Examining the US Semiconductor Subsidy 'Poison Pill'... Demands for Disclosure of Technology and Books

Demand for 3 Years of Accounting Records to Recoup Excess Profits
Technical Security Essential... Yet Access Rights for Security Also Demanded
Toxic Clauses Hard to Accept Before China's Investment Restrictions

The U.S. Biden administration began accepting applications for subsidies under the CHIPS Support Act (CSA) on the 28th of last month (local time), launching a $39 billion (approximately 51.5 trillion KRW) support initiative to build semiconductor production facilities. However, controversy is spreading as very stringent support requirements are being imposed alongside the funding.

In particular, the most difficult conditions for semiconductor companies to accept are the sharing of excess profits and related disclosure of production facility information, submission of accounting books, and other corporate information disclosures. For semiconductor companies, where maintaining the security of advanced technology is crucial, these are considered unacceptable "poison clauses."

Not only overseas semiconductor companies from Korea and Taiwan investing in U.S. factories but also U.S. semiconductor companies have expressed reluctance over these unexpected requirements, leading to criticism both inside and outside the U.S. regarding the intent and direction of the support law.

[Image source=Yonhap News]

1) "Upside Sharing"

"Applicants must provide information related to the expected cash flows during the project. The project may generate cash flows or profits that significantly exceed the projections that formed the basis for deciding on 'CHIPS Direct funding' (direct support in the form of grants rather than loans or loan guarantees). Companies receiving more than $150 million in grants will be required at the time of application to share a portion of the cash flows or profits that significantly exceed the projections with the U.S. government. This will not exceed 75% of the grant. The excess profits will be used to strengthen the semiconductor ecosystem within the U.S."

The first condition that companies may feel pressured by as a grant requirement is the sharing of excess profits. The New York Times (NYT) reported that "the U.S. Department of Commerce explained that this clause aims to ensure that companies submitting applications provide as accurate forecasts as possible so they do not exaggerate losses to secure grants." Since the grant funds come from American taxpayers, the intention is to prevent wasteful spending. If accurate forecasts are not made, the U.S. government will reclaim a portion of the additional profits.

It is difficult to attribute a company's higher-than-expected profits solely to the grant, but the fact that the government will reclaim part of the excess profits beyond the forecasted amount is a challenging situation for companies investing in the U.S. Detailed information regarding upside sharing is expected to be disclosed later this month.

2) "Disclosure of 'Confidential' Production Facility Information"

"Applications must include details about construction, expansion, and modernization of each facility, as well as the location and existing or required infrastructure information. This must include information on the products each facility produces or plans to produce, the top 10 customers for these products, production scale, and production capacity. If multiple projects are submitted in one application, explanations of each project and their interrelations must also be provided. For example, if an application is submitted for two fabs (factories) at one location, it should explain that the two projects share a joint workforce development strategy and aim to increase market share together, while the planned construction, expansion, and modernization of each fab can be conducted independently."

Production facility information is core confidential information for semiconductor companies. In an industry with fierce advanced technology competition, even understanding how equipment is arranged within a factory can risk leaking secrets, so submitting such information places a significant burden on semiconductor companies.

[Image source=Reuters Yonhap News]

This is not the first time the Biden administration has demanded confidential information. Previously, in September 2021, the U.S. government requested detailed information on production volume, inventory, and product demand from global semiconductor companies, citing semiconductor supply chain responses, which sparked controversy. Two months later, companies submitted survey responses without including sensitive information. At that time, the U.S. government requested semiconductor companies to respond 'voluntarily' to such data submission requests.

This time, since the materials are part of the application documents that semiconductor companies doing business in the U.S. must submit to receive government grants, the burden on companies is inevitably much greater than two years ago.

3) "Demand for Accounting Books Including Sales and Expected Cash Flows"

"(Applicants and their ultimate parent companies and major intermediate companies must submit audited consolidated financial statements for the past three fiscal years and provisional financial statements for the current fiscal year. They must also provide key performance indicators such as profits and return on equity, details related to leverage, and credit rating information. Additionally, they must submit expected sales, costs, and cash flow summary information for each project, including major assumptions used to derive these forecasts."

The U.S. government stated that it requires financial information related to projects to verify whether companies have the financial strength to withstand pressure when the semiconductor market declines. Commerce Secretary Gina Raimondo said during the announcement, "We will require companies receiving grants to disclose their accounting books," adding, "There is no blank check." This reflects the intention to support domestic subsidies only to financially sound companies to achieve the goal of nurturing domestic industries without wasting taxpayers' money.

However, the industry has criticized these demands by the U.S. government as excessive. Requesting extensive internal information from global private companies rather than U.S. state-owned enterprises has led to criticism of "excessive managerial interference."

[Image source=Reuters Yonhap News]

4) "Providing the Department of Defense Access to Production Facilities"

"Semiconductors are fundamental components in U.S. defense and critical infrastructure systems and are essential to U.S. national security. The Department of Commerce is striving to support projects that meet government agencies' needs for semiconductors produced safely and reliably domestically. The Department of Commerce seeks projects capable of coordinating commercial production, testing, and packaging models for national security parts or applying commercial technology to support security-related missions. The Department of Defense also desires to be granted access to production facilities by the U.S. government for experimentation, implementation, production, and potential integration related to national security programs."

The Biden administration emphasizes national security as a core aspect of semiconductor policy. The U.S., having recognized the importance of semiconductor supply chains during the COVID-19 pandemic, is leading alliances such as the "Chip 4" (Korea, U.S., Japan, Taiwan) alliance for this reason. It also imposes semiconductor export controls on China to prevent it from dominating the semiconductor sector.

In this context, the U.S. Department of Commerce emphasized the necessity of national security to semiconductor companies seeking grants. On the day the announcement was made, The Wall Street Journal (WSJ) reported that the Department of Commerce explained, "The military currently cannot procure cutting-edge semiconductors produced domestically," and "critical military systems could become vulnerable to supply chain crises." The Department of Commerce also required companies to explain in no more than 30 pages how their projects could benefit the U.S. economy and security interests.

However, semiconductor companies express significant concerns, as it is problematic for national security agencies to have easy access to private companies, and there is a risk of technology leakage during this process.

Gina Raimondo, U.S. Secretary of Commerce
[Photo by AP News]

5) Securing Childcare Facilities and Expanding Union Participation

"Childcare is a key factor in increasing employment opportunities for economically disadvantaged groups, including women. The Department of Commerce requires all applicants requesting more than $150 million in direct semiconductor support to establish plans ensuring access to childcare facilities."

"When developing workforce plans for factories, applicants must consult and coordinate with workforce partners, including educational institutions, education providers, community-based organizations, labor unions, and public sector organizations."

The Biden administration has demanded securing childcare facilities and expanding union participation as part of the semiconductor support law industrial policy. Secretary Raimondo emphasized, "For semiconductor companies to succeed, they must offer attractive conditions to female workers (by installing childcare facilities)."

Both inside and outside the U.S., there are criticisms that the government has incorporated progressive socialist policies into industrial policy under the economic rationale of securing labor. The Wall Street Journal (WSJ) editorial on the day the announcement was made criticized, "The semiconductor support law has become a tool that imposes left-wing (progressive) policies on companies by setting standards not even in the law," and "The government is giving money to companies to make them implement government-desired policies."

6) "Restrictions on Investment in China" of Great Interest to Samsung and SK; Details Yet to Be Released

"Applicants receiving grants under the semiconductor support law must not make significant investments in expanding semiconductor production facilities in 'foreign countries of concern' for the next 10 years from the date of receipt. Some limited exceptions will be recognized. Additional information will be provided to applicants before grant disbursement."

[Image source=Reuters Yonhap News]

One of the elements that domestic semiconductor companies focused on in the announcement is the section related to investment in China. Samsung Electronics produces 40% of its NAND flash at its Xi'an factory, and SK Hynix produces 50% of its DRAM at its Wuxi factory. The U.S. has declared it will set "guardrails" prohibiting semiconductor facility investments in countries of concern such as China. Considering the rapid growth of the semiconductor industry, not investing in facilities in China for the next 10 years is practically impossible.

Some exceptions mentioned in the semiconductor support law allow investments in existing facilities producing legacy (old process) semiconductors in the countries of concern. However, even if production capacity is expanded at these facilities, most of the output must be for the Chinese domestic market. The U.S. plans to disclose detailed guardrail information within this month.

This content was produced with the assistance of AI translation services.