[ANALYSIS] US geopolitical strategy may impact Samsung, SK

U.S. Secretary of Commerce Gina Raimondo listens during a virtual meeting with Deputy Secretary of Defense Kathleen Hicks, CEOs and labor leaders called to discuss the importance of passing the Chips Act to bolster America's competitive edge, its manufacturing power and national security at the White House in Washington, D.C., July 25, 2022. UPI-Yonhap

How to define 'legacy chips' to become key issue for funding from CHIPS Act

By Kim Yoo-chul

U.S. President Joe Biden's official launch of the first funding opportunity for the CHIPS and Science Act (CHIPS Act) features a set of export controls that include detailed measures to cut China off from importing advanced semiconductors made in any country using U.S.-patented chip equipment.

The law clearly illustrates the administration's intention to set Chinese manufacturers back years because the regulations will directly curb their ambitious aim to miniaturize chips. Seemingly, the U.S. is feeling a sense of urgency about China threatening its decades-long dominance in the military and technology sectors.

What is noteworthy within the CHIPS Act is that it will direct funds to federal agencies supporting the development of sophisticated artificial intelligence (AI), quantum computing and even data science. All these areas require advanced semiconductors to maintain and smoothly run data-intensive processing.

According to a report last year by the Australian Strategic Policy Institute ― to Washington's alarm ― China was leading in 37 of 44 technologies in electric batteries, 5G, 6G and hypersonic aerospace, with Beijing potentially establishing a monopoly in some security-related areas. It advised the Biden administration and its allies to jointly fund the development of the most promising and critical technologies.

As such, government officials and company executives told The Korea Times that the CHIPS Act isn't intended to replace Asia's current dominant position in semiconductor production, but is aimed at reducing risks posed by future crises such as pandemics, and hedging against extensive supply chain disruptions. It is doing this by establishing a U.S. "pressure valve" to cope with future supply chain problems, leaving Samsung and SK the option to apply for CHIPS Act funding. The law oversees $50 billion to revitalize the U.S. chip industry, including $39 billion in semiconductor incentives.

Asia is the production hub for between 75 percent and 80 percent of global semiconductor manufacturing ― mainly from firms based in South Korea, Taiwan, Japan and mainland China, according to data provided by the Semiconductor Industry Association.

"We have to view the CHIPS Act as a tool within the context of Washington's Indo-Pacific geopolitical strategy. The U.S. wants to contain Samsung and SK on its soil as it doesn't care about increasing its chip market share. By containing them, the U.S commerce department could be able to access the specifics of chip production roadmaps and to customize areas of applications according to its interests," an aide to former President Moon Jae-in who managed the country's trade policies told by telephone.

Semiconductor chips on a circuit board of a computer Reuters-Yonhap

"As the CHIPS Act has become a matter of politics given Seoul's full support of Washington's signature foreign policy agenda since President Yoon Suk Yeol took office, it's no surprise to see Samsung Electronics and SK applying for funding," he added.

Consequences and risks of taking federal incentives

But there is no free ride.

Samsung, for example, could be eligible to receive between $850 million and up to $6 billion in federal incentives if it requests federal loans, and/or federal guarantees for third-party loans, in addition to direct funding as it is building a foundry semiconductor plant in Taylor, Texas. The world's largest memory chipmaker plans to construct 11 new semiconductor plants in the State of Texas over the next two decades.

SK hynix, one of the world's top three memory chip suppliers, plans to invest up to $15 billion in the U.S. to construct chip packaging facilities. Sources at Samsung Electronics said it will apply for the funding, however, representatives at the company only said: "We will continue to closely monitor the situation."

SK officials said the company isn't urgently looking to receive tax incentives from the U.S. The Biden administration has warned that applications for funding from the CHIPS Act that are approved will come with a lot of requirements attached, including restrictions on investing in other countries, mainly China, and limits on chip output there and on stock buybacks.

Applications for funding will start March 31 for projects related to the construction of cutting-edge semiconductor factories, while the process for candidates wanting federal incentives in return for constructing of packaging facilities or chip plants using mature-node processing technology will start from June 26, according to the U.S. commerce department.

"All recipients of funding from the CHIPS Act will be asked to hand over their chip production- and profit-related data to the U.S. authorities. By providing cash incentives to non-American chip manufacturers but within its alliance network, the U.S. wants to boost research into advanced technologies that would give U.S. companies a competitive edge over their Chinese rivals," said Hong Ki-yong, a professor of economics at Incheon University. He expects South Korea to join the U.S. ban on exports of advanced chip-making tools to China that the Netherlands and Japan have recently agreed to do.

US President Joe Biden attends an event to support legislation that would encourage domestic manufacturing and strengthen supply chains for computer chips in the South Court Auditorium on the White House campus, Washington D.C., March 9, 2022. AP-Yonhap

The South Korean government is being pressured to seek clarity on how the CHIPS Act will impact the country's chip-making duo, which have massive manufacturing operations in China. This is because the act prohibits funding recipients from applying advanced semiconductor manufacturing technology in China as this, as defined by U.S. law, poses a possible national security threat. Specifically, the recipients will be banned from building any new facilities in China, unless they mainly produce legacy and non-advanced chips, only for Chinese consumption.

China is the largest market for South Korea in terms of chip exports with Samsung and SK operating massive plants in Xi'an, Suzhou, Wuxi and Chongqing. Samsung's Xi'an plant accounts for about 40 percent of its NAND Flash production, while SK's Wuxi plant makes nearly 50 percent of its DRAMs. That means a ban imposed by the U.S. through the CHIPS Act will hurt the Korean companies financially. Trade ministry data shows that Samsung Electronics invested $17 billion in China from 1997 to 2020, while SK invested $24.9 billion during the same period.

Government officials said they are maintaining channels of communication with Chinese authorities because Seoul is well aware of the possibility of China imposing potential economic retaliation if South Korean firms officially get on board with U.S. export controls.

"Getting an extended exemption from U.S. export controls is considered a short-term goal that is achievable. Both Samsung and SK will have to review their semiconductor business strategies in China as it will be very tough for them not to apply for funding from the CHIPS Act. Similarly it will be another tough decision as to whether to let their cash-intensive chip facilities in China only handle less-pricey and unprofitable legacy products. In a way to diversify their semiconductor supply chain, Samsung and SK may review the possibility of building new plants in countries in the Indo-Pacific region," said Lee Joo-waan, an economist at POSCO Economic Research Institute.

When South Korea allowed the U.S. to deploy a THAAD missile defense system battery back in 2017, China imposed heavy economic sanctions against South Korean businesses operating there.

"How to specifically define legacy semiconductors will be a key issue when it comes to the process development for funding from the CHIPS Act. Samsung and SK should thoroughly consider whether the estimated value of the funding will offset negative aspects of these geopolitical manufacturing constraints," another Samsung source said.