[Retreated K-Chips Act] ① Additional Deduction Rate Increase Only for Large Corporations? Mid-sized and Small Businesses Still in 'Midwinter'

Lost both justification and achievements
"Far from attracting overseas investment,
it seems difficult to even retain Korean talent"

Samsung Electronics Hwaseong Campus view. (Photo by Samsung Electronics)

[Asia Economy Reporter Moon Chaeseok] The semiconductor industry views the passage of the 'K-Chips Act' (Semiconductor Special Act) in the National Assembly, which raised the tax credit rate applied to semiconductor companies, as far from sufficient to induce additional domestic investment and attract overseas investment to compensate for the weaknesses of the semiconductor industry. According to the legislative intent, the new law was supposed to serve as a catalyst to attract additional investment in the non-memory sectors?such as design, equipment, and foundry?that are weaknesses of K-semiconductors. However, the tax credit rate for large corporations only increased by 2 percentage points, from 6% to 8%. Compared to the U.S. rate of 25%, this is a meager level.

There are even harsh criticisms regarding fairness issues in the content. Only the tax credit rate for large corporations increased by 2 percentage points, while the rates for medium-sized companies at 8% and small businesses at 16% remained unchanged. Large corporations are disappointed with the 'slight' increase in the tax credit rate, and medium and small companies are on the verge of complaining that they did not receive even that. A semiconductor industry official pointed out, "Minister Lee Young of the Ministry of SMEs and Startups said last June that Korea's fabless (semiconductor design) market share is only 1%, and pledged to solve the three major difficulties: huge initial capital problems, shortage of design personnel, and foundry supply shortages." The official lamented, "But the tax credit rates for medium and small companies remain unchanged."

The need for the government to provide more radical support to nurture the domestic semiconductor industry is starkly revealed by comparing the situations of leading semiconductor companies TSMC and Samsung Electronics. The Korea Economic Research Institute reported that, based on annual new hires, Taiwan's TSMC hires 10,000 people, whereas Samsung hires 1,400; the total number of employees is 65,152 at TSMC and about 20,000 at Samsung. Despite having fewer employees than TSMC, Samsung is competing by spending more money. This supports the companies' complaints that they cannot make domestic investments even if they want to.

Voices are emerging that the government should remake its previously announced workforce development, deregulation, and investment blueprints. The 'Strategy to Achieve Semiconductor Superpower Status' announced by the government in July last year included plans to reach 150,000 semiconductor personnel by 2031 and to promote investments totaling 340 trillion won over five years. However, the situation now is completely different from when the strategy was announced. SK Hynix announced it would cut capital expenditures by 50% this year. Companies are planning to halve their capital expenditures next year. Instead of promoting investment, the government now needs to present measures to maintain investment.

The government's goal of achieving a 25% global market share in five years may be difficult to realize as things stand. The government’s position is that domestic semiconductor companies, which currently hold a 22% share of the global market, only need to increase their share by 3 percentage points with government support. However, companies question where exactly they can gain that 3 percentage points. Even if the memory semiconductor sector can increase by 1 to 1.5 percentage points, a breakthrough plan is needed to raise market share in the non-memory sector, where they lag significantly behind TSMC.

Kim Jeong-ho, a professor in the Department of Electrical and Electronic Engineering at KAIST and a former private member of the People Power Party’s Special Committee for Strengthening Semiconductor Industry Competitiveness, warned, "Rather than attracting overseas investment, Samsung Electronics and SK Hynix might move their factories to the U.S. or elsewhere," adding, "The trend of competing countries poaching Korean talent could become the norm."