The government has moved to disperse the semiconductor production base beyond the capital region, but critics say moving fabs alone may not have much effect.

To relocate semiconductors to the provinces, the government has proposed incentives including allocating more than 40 percent of the National Growth Fund to non-capital regions as a priority and adding special subsidies for materials, parts and equipment (MPE) companies that relocate or expand. But the dilemma is that there is almost no MPE ecosystem in non-capital regions to move to. Because moving fabs alone does not create synergy, the success of the incentives ultimately depends on how quickly the MPE value chain follows.

The non-capital dispersal plan is linked to the government’s mid- to long-term economic goals. Under the “Economic Growth Strategy for the Second Half of 2026” announced by the Ministry of Economy and Finance on the 14th, the government has put forward a “3-4-5 vision” centred on a potential growth rate of 3 percent, becoming the world’s fourth-largest exporter, and $50,000 in per capita income. It is a goal to break through long-term low growth and a starting point for the “5 poles, 3 specials” plan that would ease one-pole concentration in the capital region by dividing the country into five super-regions and three special self-governing provinces. Semiconductors are the first test.

The government says it wants to reverse the flow of semiconductor investment concentrating in the Yongin and Pyeongtaek mega cluster because of the capital region’s physical limits. Yongin and Pyeongtaek have already hit constraints in securing extra-high-voltage transmission lines, stabilising grid voltage and procuring power to meet 100 percent renewable energy (RE100) commitments. Given the nature of fabs that must consume large amounts of electricity stably, non-capital regions with more room for power and land are an alternative. In line with this, the industry ministry’s “AI and Semiconductor Mega-Project Promotion Plan” sets specialisation directions: the southwest region for new fabs based on renewable energy, the Chungcheong region for high-bandwidth memory (HBM) and back-end processes and packaging, and the Yeongnam region as a base for next-generation and power semiconductors.

But there is a problem with the government’s plan. According to an analysis by the industry ministry, existing semiconductor MPE companies are concentrated in the capital region, and outside it the base is weak except in Chungcheong. The southwest was identified as having the most underdeveloped infrastructure. The MPE ecosystem is as important as water and power in deciding fab locations.

A source in the MPE industry said, “Yield management depends on how quickly engineers can get into the fab and respond when equipment abnormalities occur.” The source added, “An extra 2 to 3 hours of travel time is a problem on an entirely different level.” Power conditions are another variable. Because a single fab requires several gigawatts (GW), annual operating profit worth hundreds of billions of won can hinge on the discount rate under regionally differentiated electricity tariffs.

Chungcheong’s 30 years of accumulation... “The semiconductor ecosystem is a function of time”

Chungcheong is an exception, and that is an important basis for the government’s dispersal policy. SK hynix in Cheongju and Samsung Electronics sites in Cheonan and Onyang did not appear overnight. After anchor companies settled in the 1990s, partner MPE companies followed in the 2000s, and it took 20 to 30 years for the back-end value chain to be completed in the 2010s.

Cheongju later expanded from M11, M12 and M15 to M17 and advanced packaging, while Onyang evolved from assembly and testing lines into an HBM base. Ultimately, the Chungcheong ecosystem is the result of a location adjacent to the capital region, accumulated infrastructure and time combined. A plan to reproduce this in the southwest with only short-term subsidies runs counter to the industry maxim that the semiconductor ecosystem is a function of time rather than money.

The cost of haste has already been confirmed overseas. The United States offered subsidies worth tens of trillions of won under the CHIPS Act, but ran into a wall of a lack of MPE supply chains and skilled workers. TSMC invested more than $40 billion in Arizona but delayed mass production at its first plant to after 2025 from 2024 due to a shortage of local partners and workers. It also clashed with local unions when it tried to rush engineers from Taiwan. Intel also delayed the start of operations at its $20 billion Ohio fab to 2026 to 2027 from 2025. The lesson is that even if money is spent, without an ecosystem, a fab remains an “empty shell.”

Conversely, if the ecosystem is a function of time, that time ultimately grows longer the more it is put off. While Chungcheong built up 30 years, the southwest failed to reach the starting line, and the United States hurried and instead extended construction timelines. The paradox is that because it is late, starting to break ground now is still the fastest option.

The government is pushing to fill this gap with a package combining fiscal, financial and tax measures. A draft “Special Act on Mega Special Zones” (tentative name) being pursued jointly by relevant ministries would provide, in a one-stop manner, regulatory exemptions, expedited permits and approvals, and tax benefits to companies investing in special zones outside the capital region. The National Growth Fund would be required to allocate more than 40 percent to non-capital regions on a mandatory and priority basis, and a “local preference index” would also be introduced to favour non-capital companies in fiscal and tax support and in public procurement. The enforcement decree of the Special Semiconductor Act reflects additional points for non-capital regions and expanded state funding when designating specialised complexes.

According to the National Assembly Research Service and the Korea Institute for Advancement of Technology (KIAT), they judged that a key issue in corporate decisions is whether tax and financial benefits can offset problems such as longer delivery lead times caused by increased distance from mega fabs after relocation. They also analysed that settlement conditions for specialised research and production personnel and the pace of building power grids are obstacles.