South Korea has earmarked 5 trillion won, approximately $3.52 billion, for a dedicated fund to develop domestic chip materials, components, and small fabless design firms. Presidential Chief of Staff Kang Hoon-sik announced the initiative on Monday as part of a broader effort to reduce the country's dependence on foreign suppliers that serve its world-leading semiconductor manufacturers.

The move adds another layer to Seoul's industrial policy at a moment when semiconductors remain central to both exports and national economic strategy. By focusing on upstream materials and smaller design firms, the government is trying to widen the local supplier base around an industry that has long been dominated by a few large players.

Additional Support Measures

According to Reuters, Seoul is pairing the 5 trillion won fund with an additional 5 trillion won in trade financing for export-oriented suppliers, bringing total direct industry support to 10 trillion won.

The government is also establishing a 10-year, 1 trillion won program to connect large chipmakers with small and mid-sized suppliers across every production stage, from design and testing through manufacturing.

Additionally, the government is urging parliament to pass a Mega Special Zones Act before the end of the year. The legislation is designed to streamline permitting, environmental reviews, and infrastructure development for major industrial sites.

The announcement followed a meeting chaired by President Lee Jae-myung, forming part of a semiconductor strategy that Lee originally unveiled in June.

Targeting Supply Chain Vulnerabilities

Samsung Electronics and SK Hynix lead the global market in memory chips and advanced manufacturing. However, the specialty chemicals and precision components essential to their production lines continue to be sourced predominantly from abroad, particularly from Japan and the Netherlands.

This dependency has proven costly in the past. When Japan restricted exports of critical chipmaking materials in 2019, the episode exposed how vulnerable South Korea's flagship industry was to external supply shocks beyond its control.

The new fund also aims to direct capital toward fabless companies — firms that design chips but do not operate their own factories. South Korea has relied heavily on its two industry giants for years and currently has relatively few domestic design houses.

Land, Power, and Water Infrastructure

President Lee ordered the Ministry of National Defense to relocate the military functions of Gwangju's air base to other sites by mid-2028, freeing an 8.3 million square meter area for the Honam Semiconductor Cluster — a project with an estimated total investment of 800 trillion won. Samsung and SK Hynix participated in the meeting as lead investors.

Lee emphasized urgency, citing TSMC's fabrication plant in Kumamoto, Japan, which progressed from groundbreaking to completion in 22 months as the benchmark. He instructed officials to conduct procedures in parallel rather than sequentially to accelerate timelines.

Modern semiconductor fabrication facilities require enormous quantities of water and electricity, with utilities often booked years in advance. Seoul plans to deliver 650,000 metric tons of water per day to the Gwangju and South Jeolla cluster by 2030, sourced from treated wastewater and nearby dams.

For the Yongin cluster south of Seoul, 14.7 gigawatts of electricity capacity are planned by 2041, drawn from cogeneration, liquefied natural gas, and regional transmission.

Semiconductor Push Amid Market Volatility

The policy push arrives during a period of significant volatility in South Korea's stock market. The KOSPI index surged 116% in the first half of the year, reaching a peak of 9,385 points driven by AI-fueled demand for high-bandwidth memory (HBM). HBM chips are manufactured by only three companies globally, two of which are South Korean.

Since mid-July, however, the KOSPI has declined approximately 40% from its peak, while President Lee's approval rating has fallen to a record low of 43.3%.