Guardrails Cautiously Welcomed
The United States has included so-called guardrail provisions regarding subsidies under the CHIPS Act. Although limited investment in semiconductor facilities in China has been allowed, there are also concerns that foreign chipmakers’ semiconductor production and sales in China will soon reach their limits, as the U.S. is expected to become more and more stringent in its competition with China for global semiconductor supremacy.
On March 20, the U.S. Department of Commerce announced guardrail provisions of the CHIPS Act.
The key point is that if a chipmaker receives U.S. subsidies, it will not be allowed to expand its production capacity outside of the U.S. by more than 5 percent of the chipmaker’s current state for high-tech semiconductors or 10 percent for general-purpose semiconductors over the next 10 years.
At the same time, U.S. authorities defined 28-nm logic semiconductors, 18-nm DRAM, and 128-layer NAND flash memory as general-purpose semiconductors. They also set a production standard for wafer inputs.
Currently, Samsung Electronics is rolling out 128-layer NAND flash memory at its Xian Factories 1 and 2 in China. The Korean chipmaker has invested about 33 trillion won (US$26 billion) in the factories. They are responsible for about 40 percent of Samsung Electronics’ total NAND flash production. The plants have the capacity to produce 250,000 sheets of 12-inch wafers per month.
SK Hynix is operating a factory that produces DRAM in the mid-10-nm to early 20-nm range in Wuxi, China, and a factory for 96-layer and 144-layer NAND flash memory in Dalian after investing about 25 trillion won (US$20 billion). The Wuxi plant produces 180,000 DRAM units per month based on 12-inch wafers. This is about 48 percent of the company’s total DRAM production. The Dalian plant that SK Hynix acquired from Intel in 2020 is also mass-producing 100,000 units of NAND flash per month.
Both companies are known to produce higher-level semiconductors in China than the general-purpose semiconductors proposed by the United States. As a result, if subsidies are received from the United States, a 5 percent production capacity limit will be applied.
Effectiveness of 5 Percent Expansion Called into Question
Some analysts call the U.S. Department of Commerce’s provision to limit the advanced process production capacities of foreign companies’ semiconductor factories “virtually ineffective.”
They say that the possibility of the further expansion of such factories is slim, as Samsung Electronics’ Xian factory and SK Hynix’s Wuxi/Dalian factories already have sufficient production capacity.
In addition, they believe that the realization of allowing technological upgrades at foreign chipmakers’ semiconductor factories in China, which has emerged as the real core of this measure, depends on the U.S. government’s lifting or suspending of export restrictions on advanced semiconductor production equipment. In the worst case, SK Hynix’s Wuxi factory, which uses deep ultraviolet (DUV) lithography equipment, will be hit hardest if equipment export restrictions are enforced after October, they say.
Those in the Korean semiconductor industry say that they are in a position to take a breather as the U.S. Department of Commerce limits the actual expansion of their semiconductor facilities in China, which is the main reason for the return of subsidies under the CHIPS Act, to quantitative expansion of their production capacities. This is because they will have more choices such as increasing production per wafer through technological upgrades instead of increasing wafer production, which is directly related to quantitative production, as they will be able to avoid the worst-case scenario of a total ban on investment in China.
With reference to the announcement by the U.S. Department of Commerce, the Ministry of Trade, Industry and Energy of Korea also predicted that Korean chipmakers will be able to additionally expand production in China depending on corporate strategies.
Previously, when a sanction on semiconductors targeting China began, both Samsung Electronics and SK Hynix brooded over making additional investments in factories in China in which they invested tens of trillions of won and a lot of time improving processes at the factories. “Assuming that it is difficult to operate our factories in China including in Wuxi, we may sell factories or equipment or bring the equipment from the factories to Korea,” said SK Hynix CEO Noh Jong-won in a conference call regarding the third quarter of last year, hinting at the possibility of leaving China for good.
“We will closely review the details of the U.S. government’s announcement and devise countermeasures,” said Samsung Electronics and SK Hynix in an official statement.
Concerns over Regulating Export of Semiconductor Production Equipment to China
However, some experts predict that uncertainties will continue unless the United States gives up the competition for semiconductor supremacy. In particular, the United States has effectively banned the export of semiconductor equipment to China. Korean companies received a one-year grace period at the time, but the grade period will expire in October of this year, and it is unclear whether it will be extended.
In the end, if Korean companies do not receive an additional grace period, technological upgrades at their Chinese factories will become virtually impossible. In other words, there are concerns that Korean companies will be able to only maintain the status quo of production at Chinese factories.
Experts say that even the technological upgrades at their Chinese factories, which were allowed on the surface, are impossible unless export restrictions to China regarding semiconductor equipment are suspended or abolished.
“Upgrading technology for increasing the number of chips per wafer requires advanced equipment,” said Kyung Hee-kwon, an associate researcher at the Korea Institute for Industrial Economics and Trade (KIET). “Samsung Electronics and SK Hynix were given a one-year grace period, but it is unknown what will happen in the future, so there will be limitations in actively running their Chinese factories.”
The U.S. government will reportedly announce additional measures to control exports of semiconductor equipment to China as early as April. Experts say that additional export control targets will include advanced DUV lithography equipment, following extreme ultraviolet (EUV) lithography equipment included in 2019. Industry insiders predict that it will directly hit SK Hynix, which produces DRAM with DUV equipment at its Wuxi plant.
For this reason, some analysts say that the United States actually put pressure on Samsung Electronics and SK Hynix to maintain the status quo at their factories in China within to the guardrail. “The price per unit of next-generation EUV equipment is 500 billion won [US$391 million], but considering that the limit amount is 130 million won [US$101,666], it seems that the U.S. side has actually ordered Korean chipmakers not to execute technological upgrades at their Chinese plants,” an industry insider said. The U.S. Department of Commerce prohibits companies that received U.S. subsidies from carrying out major semiconductor-related transactions worth more than US$100,000 (130 million won) within countries blacklisted by the U.S. government, such as China, for 10 years.
Samsung Electronics and SK Hynix Seem Focused on U.S. Subsidies
On the other hand, when the details of the provisions of the guardrail under the CHIPS Act were disclosed, Samsung Electronics and SK Hynix have decided to make applications for subsidies earlier, some analysts say. This is because the guardrail clause does not include technology development (upgrade) regulations which Korean semiconductor makers were initially concerned about so the possibility of Korean chipmakers having to return US subsidies even if they produce advanced semiconductors in China has been decreased.
According to the detailed regulations, if high-tech semiconductors are produced in China, and if their transaction volume exceeds US$100,000 (about 130 million won), the chipmaker will not be allowed to ramp up its production by more than 5 percent. Experts say that the U.S. regulations will only put the brakes on the expansion of quantitative production capacity.
“Efforts made by Korean government officials removed many of the risks to our companies that will be caused by the guardrail clauses,” said an official in the Korean semiconductor industry. “The guardrail will make it difficult for Korean chipmakers to build more fabs or ramp up their production capacities in China, but those same Korean chipmakers will be able to maintain their business in China. Therefore, they have passed the crisis of being forced to withdraw from China.”
“The time for subsidy application is also coming, but the details of the provisions were released later than expected,” the official said. “From now on, Korean companies will start their subsidy application processes in earnest by reviewing limits on production at their Chinese fabs in detail.”
“We will closely review the contents of the announcement and set our future directions,” Samsung Electronics and SK Hynix said. But analysts forecast that they will apply for subsidies soon as concerns have subsided.
Companies that want to build state-of-the-art semiconductor factories in the United States must submit applications for semiconductor subsidies to the U.S. Department of Commerce starting March 31. Taiwan’s TSMC, the No. 1 global foundry company, is also likely to apply for the subsidies.
If Korean companies apply for the subsidies after the end of March, the Korean government will continue further discussions with the U.S. government until the provisions of the guardrail are finalized. “We will continue to communicate with those in the Korean semiconductor industry and thoroughly analyze the details of the regulations by placing them under a microscope,” said the Korean Ministry of Trade, Industry and Energy on March 22. “Based on the analysis results, we will have additional consultations with the U.S. side during the 60-day opinion collection period.”
If uncertainties about the guardrail provisions have been somewhat resolved, companies should now consider whether it is possible to fulfill requirements such as the return of excess profits and the development of semiconductor-related human resources in the United States. In this situation, a new variable has appeared -- Samsung Electronics’ plan to create the world’s largest semiconductor cluster in Korea.
“The guardrail provisions at this level mean that the U.S. government wants Korean makers to stand on its side,” said Kim Hyung-joon, head of the Next-Generation Intelligent Semiconductor Project and professor emeritus at Seoul National University. “Korean chipmakers will not be hurt if they apply for the U.S. subsidies. They are advised to take into account the fact that an increase in cost such as cost for the construction of fabs in the United States has deepened concerns over the success of investments in the United States and a possibility that they will have difficulties in running their Chinese plants.”