The U.S. Commerce Department concluded that South Korean semiconductor firms supported by the CHIPS and Science Act could expand their cutting-edge production capacity up to five percent in China, only a 10th of what the South Korean government and companies requested. With some of their production lines built in China, Samsung Electronics and SK hynix are left more concerned with the decision made.
The act's national security "guardrails" stipulate that U.S.-aided businesses shall return the total amount of grants if they carry out the material expansion of production capacity in “foreign countries of concern,” including China, for 10 years from the date of subsidy support. The cap on “material expansion” is more than 5 percent and 10 percent for highly advanced chips and legacy facilities, respectively. The total sum of semiconductor grants is a whopping 39 billion dollars or 52 trillion won.
Indeed, the rule appears to be an obvious block to investment decisions that will be made by Samsung Electronics – with 40 percent of NAND flash memory produced in Xian – and SK hynix manufacturing 40 percent of D-RAM chips in Wuxi and 20 percent of NAND flash memory in Dalian. Given the nature of the semiconductor industry, any brief delay in facility enhancement can cause companies to start losing ground in competition. Although more flexibility has been added to the status quo since Washington changed production standards from wafer inputs to the scale of production facilities, things have made it difficult for chip manufacturers to consider aggressive investments that can, in turn, upgrade their existing capacity.
Washington seems to take an increasingly stringent approach to semiconductor regulations against China as Huawei on the U.S. government’s sanction list has recently revealed its latest smartphone equipped with a Chinese cutting-edge CPU system and SK hynix's D-RAM chips that the company allegedly obtained through illegal channels. U.S. Commerce Secretary Gina Raimondo emphasized that not any cent of grants should go to help China outcompete U.S. companies.
On one hand, to South Korean chip manufacturers, it may not be an attractive offer that Washington can give each of their factories as many as several trillion won. If they miss the opportunity, they may lag behind Taiwanese and U.S. firms that will be aided by the U.S. government. On the other hand, they cannot easily back off from China – their major production hub and the world's largest semiconductor market – by holding back business expansion or scaling down. They must set as efficient investment strategies as possible within the predefined guardrails to minimize any negative impact.
Next month, more decisions are to be made that will affect how South Korean companies deal with their China-based facilities. For example, Washington will decide whether to extend the exemption granted to South Korean firms regarding export controls on cutting-edge semiconductor equipment produced by the United States, the Netherlands, and Japan bound for the Chinese market. South Korean chip manufacturers have responded positively to U.S. investment requests, creating local jobs. Using the fact as a lever, South Korea needs to talk to the United States so that they will not suffer any further disadvantages.