The Cost of Chaos: South Korea’s Martial Law and Market Reactions

As South Korea grapples with unexpected turbulence, here’s why the fallout could affect the global tech supply chain and impact major US companies.

This is your wakeup call. My regular readers know that MY wakeup call is on or around 4:00 AM each day. This morning, it was an especially early 3:00 AM to prep for a live CNBC interview, but let’s start with yesterday. I was just heading out the door for my office. As I bid my wife adieu for the day, I noticed a headline on her phone. Something about martial law in Korea. BAMM. At first, I thought that it was a mistake. South Korea, martial law? Couldn’t be. That was the beginning of my journey which ended this morning at 1:30 AM Wall Street Time when the markets closed in Korea. So, here I am, wide awake, 1½ hours of broken sleep, and just one espresso in, and I am going to share with you what you need to know.

Indeed, South Korean President Yoon Suk Yeol did declare martial law yesterday morning (US EST), but after the Korea Exchange closed. This left us with simply a handful of depository receipts that traded in London and Germany for reference. Of course, there was the 24-hour currency market, where we could witness the Korean Won drop like a rock. We will get back to that in a moment.

While the situation for South Korea had been deteriorating, no one expected the President to declare martial law. It was an eye-opener that caused the most careful of us to spend the next 24 or so hours attempting to assess the potential risks of the event and the potential for the country to fall into further strife. First, it must be understood that South Korea is in the top 5 global traders with the bulk of its GDP coming from exports. The US imports around $117 billion from South Korea, which is just a portion of the $727 billion it exports to the World. It is the 6^th largest US trade partner just below Japan but above the United Kingdom. So, yeah, you can say there may be some implications. I won’t get into the complex politics of what happened but rather, I will focus on the implications for the US markets/economy.

Let us start with three of the largest South Korean companies that trade with the US. Two of them will be instantly recognizable and one – maybe not so much. They are Samsung, LG Electronics, and SK Hynix. You know about Samsung phones and appliances, and I am sure that you also know about LG Electronics appliances. SK Hynix is in the semiconductor industry and is a mostly pure-play producer of memory chips.

We will get back to SK Hynix in a moment, but let’s start with the first two. Imagine a supply chain disruption between South Korea and the World. Think about the impact that would have on mobile phones sold by Verizon Communications, or appliances sold by Best Buy. Some 5% of Verizon’s cost of goods sold (COGS) comes from Samsung. In the case of Best Buy, Samsung imports make up almost 19% of the company's COGS. LG Electronics make up 5.6% of Best Buy’s COGS but also some 2% of Home Depot's and Lowe’s COGS. Were you thinking of buying a new Samsung phone or watch? How about an LG refrigerator? Do I need to remind you of what it was like if you had to replace a kitchen appliance during the pandemic? I did and it was not a good experience. 🤦 While we are at it, did you know that Hyundai and Kia automobiles account for 10% of US auto sales? Were you thinking of buying one of those new, cool-looking Hyundai SUV’s?

While we are on the topic of automobiles, did you know that LG Energy Solutions is one of the largest EV battery manufacturers? That’s right, LG makes up 6.3% of Tesla’s COGS. In fact, LG also sells batteries to GM and Ford, along with non-US Volkswagen, Stellantis, Mecedes-Benz, Volvo, and more. Do you remember how supply-chain outages during the pandemic caused major auto manufacturers to literally shut down production lines, and more recently Tesla shutting down its production lines for the same reason?

Let’s do a quick tally and then move forward. Samsung supplies to Apple, Best Buy, Verizon, Dell, AMD, and Intel, to name only some of the tops. LG exports end up in Best Buy, Home Depot, Lowes, and GM. What about SK Hynix? Its chips can be found in products by Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta, Dell, HP, and Intel. [insert record scratch sound here 🫨]  Wait, what? Those are some of the most popular growth stocks in the US. Who is this HK Hynix, again? HK Hynix is known for its high-performance memory chips called high-bandwidth (HBD) memory chips. Those HBD chips are important for the AI ecosystem!

We often speak of the “shovels” strategy in AI. The strategy goes back to the 1800s when Levi Strauss himself, decided to sell his iconic, riveted blue jeans to gold prospectors rather than risk digging for gold. This ensured a 100% chance for success. The gold miners needed overalls and shovels whether they struck paydirt or not. Similarly, at the base of all AI, are powerful chipsets used to get those Artificial Intelligence models – well, intelligent. That is why NVIDIA, a leader in the space, is so highly coveted as an investment and expected to gain value despite how well companies commercialize AI. But now we have learned that memory chips manufactured by HK Hynix are part of NVIDIA’s offerings. Let’s call it the steel necessary to forge the blade of the shovel. In fact, HK Hynix products represent almost 10% of NVIDIA’s COGS. Despite the value, imagine if there were supply chain disruptions? Imagine the impact that could have or the solutions delivery challenges that could cause for NVIDIA, which is already challenged due to sky-high demand.

Now that we are here, we may as well just go there. Yes, the Magnificent-7. It has been a minute, but they are still relevant, if you are looking for growth investments. Let’s run down the Mag-7 and see impacts from any of the three aforementioned South Korean manufacturers. Deep breath … here we go! Apple -> 7%, Tesla -> 6.3%, NVIDIA -> 10%, Microsoft -> 6.4%, Amazon -> 4.3%, Alphabet -> 5.5%, and Meta -> 6.6%! There you have it, folks, South Korean exports impact all seven of the Mag-7 stocks. Like before, these percentages represent COGS exposure, but that does not account for entire product lines that may not be delivered if there were supply chain issues upstream in the pipeline.

At this point, I think it should be clear that, should things deteriorate further causing supply chain issues, there can be a world of hurt awaiting many companies, including some of the biggest index drivers. Lest I leave a sour taste in your mouth, I want to be fair and contemplate some silver linings, if you could call them that. SK Hynix is the recognized leader in the HBD memory space; however, American-based Micron also competes in the space, but is a late entrant. Outages from HK Hynix may become opportunities for would-be, direct competitors, as companies rush to find alternative supply sources. Hyundai and Kia may find American competitors Ford, GM, and Tesla taking market share, if deliveries get delayed. Samsung’s direct competitor Apple may find smartphone buyers shunning Samsung phones for its iPhone. But wait… Samsung supplies Apple with chips and OLED screens. Oh boy, did this equation just get more complicated? It sure did, and I didn’t even talk about how South Korea’s currency is doing. Remember, US manufacturers have to purchase foreign parts. In this case a weaker Won will work in favor of foreign importers.

I am sure that it won’t surprise you to learn that the Korean Won fell in the wake of President Yoon’s announcement. It has recovered since its initial decline but still remains weaker than it was when I got my wake-up call yesterday morning. Since then, martial law has been lifted and calm has swept over the markets as Korean officials attempt to calm investors and trade partners. Many expect the strife to be short-lived, but now it is out there. Democratic economic superpower South Korea has done the unthinkable, for whatever reason, by declaring martial law when Wall Street was not expecting it. The situation that caused it may resolve itself but knowing that it can happen will not go away so fast. Markets have appeared to take all of this in stride and the Kospi Index only gave up some 1.4% in today’s session. Likewise, US markets are pointing to a positive open as investors, in the US at least, will be focused on the first big employment number of the week, which will be released this morning and Chairman Powell’s speech later today. You can bet that every responsible portfolio manager has now added “South Korea exposure" to their list of factors to consider. This one certainly has. 😉

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday as investors eyed global unrest but chose tried and true exuberance to overcome the worry. JOLTS Job Openings spiked beyond economists’ estimates leaving those economists wondering if the labor market may be tightening. It could be a sign of future inflation. 📈

NEXT UP

• ADP Employment Change (November) is expected to show 150k new jobs created, lower than last month's 233k.
• ISM Services Index (November) may have slipped to 55.7 from 56.0.
• Factory Orders (October) probably gained 0.2% after slipping by 0.5% in September.
• Federal Reserve Beige Book will be released at 2:00 Wall Street Time.
• Fed speakers today: Powell, Musalem, Barkin, and Daly.
• This morning, Dollar Tree beat on EPS and Sales, while Hormel, Foot Locker, and Chewy missed. After the closing bell, we will hear from Synopsis, PVH, Five Below, and American Eagle Outfitters.

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