or two single sources and they wanted to reduce dependency on any one source, um, there was a lot more cooperation and dialogue happening between not just Japan and Korea, but all the other countries as well. I do consider it as a natural behavior. And luckily, as you mentioned, we didn't really know what to expect from Prime Minister Takai or President Yi Jameeong based on their past, but um, they seemed to make a concerted effort. They were much more practical than we had anticipated. They seemed to get along pretty well um after the first few frictions. And then I do think that um the energy hormose crisis also made them realize that they there was a lot of complementary um industries that they could co collaborate um together with and then also create a synergy effect together. So that includes the energy part. They did create an LNG swab. They did agree to cooperate, um given that both countries are import-dependent countries. And if they combine their forces, they believe that they could get leverage over LNG imports. So there that that's one area that they would cooperate in. And then also on defense, as you mentioned, North Korea is not going anywhere. There is increasing China regional security issues that the two countries believe that they can um kind of work together on, and also the supply chain. Um, there, of course, there are industries that the two countries compete in, but there are also a lot that they are complementary in. For example, the even the semiconductor um chain, where um Japan is very, very strong on equipment and advanced manufacturing, whereas South Korea produces the memory chips. So I do think that um we'll see what happens under the next US administration, but I do believe that um there is a lot of push factors also pulling them together.

SPEAKER_00 17:44

Yeah, that's a great answer, Jen. And I really love your point about the sort of complementarities in the semiconductor supply chain. As you say, there are areas in which they compete and may compete more in the coming years. Um, but the fact that they don't directly compete for their comparative advantages in the semiconductor supply chain is actually, I think, critically important and is sort of a pathway to opportunity for how future leaders might think of pursuing tech stack integration um as sort of a almost pillar of alliance relations amongst countries like Japan and the ROK. I love you, you know, to the extent that you're you're willing, let's let's take it broader for a couple of minutes. I'd love to talk just about the state of the alliance more broadly, because of course, US ROK relations is much more um than the Strait of Hormuz crisis. And the alliance has weathered many things and will continue to do so well into the future. Uh, prior to the US war with Iran, the US and ROK were juggling a whole basket of issues from trade issues to issues related to defense on the peninsula um to broader national security issues. I welcome an update from you on a couple of things. Number one, what's the state of play in the US-Korea trade agreement? And in particular, with respect to the investment vehicle that Korea has pledged to facilitate investment in the United States. And this was an area of some tension between President Trump and the Korean government a few months back because President Trump felt that that vehicle was not moving quickly enough. It's something that President Lee has clearly prioritized. Um, but there's no question that he's really watching the results of these investment vehicles uh from both South Korea and Japan. And then I'd also love you to update us on a very distinct thing, which is the ROK's interest in acquiring a nuclear submarine. I understand that there have been US officials visiting Seoul recently, um, that the sort of model as to how an ROK nuclear sub uh would be developed is sort of really coming into view. Uh, but it certainly seems to me that there will be a lot of challenges uh getting to a place where the ROK actually produces a nuclear stub. So I would love to check in with you on the state of play on that project as well. Right.

SPEAKER_01 20:02

Um, thank you, Mira. Um, the fact that everyone is asking about the state of the alliance tells you something where um it is not it is not in a in the best place, let's put it that way. And um while so the nature of the alliance, as you know, it shifted quite a bit during the past five years, let's say. It's because before it used to be all about security alliance, and it kind of increased uh sort of expanded into the economic security um aspect of things, where the two sides agreed that you know there is a lot of areas to cooperate on the economic security front front. So that is a positive thing where um more is more is on this at stake um in terms of the two alliances. However, as you know, the current um US administration, its posture towards its partners and allies have shifted quite a lot. And it was a lot lot for the partners and allies to sort of absorb and kind of digest and react to. So we are we are sort of in that stage where a lot of the allies have been a little bit confused about what it means to be an ally. Um, Koreans are very, very adamant about keeping that alliance very, very strong and have committed, for example, South Korea has committed $350 billion in investment in the United States, um, similar to the $550 billion that Japan has committed to. And where that stands right now, as you mentioned, the US is eager to see some results from that. Um Japan has announced a few projects. South Korea has not yet. Um, the two models are very, very similar, but at the same time, South Korea has put in place some checks. Um, like, for example, it needs to go through the National Assembly. There is a clause where um economic financial fee uh profitability is one of the factors that they look at very, very closely. And um and also if that doesn't if that criteria Is not met, then they need to have a broader discussion on whether there is a national security um aspect to it that we should consider, the South Koreans should consider. So that the KUIC is a Korea US Strategic Investment Cooperation Agency. KU, um, so I don't know, I don't even know how to call it KUIC. Um, and that was launched just this past month on June 18th in Sejong City. So that is run, it's an interagency organization led, currently led by the um finance ministry, but um they are currently hiring it still in the rudimentary stages, but it is also um reviewing several of the projects that the South Korean government wants to pursue and also some of the projects that the Commerce Department has suggested that South Korea um review as well. So we do uh it I did um talk to several stakeholders in the past few weeks. Um it is still unclear when the initial project will be announced, but definitely um they are in the process of reviewing some of these um investment projects. And according to the finance minister, um he did mention that this is not just now, you know, when when it um the Korean bilateral, Korean US bilateral um alliance stemmed from the security alliance, it expanded to economic security. Now they want to say that it expanded to strategic industry cooperation. So this is something that we should look carefully into because that agency's lifeline life is about 20 years right now. South Korean um government has invested about 1.3 billion to um get this established. And um, because if even if South Korea committed to 350 billion, there is a cap for each year. There is a 20 billion cap. So we will see this um development develop over several, several years. So we will um we are monitoring very closely on what will be announced. We believe that most of them will be in the sectors of energy. And of course, as you know, of the 350 billion, 150 billion is sort of carved out for the shipbuilding industry. So that is an area that is quite promising because um, as you know, on the sidelines of the G7 summit, President Trump specifically mentioned um, like, can you build 10 warships in Korea to President Li Jemyang? And then according to sources, um, the US Navy also sent an RFI to the South Korean shipbuilders to bit um on building eight warships and oilers um just this pat in the past month. So we do anticipate some movements along those lines as well.

SPEAKER_00 24:42

And that would be great to see, obviously, the sort of acceleration of the shipbuilding cooperation and is the perfect segue to the second question I asked you, which of course is you know, and and I want to sort of bring the framing together because I think the question about an ROK nuclear sub actually directly relates to the rest of its shipbuilding capacity. Um, you know, so both what is the state of play on the ROK push to try to build a nuclear sub with some amount of US assistance, but what do we understand that might mean for the rest of its shipbuilding capacity, which is, you know, currently being held out as sort of a crown jewel for cooperation with the United States, and strikes me as something that we very much want to have continue. But back to you, Jen.

SPEAKER_01 25:24

Yep. Um, nuclear submarine, I think there is um some development, but it's very, very initial, despite the fact that um the two pro two leaders agreed on it um earlier this uh last year. Um, that conversation has begun in earnest in just this past few months. And to be very frank, um the South Korea and the United States have a very different concept in terms of what needs to be done for South Korea to have a nuclear submarine. The Koreans believe that they have the shipbuilding technology, they have the nuclear technology as well, especially on the um SMR front, and therefore they just need to import the nuclear fuel. Whereas the United States are not, they're not necessarily clear about if just sending nuclear fuel is the answer to all of this, and there might be a lot of like information agreement that is necessary for this to happen at the same time. So, South Korea, in addition to just trying to get the um nuclear fuel, the low enriched uranium or the Halu, um US does not really have that capacity at the moment to export some of these enriched uraniums. So South Korea wants to also revise the 1, 2, 3 nuclear agreement so that they can actually process um low enriched uranium and also um pyroprocess, which is recycling that enriched uranium as well, um, down the road without having to ask for permission every time. So this is not something that you are you you are going to get an answer on uh right away because there are so many stakeholders um related to this issue itself. And as you may have heard, um, among the US delegation that went to Korea, it included um a non-proliferation um sort of government official as well. So there is a lot of um aspects to be considered and it will take a while. And South Korea, while it wants some answer in the near term during this current administration, um it because it is aiming to it is targeting the mid-2030s for a nuclear submarine. So it will take some time, and also because there are a lot of US priorities in terms of what it is communicating with its partners, nuclear submarine is definitely not on the top of its agenda. So we might see some struggling and um pooling to see what makes sense for them.

SPEAKER_00 27:46

Yeah, that makes a great deal of sense to me, Jen. Um, you know, I think uh everything that you've said uh is what we've been tracking. The issue of, you know, would the United States ever supply nuclear fuel to the ROK for a sub is exactly as you say, going to be bureaucratically incredibly thorny and probably take quite a while to sort through. Of course, we knew that prior to this nuclear sub idea, there had been questions raised by the E. J. Myung administration as to whether the United States would be willing to revise the one, two, three agreement outright. So suffice it to say that it seems like the revision of the one, two, three may be a goal for the Lee government, regardless of the nuclear sub project. I also um would note that, you know, I think uh it's important at a moment that South Korea is doing so much great work in uh the shipbuilding industry in particular, and is holding this out as an area for cooperation um between our two countries where South Korea can really be useful to the United States. The possibility of building nuclear submarines right now has the potential to um create a bit of a drag on uh the rest of the South Korean defense industry. I'd actually commend to our listener, um, our uh colleague in our defense practice here at Tag, Wilson Grossman Trowick, had a uh article not long ago about the drag that the um sub could have on the rest of the shipbuilding industry in Korea. Um so it's very much worth um Korean policymakers and American policymakers doing the analysis to make sure that any project like this really nets out to the strategic benefit of both countries. Of course, there remains the looming question of sort of why South Korea needs a nuclear sub. Uh, there's no question um that South Korea is seeing increased threats both from the DPRK and from the PRC. Um, but one also hopes uh that the alliance can continue to be the backstop uh to those, uh, which maybe helps both sides to navigate through the nuclear sub question. And Jen, this has been a terrific conversation today. You've really covered the waterfront and helped us understand um not only the last few months of crisis in the Middle East and its reverberating effects in very differential ways on South Korean industry, uh, but also some of these key alliance issues that are likely to be with us for some time to come. We look forward to seeing you back very soon. And thanks so much for your wisdom.

SPEAKER_01 30:10

Thank you, Beera. Always a pleasure to talk to you.

SPEAKER_00 30:13

As I reflect on my conversation with Jen, I'm really struck by her description of the bifurcation of Korean industries in the way that they've been able to manage and cope with the Strait of Hormuz crisis and how each has absorbed the reverberations of the supply and price shocks that Korea has had to deal with. In particular, as Korean chip and AI-related stocks buffet the Korean economy and the Korean market more broadly, it increasingly seems like that industry may be able to subsidize government interventions, um, both on behalf of the Korean people and in other industries, which is a fascinating turn of events. Of course, the Korean chips industry role in Korea is not unlike the AI industry's role in the United States. But what it says to me is that for countries that are seeing their stock markets surge, their economies surge on the backs of AI, those surges may actually create more resilience for managing geopolitical crises that have major reverberations in other industries. This episode was produced by Refund Dewey Astino, an executive produced by Lauren Dewick. It contains music from Cody Martin via Soundstripe. What comes next is a production of the Asia Group and is powered by Tag AI, Tag's geopolitical decision engine for business. We'll see you on the next episode.