The finalized and announced “Semiconductor Law Guardrail” regarding China, which could potentially weaken the competitiveness of South Korean semiconductor factories established in China, has failed to incorporate key demands made by the South Korean government and businesses.
While some of South Korea’s demands were acknowledged, the semiconductor industry in the country is growing more concerned since Samsung and SK hynix’s requests for relaxation were not accepted, and the deferment period remains unclear. The current situation isn’t so dire as to immediately halt the operation of factories in China or withdraw business, but predictions for the future are becoming less promising.
On Sept. 22, the U.S. Department of Commerce released the final version of the Guardrail Provisions Detailed Regulations, which restricts facility expansion and technological cooperation within concerning nations, like China, for companies receiving investment incentives, such as subsidies, under the Semiconductor Law. These restrictions are related to production capacity and technological developments within facilities in China.
According to the final guardrail provisions, if companies within 10 years of receiving subsidies engage in “significant transactions” to substantially increase their production capacity in China or similar countries beyond the allowed limits, they must return all subsidies. The substantial expansion is defined as 5% or less for advanced semiconductors, and less than 10% for legacy semiconductors of 28 nanometers (nm) or larger.
Previously, the South Korean government requested the U.S. to adjust the substantial expansion criterion from 5% to 10% and to relax the range of legacy semiconductors. However, these requests were largely ignored. The U.S. Department of Commerce stated that “a 5% exception allows for routine upgrades of semiconductor facilities and production lines.” There was a change in defining what qualifies as an expansion, shifting from a focus on “physical space or equipment” to “clean rooms, production lines, or other physical spaces,” suggesting no restrictions on production volume increase.
The criterion for semiconductor production capacity also changed from “monthly” wafer counts to “annual” wafer counts. This broader measure appears to incorporate the semiconductor industry’s argument that production varies depending on market conditions.
If production capacity expands beyond 5%, there is an investment amount limitation of US$100,000. It’s noteworthy that the subsidy amount and other details will be determined through negotiations between the applying company and the U.S. Department of Commerce.
Regarding generic semiconductors, facilities under construction at the time of subsidy reception can also be included based on negotiations with the U.S. Department of Commerce. Especially if 85% of generic semiconductors produced in Chinese factories are utilized as final products in concerning countries, they are not subject to expansion guardrail limitations.
Upgrades within the scope of the expansion guardrail and equipment replacement for maintaining current facilities are allowed. Cooperative semiconductor technology research being developed with China is permitted. International standard activities, patent-related activities, and collaborative research on technologies and items that don’t raise national security concerns are still feasible.
U.S. Commerce Secretary Gina Raimondo stated, “The Semiconductor Law is fundamentally about national security, and these guardrails will help ensure that companies receiving U.S. government funds do not compromise our national security. We continue to cooperate closely with our allies and partners to strengthen the global supply chain and collective security.”
The South Korean government plans to continue cooperating with the U.S. to strengthen the global semiconductor supply chain and ensure the investment and business activities of our companies. The related industry is considering responding by taking into account the scale of incentives under the Semiconductor Law and guardrail provisions based on individual global business strategies.
Meanwhile, China has recently succeeded in producing advanced 7 nm semiconductors. This sets Chinese semiconductors ahead with less than 128-layer NAND Flash and more than 18-nm DRAM than generic semiconductors. For South Korean companies to maintain competitiveness in China, they must increase advanced semiconductor production. However, the recently confirmed 5% expansion is merely maintaining the current production volume, according to industry evaluations.
Furthermore, with the exemption measure for importing advanced semiconductor production equipment expiring next month, South Korea and the U.S. are in the final stages of negotiations. The industry expects the exemption measure to be extended by another year, but if no extension is made and control measures take effect, uncertainties increase.