Conditions Not Expected
As the US government announced conditions on payment of production subsidies under the CHIPS Act, Korean semiconductor companies have been brooding over how to respond to the conditions. This is because the United States put forward strict conditions difficult for private companies to accept such as sharing excessive earnings, saying that the US government puts national security interests first.
The US Department of Commerce announced a detailed support plan for financial incentives for semiconductor manufacturing facilities in incentive programs under the CHIPS Act on Feb. 28 (local time). As a follow-up to the semiconductor support act which stipulates US$52.7 billion in financial support and a 25 percent investment tax credit for the semiconductor industry, the US announced the conditions on financial support this time.
One of the things companies point to as a problem in the conditions is the sharing of excessive earnings. Although specific standards or provisions related to excessive earnings have not been presented, companies receiving subsidies of more than US$150 million must submit their detailed financial plans including cash flows in advance. If their actual earnings exceed this limit, up to 75 percent of the subsidies awarded must be paid back to the US government. Companies that want to apply for subsidies from the US Department of Commerce will inevitably feel pressure as they have to have negotiations to set standards on excessive earnings. The shared excessive earnings is said to be used to strengthen semiconductor ecosystems in the United States. Moreover, all companies applying for the financial support must lay out local human resources development plans.
In addition, the condition prevents companies from using support funds for dividend payment and share buybacks which are traditional management methods used by companies to enhance shareholder value and boost stock prices.
Another potential risk factor is a clause requiring that US national security agencies will be given access to cutting-edge semiconductors produced in the United States. The U.S. government says that the clause was made to stably supply semiconductors to the US Department of Defense and other US national security agencies, but the problem is that there are no specific details on the scope of such access. Beyond the timely supply of products, if the access to advanced semiconductor design and even an entire semiconductor plant containing core process technology becomes possible, it will cause problems regarding technology protection and security. “I understand that no specific guidelines have been issued about the clause,” said an official of the Korean semiconductor industry, adding “No chipmaker will want to bear the burden of leaking trade secrets in order to receive subsidies.”
A guardrail clause is also a big burden in that it forces Korean companies to choose between the United States and China. Samsung Electronics operates a NAND flash production plant and a semiconductor packaging plant in Xian and Suzhou, China, respectively, while SK Hynix run a DRAM plant in Wuxi, a back-end process plant in Chongqing and a NAND flash plant acquired from Intel in Dalian in China. The amount of semiconductor products produced by the two companies in China is close to 40 to 50 percent of their totals and the proportion of their sales in the two companies’ total sales stands at 30 percent. If they receive US subsidies, they will face US restrictions in their joint research or technology license with Chinese companies and it will be impossible for them to expand facilities at their Chinese semiconductor plants for 10 years. They have to produce products without technological progress as about 40 to 50 percent of their products in total.
As the US government’s semiconductor subsidy conditions were disclosed, Korean semiconductor makers such as Samsung Electronics and SK Hynix have not hidden their embarrassment, saying that the standards were much tougher than expected. While mulling over whether to apply for the US subsidy program, Korean chipmaker seem much perplexed, saying that the subsidy program is highly likely to fetter them. The subsidy program is a decision that puts the U.S. national interests first, and consequently Korean chipmakers have no choice but to reexamine their profit and loss possibilities as the conditions will make them risk technical security breaches and have a big impact on their financial conditions. The Korean government is showing a cautious reaction about the US plan. “The issue announced this time will be judged by the Korean semiconductor industry ahead of others,” it said, showing its vivid embarrassment.
Samsung Electronics is building a foundry plant by investing US$17 billion in Taylor City of Texas. SK Hynix is also proceeding with various procedures such as site selection to build an advanced packaging R&D center by investing US$15 billion in the United States.
The U.S. Department of Commerce also made clear the guardrail clause stating that companies receiving subsidies must return all the money if they conduct joint research with concerned countries such as China. In response, the Korean government shall continue consultations with the US government to fully reflect its positions, believing that the details of the guardrail clause to be disclosed by the United States in the future would have the greatest impact on Korean companies among other companies in the world.
Experts agreed that the Korean government’s role has become more important than ever. “The Korean government ought to help Korean chipmakers obtain a grace period by getting the US government to understand that semiconductors which Korean chipmakers produce in China are memory semiconductors in that the US government’s subsidy regulations and guardrail clause place weight on system semiconductors,” said Kim Yong-seok, a professor of the Department of Electronic Engineering at Sungkyunkwan University who serves as vice president of the Korean Semiconductor Engineering Society. Kim meant that the Korean government should recognize that a US-China semiconductor supremacy war is the essence of the issue and focus on persuading the US government.