United States pressures China with decoupling,

using semiconductor incentives as “carrots”…

What is Korea’s choice?

United States pressures China with decoupling,

using semiconductor incentives as “carrots”…

What is Korea’s choice?

Samsung Electronics, expects subsidies of as much as KRW 3.4 tln…

Tough terms plunging industry into dilemma 

United States demands applicant companies to

“explain contribution to U.S. national security”

Demands commitment to supply semiconductors for military purposes

Receipt of subsidies means “participation in U.S. checking of China”…

Government official: “Implication to national security must be considered”

As the United States announces the procedure for paying subsidies to semiconductor invested companies in accordance with the CHIPS Act, the calculations of Korean companies that are caught in between U.S. and Chinese competition over semiconductors has become more complicated.

With Samsung Electronics and SK Hynix expected to apply for subsidies to the U.S. government, the United States has made it clear that it will provide subsidies to companies that cooperate with the stable supply of military-purpose semiconductors, and decoupling with China, the greatest competitor.

On February 28 (local time), the U.S. Department of Commerce explained the procedure for applying for subsidies for semiconductor production as per the CHIPS Act, and said that although there are no limits to the subsidies, in most cases, they shall be 5-15% of total facility investment amount of the relevant project.

The Department stated that the total assistance amount which includes subsidies and loans shall not exceed 35% of the total facility investment amount, and requested that the applicant companies attract private investment to the maximum extent.

If a simple calculation was to be made by assuming that Samsung Electronics will apply for subsidies, the amount of direct subsidies that it could receive in relation to the Taylor Foundry Plant in Texas, U.S.A., through an investment of USD 17 bln, would amount to a range of USD 850 mln - 2.55 bln.

When including loans and guarantees, the subsidy amount could increase to as much as USD 5.95 bln.

The domestic semiconductor industry, although showing a prudent attitude towards applying for subsidies so far, is in a dilemma due to the strict terms.

The U.S. Department of Commerce announced that the most important criteria to be evaluated would be how much a project of a company building semiconductor facilities in the U.S. would contribute to U.S. economic and national security interests.

The original intent in enacting the law stemmed from a stark awareness that the U.S. could no longer depend on other countries for semiconductors, which are important for security. Such a position of the U.S. government is not unexpected, but on this day the Department of Commerce stated this more specifically than before.

“Semiconductors are an essential component of the modern defense system, and a secure design and stable supply are essential for national security,” stated the Department of Commerce. It announced that it shall take into account how much production there is by projects proposed by companies of semiconductors that are necessary for U.S. government agencies including the Department of Defense, and major facilities.

The Department of Commerce elucidated that “The Department of Commerce wants a project that can adapt commercial production, testing and packaging models into small-quantity batch production of components necessary for national security…and a project through which commercial technology can be applied to support national security affairs.”

In addition, the Department of Commerce announced that “The U.S. government wants an applicant that is willing to provide semiconductor facilities that can be used for testing, conversion, production and purposes potentially integrated with national security programs.” This can be interpreted as meaning that it will provide subsidies as a priority to companies that will cooperate in the development and supply of semiconductors for military purposes.

It appears that the United States seems to regard semiconductor factories as strategic facilities that can be a target of the enemy.

The Department of Commerce revealed that it shall look into whether the applicant company can protect the production facilities from the danger of “the enemy stealing, preventing usage, fabricating or destroying sensitive information necessary for economic and national security.”

It emphasized that the ability to technology that is critical for national security or the target of export controls from cyber attacks and other threats, as well as spy activity, is of the utmost importance. This appears to be taking into consideration technological theft by China.

In addition, the Department of Commerce stated it shall investigate each company’s plan for managing risk factors regarding the supply network, and verify whether companies can procure materials, equipment and parts that are required for semiconductor production despite difficult circumstances, and whether they can continue to operate facilities when they are blocked from facilities and human resources outside of the U.S. for a certain period of time.

Whether semiconductors can be supplied to the U.S. without fail, amidst geopolitical crises or emergency situations such as Covid-19, are to be important factors of consideration.  

Each company need not fulfill all of these conditions, but since the Department of Commerce has emphasized that they are priorities, companies shall feel a need to cooperate to a certain extent.

The Department of Commerce asked companies applying for subsidies to state within 30 pages how they were going to assist in attaining U.S. economic and national security goals.

It has announced that, in order to prevent subsidies from ending up in China’s hands, if a company that receives subsidies conducts joint research with China and/or pursues a technology license for a technology or product that could be a security concern for the U.S., the total amount of the subsidy must be returned.

Companies must establish an agreement with the Department of Commerce saying they shall not expand their semiconductor production capability in China for 10 years after extension of a subsidy.

In addition, companies are not allowed to use their subsidies to purchase telecommunications and video surveillance equipment of Chinese companies such as Huawei and ZTE. This is because the 2019 National Defense Authorization Act stipulates that federal subsidies cannot be used to purchase equipment of such companies.

This guardrails provision of the CHIPS Act must be viewed in line with U.S. export controls that were announced on October 7 of last year regarding semiconductors to China.

Export controls are the “sticks” that force decoupling with China in the high tech, semiconductor industry, while semiconductor subsidies are the “carrots” that encourage voluntary participation for restructuring of the U.S.-led supply network.

Therefore, the receipt of subsidies by semiconductor companies is not only a simple economic issue of how much Samsung Electronics and SK Hynix will receive, but is expected to result in cooperation by Korea with the U.S. on checking the semiconductor industry in relation to China.

Whether to apply or not is a matter to be decided upon by each company, but the potential diplomatic and security repercussions could be considerable. 

“When determining whether an application will be made for semiconductor subsidies, and the amount and other terms, it is necessary to consider business aspects such as the profits of each company, but also national interest and security concerns as well,” remarked a Korean government official.

(Washington/Seoul, Yonhap News)