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Navigating South Korea's Export Crossroads: Semiconductor Triumphs and Tariff Traps

Albert FoxTuesday, May 20, 2025 9:16 pm ET

15min read

The South Korean economy stands at a critical juncture. While overall exports face headwinds from U.S. tariffs and global demand weakness, the semiconductor sector is defying gravity—propelled by AI-driven innovation. This divergence creates a unique investment landscape: a compelling case for selective long positions in tech leaders and strategic short exposure to tariff-exposed sectors. Let’s dissect the opportunities and risks.

Semiconductor Sector: The Bright Spot in a Downturn

South Korea’s semiconductor exports surged 17.2% year-on-year in April 2025, hitting $11.7 billion—a record for the month. This growth is no accident. Advanced chips like high-bandwidth memory (HBM) and DDR5 are the lifeblood of AI infrastructure, data centers, and next-gen computing. Samsung and SK Hynix, the twin pillars of this sector, are reaping rewards from $260 billion in projected global AI server spending by 2027.

Both stocks have outperformed broader indices amid rising AI demand, despite macroeconomic headwinds.

Why invest now?
- Technological leadership: South Korea dominates 70% of the global DRAM market and leads in HBM production.
- Geopolitical insulation: AI chips are a strategic U.S. priority, making them less vulnerable to trade wars compared to traditional sectors.
- Valuation: Despite strong fundamentals, semiconductor stocks remain undervalued relative to growth prospects.

Tariff-Trapped Sectors: Autos and Steel Face a Crossroads

While semiconductors soar, automotive and steel exports are under siege. U.S. tariffs have slashed automotive exports to North America by 17.8%, with shipments to the U.S. plunging 19.6%. Steel exports to the U.S. fell 8.7%, reflecting retaliatory trade measures.

Auto stocks have lagged semiconductor peers by over 20% YTD, reflecting tariff pressures and slowing U.S. demand.

Why short these sectors?
- Structural decline: Tariffs are accelerating a shift toward regional supply chains, eroding South Korea’s cost advantage.
- Weak demand: U.S. auto sales are cooling as interest rates bite, while domestic overcapacity in steel persists.
- Policy risks: Ongoing trade talks offer little relief, with U.S. lawmakers pushing for stricter rules of origin.

Undervalued Opportunities in Tech-Adjacent Industries

Beyond semiconductors, three areas offer asymmetric upside:
1. AI-Enabled Semiconductor Equipment: Companies like LG Display (034220.KS) and Doosan Heavy Industries (042660.KS) supply critical tools for chip fabrication. Their valuations are 30% below 5-year averages despite rising demand for EUV lithography equipment.
2. Electric Vehicle (EV) Components: While automakers struggle, suppliers like Sungrow (206420.KS) (EV battery tech) and Hyosung (004830.KS) (lightweight materials) are diversifying into U.S.-friendly markets.
3. AI Infrastructure Software: Kakao Brain (357250.KS) and Naver Cloud (035420.KS) are capturing the AI data pipeline, a sector insulated from hardware tariffs.

Risks and Mitigation

U.S. semiconductor tariffs: A 25% tariff threat looms, but AI chips are likely exempt. Focus on firms with diversified clients (e.g., SK Hynix’s 40% China exposure vs. Samsung’s 25%).
Global recession: Semiconductors are cyclical, but AI adoption is a secular tailwind.

Action Plan for Investors

Go long:
Samsung Electronics: Buy dips below KRW 55,000; target KRW 70,000.
SK Hynix: Accumulate below KRW 100,000; watch for AI chip revenue upgrades.
LG Display: Enter on pullbacks; target 20% upside.
Go short:
Hyundai/Kia: Short at current levels; target 15-20% downside if U.S. tariffs expand.
Posco (005490.KS) (steel): Short on rallies; U.S. demand collapse could hit margins.

Conclusion: A Divided Economy Demands Disciplined Opportunism

South Korea’s export downturn is not uniform—it’s a tale of two economies. Semiconductor-driven tech ascendancy contrasts starkly with tariff-stifled legacy sectors. Investors ignoring this divide risk missing the next phase of global tech growth while overpaying for declining industries. Now is the time to double down on AI infrastructure leaders and short overexposed laggards. The semiconductor revolution isn’t just a trend—it’s a generational shift. Act decisively.

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