[US Semiconductor Subsidies] ① Withdrawal from China Impossible... Samsung and Hynix Dilemma

Recurring China Risks
Withdrawal Possibility Mentioned but Industry Responds Seriously
Investment in China Could Soon Become Losses

As the United States begins accepting applications for semiconductor support law subsidies, domestic semiconductor companies such as Samsung Electronics and SK Hynix, which are investing in the U.S., are facing deep concerns. This is because the U.S. is pressuring them to give up advanced semiconductor production in China in order to receive subsidies. Although there are suggestions that they may have to withdraw from their China operations, the industry explains that this is not feasible. The local investment amount exceeding 50 trillion won could soon become a loss.

On February 28 (local time), the U.S. Department of Commerce announced the application procedure for semiconductor support law subsidies. The Semiconductor Support Law includes provisions to provide $52.7 billion (approximately 69.037 trillion won) in subsidies and tax credits to companies building semiconductor production facilities in the U.S. The Department of Commerce will select subsidy recipients through five stages starting now. From this day, letters of intent from companies wishing to receive subsidies will be accepted, followed by application submissions, financial analysis, and due diligence. The subsidy per company is expected to be between 5% and 15% of capital expenditures (CAPEX), and is unlikely to exceed 35%.

Domestic semiconductor companies may qualify for subsidies. Samsung Electronics is investing $17 billion (approximately 22.27 trillion won) to build a foundry (semiconductor contract manufacturing) plant in Taylor, Texas. SK Hynix plans to invest $15 billion (approximately 19.65 trillion won) to establish an advanced semiconductor packaging plant and a research and development (R&D) center in the U.S. However, these companies face many concerns. The U.S. Department of Commerce has decided to apply an excess profit sharing system to companies receiving subsidies exceeding $150 million (approximately 196.5 billion won). If profits exceed the expected earnings submitted with the application, the U.S. government can claim up to 75% of the received subsidy.

In particular, the soon-to-be-released guardrail provisions could hinder domestic companies. The Semiconductor Support Law includes guardrail provisions that restrict the China investments of companies receiving subsidies. For ten years, companies will be prohibited from building new factories, expanding existing ones, or replacing equipment in China. Although the detailed guidelines of the law are undecided, it is expected to block advanced memory semiconductor production in China.

China accounts for about 40% of domestic semiconductor exports (60% including Hong Kong) and is considered the largest consumer market globally. It is also a production base for domestic companies' memory products. Samsung Electronics operates a NAND flash factory in Xi'an and a packaging plant in Suzhou. SK Hynix runs a DRAM factory in Wuxi and a packaging plant in Chongqing. There is also a NAND flash factory in Dalian acquired from Intel. Samsung Electronics produces 40% of its total NAND in China, and SK Hynix produces 50% of its total DRAM there.

Given this situation, there are ongoing calls to reduce domestic companies' dependence on China. Some even argue that production facilities in China should be withdrawn. However, this is not an easy task. An industry insider explained, "Building a semiconductor factory and installing equipment to create a single production line requires investments in the trillions of won. It is not a matter that can be simply relocated like moving house."

According to data received by Kim Hoe-jae, a member of the National Assembly's Industry, Trade, Energy, Small and Medium Business Committee from the Ministry of Trade, Industry and Energy, Samsung Electronics invested $17.06 billion (approximately 22.3486 trillion won) in China from 1997 to 2020. SK Hynix invested $24.9 billion (approximately 32.619 trillion won) in China during the same period. Withdrawing from the Chinese market could result in losses equivalent to the scale of these investments.

Of course, the industry agrees on the need to prepare countermeasures. Since October last year, the U.S. has been blocking various equipment exports to prevent advanced semiconductor production in China. Samsung Electronics and SK Hynix have received regulatory exemptions, but these are temporary for one year, creating significant uncertainty. After attending the Doheon Academic Institute event this month, SK Hynix Vice Chairman Park Jung-ho told reporters, "Efforts to ease the concentration of facilities in Asia seem necessary."

Lee Ji-hyun, KOTRA Silicon Valley Trade Center, explained, "The global semiconductor supply chain is effectively divided into two. One consists of the U.S. and its allies, and the other includes various countries in Southeast Asia, the Middle East, Eurasia, and Africa where China is promoting the adoption of its own technology standards." She added, "Our companies need to prepare plans to respond to this."