Despite the current super-cycle in the semiconductor market, the substrate industry—a critical backbone of the tech ecosystem—is struggling to maintain its momentum. The primary culprit behind this stagnation is the industry's inability to adjust product supply prices to match surging raw material costs, largely due to systemic blind spots in the government’s "Supply Price Indexing System."

The Systemic Gap

The Supply Price Indexing System, designed under the "Act on Promotion of Shared Growth with Large and Small Enterprises," mandates that fluctuations in raw material costs must be reflected in the prices paid to suppliers. It was intended to protect small and medium-sized enterprises (SMEs) from the unfair burden of volatile commodity prices.

However, a significant portion of the South Korean semiconductor substrate industry is excluded from this protection. Current regulations disqualify companies with annual revenues exceeding 300 billion KRW (approximately $220 million). While this threshold aims to protect only the most vulnerable firms, it fails to account for the unique economic structure of the semiconductor substrate sector.

Industrial Realities Ignored

Semiconductor substrate manufacturing is a capital-intensive industry requiring massive facility investments and high-volume production. Consequently, it is common for even mid-sized companies to surpass the 300-billion-KRW revenue mark, especially during periods of high demand. Major players such as Daeduk Electronics, Simmtech, Korea Circuit, and Haesung DS, along with subsidiaries of major conglomerates like Samsung Electro-Mechanics and LG Innotek, find themselves ineligible for the indexing system.

Industry insiders argue that this revenue-based criterion ignores the specific operational realities of the sector. "Raw material prices have skyrocketed, yet we are unable to pass these costs onto our customers," said an industry representative. "Because most substrate manufacturers are excluded from the mandate, our clients—the chipmakers—are under no legal obligation to adjust purchase prices to accommodate our rising production costs."

The Margin Disparity

The data highlights a glaring disparity. While global semiconductor manufacturers are reporting operating profit margins exceeding 70% as of the first quarter, substrate suppliers are struggling with single-digit profit margins.

The pressure is exacerbated by the global artificial intelligence (AI) boom, which has driven an unprecedented surge in demand for high-performance semiconductors. As supply chains struggle to keep up, the prices of core materials—gold and copper, which account for over 30% of substrate production costs—have spiked by as much as 50% since the beginning of this year. Despite this, substrate suppliers have reportedly been able to increase their own supply prices by a meager 3% to 4%.

A Call for Sustainable Reform

The current situation creates a bottleneck in the semiconductor supply chain that could threaten long-term stability. If suppliers cannot recover their costs, their ability to invest in R&D and facility expansion is severely compromised, which in turn jeopardizes the output of the very chips that drive the AI revolution.

Ahn Young-woo, Secretary-General of the Korea PCB & Semiconductor Packaging Industry Association (KPCA), emphasized the urgency of the situation. "To build a sustainable industrial ecosystem in the era of AI semiconductors, we must establish a rational pricing mechanism that ensures raw material cost burdens are not concentrated on a specific tier of suppliers," Ahn stated.

He further urged, "We look to the government and the National Assembly to actively listen to the voices from the field. It is time for institutional reform that can support both the strengthening of our overall supply chain competitiveness and the sustainable growth of our industries."

As the semiconductor industry continues to evolve, the resilience of its supporting sectors will be paramount. Without addressing these structural imbalances, the "super-cycle" risks leaving behind the very companies that make the silicon revolution possible.

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