Chips contribute to nearly 80% of export growth; is the South Korean economy "putting all its eggs in one AI basket"?

Driven by the sustained release of demand for artificial intelligence (AI) infrastructure, South Korea's exports continued to experience rapid growth led by semiconductors in August. This strong performance has brought tangible benefits to the country's position as the fourth-largest economy in Asia, propelling its overall export figures to an all-time high. However, this remarkable growth rate has also sparked concerns regarding "what the next steps will be." According to the latest data released by the Ministry of Trade, Industry, and Energy, exports in August increased by 68.7% year-on-year to $98.26 billion, exceeding the market expectation of 62%, and setting a new historical record. Notably, semiconductor exports surged approximately 209% year-on-year, reaching $46.65 billion, marking a record high for a single month and accounting for 47.5% of total exports for the month. On the import side, August imports rose by 22.5% year-on-year to $63.51 billion. The trade surplus for the month was $34.75 billion, significantly larger than the revised $30.39 billion from July. This marks several consecutive months of positive growth in South Korean exports, with growth accelerating further from the revised rate of 63.0% in July. Semiconductors as the Absolute Engine Semiconductors were the primary driver behind the export growth in August. The Ministry of Trade, Industry, and Energy reported that large cloud service providers such as Alphabet Inc. Class C (GOOGL.US) and Amazon.com, Inc. (AMZN.US) have increased capital expenditures, leading to a rapid rise in demand for AI infrastructure, which is the core reason for the explosive growth in semiconductor exports. Data shows that South Korea's semiconductor exports in August reached $46.65 billion, surpassing July's $41 billion and June's $45 billion. Jeff Ng, Head of Asian Macro Strategy at Sumitomo Mitsui Financial Group, Inc., estimated that semiconductor exports contributed nearly 80% to the overall export growth in August. "Overall export growth is mainly driven by chips, computers, and rising oil product prices," Ng stated. From a product category perspective, computer exports soared fivefold year-on-year, while smartphone exports increased by 21%, both indicating strong performance. However, traditional manufacturing sectors are under noticeable pressure. Influenced by strikes in the automotive industry and summer vacation schedules, automobile exports fell by approximately 30% year-on-year in August, while shipbuilding exports decreased by 10%. The Ministry of Trade, Industry, and Energy noted that part of the decline in automobile exports is due to the timing of vacations and some strikes, but tariffs from the United States and automakers shifting production to U.S. factories are forming more enduring resistance. By destination, South Korea's exports to both the United States and China experienced strong growth in August. Exports to the United States rose by 89% year-on-year, while exports to China more than doubled. In contrast, exports to the Middle East declined by 15%, indicating significant differences in recovery rates across various markets. This structural differentiation is also reflected internally within the South Korean economy. On one hand, the technology sector, represented by semiconductors and computers, continues to thrive; on the other hand, traditional manufacturing industries such as automobiles and ships, as well as some domestic demand-related sectors, still face pressure. Dave Chia, an economist at Moody's Corporation, described this phenomenon as a "two-speed economy." Concerns Behind Rapid Growth Despite the impressive export data, the extreme growth pace in the semiconductor industry has led some analysts to focus on potential risks. Chia stated, "A gradual slowdown is manageable. But if there is a sudden halt, it would be a different story, as the South Korean economy operates at two speeds, and the sectors that need to take over growth are currently under pressure." He further warned that if semiconductor demand cools while monetary policy remains tight, the domestic demand may not be strong enough to take over the growth baton when the unexpected windfall dissipates. In August, the Bank of Korea raised the benchmark interest rate to 3%, marking the second consecutive rate hike, citing that core inflation remains high. This implies that should the semiconductor boom cycle turn around suddenly, the monetary policy's buffer space may be limited. However, the Bank of Korea stated in its August monetary policy resolution that the recovery of consumption is gradually accelerating. Data from the Ministry of Trade, Industry, and Energy also indicate that non-semiconductor exports increased by 20% year-on-year in August, suggesting that other sectors are not entirely lacking in vitality. Homin Lee, a senior macro strategist at Lombard Odier, believes that if semiconductor momentum weakens while other cyclical industries perform well, South Korea could still maintain an annual real economic growth rate of 2% to 3%. He also expressed that he is not inclined to characterize South Korea's current export structure as "overly reliant" on semiconductors, as the country has other cyclical industries that typically perform well in the broader global economy. Businesses Remain Optimistic About AI Demand From the corporate perspective, Korea's two major memory chip giants, Samsung Electronics (SSNLF.US) and SK Hynix (SKHY.US), remain optimistic about the demand outlook driven by AI. Last week, SK Hynix CEO Lee Seok-hee stated that AI-related demand will continue to create a supply-demand imbalance in the memory chip market until the end of this decade. This forecast extends two years beyond Samsung Electronics' prediction made in July. SK Hynix is one of the major suppliers of high-bandwidth memory chips to NVIDIA Corporation (NVDA.US). The company recently announced a $4 billion investment to build an AI chip factory in Indiana, USA, and has already begun construction. Lee Seok-hee mentioned that the semiconductor supply shortage may last until the end of 2030. Both Samsung Electronics and SK Hynix reported record profits and revenues in the second quarter, and the market generally expects this momentum to continue at least until the end of this year. Jeff Ng from Sumitomo Mitsui Financial Group, Inc. anticipates that South Korea's overall exports will maintain positive growth over the next 12 months, although the growth rate may slow down due to base effects and stabilizing prices.