For Chip Makers, a Choice Between the U.S. and China Looms

Date: Thursday, March 30, 2023
Source: Wall Street Journal

WASHINGTON—Semiconductor companies seeking federal grants under the Chips Act could face a tough decision: take Washington’s help to expand in the U.S., or preserve their ability to expand in China.

The Biden administration last week proposed new rules detailing restrictions chip companies would face on operations in China and other countries of concern if the companies accept taxpayer funding.

Some of the proposed restrictions, known as the China guardrails, were tougher than industry executives, lawyers and national-security analysts say they had expected—both for leading-edge semiconductor plants needed for advanced military weapons systems as well as factories making so-called legacy chips used in consumer electronics.

“It’s going to make a good number of companies question whether they want to accept the Chips funding,” said Angela Styles, an Akin Gump lawyer who advises semiconductor-industry companies.

The restrictions would be particularly onerous for East Asian companies with significant operations in China, where they have already invested billions of dollars. These include Samsung Electronics Co. and SK Hynix Inc. of South Korea, the world’s top two memory-chip makers, and Taiwan Semiconductor Manufacturing Co. or TSMC, the world’s largest contract chip maker.

U.S. restrictions placed on exports of advanced chips and chip-making equipment to China would make it more difficult for South Korean companies to continue investing in China, Trade Minister Ahn Duk-geun said in Seoul recently, before the U.S. Commerce Department’s detailed proposals on the Chips Act’s guardrails.

It would be up to the companies to make those decisions, he said.

Commerce Secretary Gina Raimondo said the Biden administration isn’t seeking to decouple economically from China.

“We want American businesses to continue to do business in and with China. And vice versa,” she said in an interview with The Wall Street Journal. “But we do have to be eyes wide open about the risks presented to the United States.”

She added that China has made it clear it wants access to the most advanced U.S. technology to incorporate it into its military capability. “We just can’t allow that to happen,” she said.

Ms. Raimondo said she might visit China this fall to keep communication open with Beijing and to make sure U.S. businesses can operate on a level playing field.

Big companies viewed as candidates for Chips Act funding are largely withholding public comment for now.

Samsung said it has been in “close discussions with the relevant government agencies of the U.S. and Korea” and plans to determine its next steps after reviewing the funding details.

Samsung is building a $17 billion advanced chip-making plant in Taylor, Texas, and last year floated plans of potentially investing as much as $200 billion in chip-making plants in Texas.

TSMC, with a $40 billion plan to build a complex for advanced chips in Arizona, declined to comment.

SK Hynix has disclosed plans for a new U.S. advanced-chip packaging plant, where the final steps of the semiconductor-fabrication process would occur. It said uncertainties around the operations of its Chinese facilities had been cleared through talks between the South Korean and U.S. governments, and that it would closely review Washington’s announcements.

The Chips Act, signed into law by President Biden in August, was aimed at renewing America’s leadership in advanced semiconductor technology and fending off competition from China. The act prohibits “significant transactions involving the material expansion” of manufacturing capacity for leading-edge and advanced semiconductors in foreign countries of concern.

The proposed rules define “significant transactions” as those costing at least $100,000 and “material expansion” as increasing a facility’s capacity by 5%. The rules cover a 10-year period, which would allow companies to make adjustments in their long-term China strategy.

“This is essentially the U.S. utilizing industrial policy to steer supply chains for semiconductors in the direction that it wants, and that direction is clearly away from China,” said Reva Goujon, director of China corporate advisory at Rhodium Group, a research firm.

The policy, she said, sends to such companies a “clear signal that it’s not going to be sustainable to produce semiconductors at the leading edge in China.”

The Commerce Department was blunt in explaining why such limits were necessary.

“These thresholds are intended to capture even modest transactions attempting to expand manufacturing capacity,” it said in the text of the proposed rule, which now goes through a 60-day public-comment period before being completed this summer.

The program also places limits on the fund recipients’ engagements in joint research and technological licensing with foreign entities of concern.

For chip makers, the China-based facilities represent years of investment and are responsible for a sizable portion of the world’s chip-production capacity.

Samsung operates a NAND flash memory-chip plant in the central Chinese city of Xi’an and a chip-packaging facility in the eastern city of Suzhou. SK Hynix operates DRAM memory-chip production facilities in the city of Wuxi, and owns Intel Corp.’s NAND flash-memory-chip factories in Dalian through a deal struck in 2020.

TSMC operates chip-making facilities in the Chinese cities of Nanjing and Shanghai.

As of last year, Samsung’s Xi’an facility accounted for roughly 16% of global NAND flash-memory production, while SK Hynix’s Wuxi facility accounted for about 12% of global DRAM memory production and its Dalian facility about 6% of NAND flash-memory production, according to TrendForce, a tech-market researcher.

TSMC’s Shanghai and Nanjing plants together contribute about 6% of the company’s total contract chip-making capacity, according to TrendForce.

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