[US Semiconductor Subsidies] ③ Samsung and SK Busy Negotiating... Government Faces Challenges in Preparing Measures

China's Semiconductor Exports Decline
Future Business in China Expected to Be Challenging

Samsung Electronics, SK Hynix, and the government are negotiating with the United States to secure maximum operational rights for semiconductors in China, but have yet to find a definitive solution.

On the 28th of last month (local time), the U.S. Department of Commerce announced detailed provisions of the Semiconductor Support Act subsidies, which include a requirement to share excess profits with the U.S. government in order to receive government subsidies. They also began accepting applications for subsidy letters of intent from the day of the announcement. However, specific details regarding the semiconductor law's guardrail provisions were not disclosed. Detailed guidelines on the guardrails are expected to be announced later. Government officials anticipate that the detailed guardrail guidelines will be released early this month.

The guardrails include a provision that receiving U.S. subsidies will restrict new investments in China for the next 10 years. Samsung Electronics operates the Xi'an NAND flash and Suzhou back-end process factories, while SK Hynix operates the Wuxi DRAM, Dalian NAND, and Chongqing back-end process factories. Receiving U.S. subsidies is expected to cause significant disruptions to their business activities in China. Approximately 30% of semiconductor sales from Samsung Electronics and SK Hynix come from China.

South Korea's semiconductor exports to China are at a critical low. According to the Ministry of Trade, Industry and Energy's announcement on the 1st, total exports over the past month decreased by 7.5% year-on-year to $50.1 billion (approximately 66.383 trillion KRW), marking five consecutive months of decline. Semiconductor exports dropped by 42.5% ($4.4 billion, approximately 5.83 trillion KRW), continuing a negative trend for seven months. Total exports to China, including semiconductors, decreased by 24.2%, marking nine consecutive months of decline. The reduction in semiconductor exports to China has contributed significantly to the overall decrease in South Korea's exports.

Jina Raimondo, U.S. Secretary of Commerce, speaking.
Photo by EPA Yonhap News

According to reporting, the Ministry of Trade, Industry and Energy is consolidating the positions of Samsung Electronics and SK Hynix to conduct bilateral negotiations with the U.S. Department of Commerce. It is difficult to bring up South Korea's business issues in the Chip4 multilateral forum (Chip4: South Korea, United States, Japan, Taiwan), which includes Japan and Taiwan. Samsung Electronics and SK Hynix are engaging in discussions with various U.S. government and congressional officials through their respective North American government relations channels.

The South Korean and U.S. governments are not currently negotiating to shorten the guardrail period (10 years) or to prioritize specific product negotiations. The period is stipulated by law, making it difficult to amend. It is also challenging for the South Korean government to initiate negotiations prioritizing specific products. For example, negotiating to prioritize back-end processes over NAND flash, which is also operated by U.S. company Micron, is difficult.

The law includes provisions for individual negotiations between the U.S. government and companies regarding subsidy receipt conditions. Detailed negotiations by product are expected to be primarily conducted by the companies themselves. An official from the Ministry of Trade, Industry and Energy explained, "We are consulting through various channels to reduce the uncertainty in business operations that the industry is concerned about," adding, "We are not approaching this by emphasizing that any particular product is more important."

The government has stated that South Korean companies do not necessarily have to be bound by the U.S. guardrail provisions. On the 27th of last month, Vice Minister Jang Young-jin of the Ministry of Trade, Industry and Energy said at a press briefing, "If there is a need to invest in China, companies can return the semiconductor investment subsidies received from the U.S. government," and added, "If demand in China exceeds that in the U.S., companies may choose not to apply for subsidies."

There are also criticisms that South Korea is relatively marginalized in the process of establishing investment cooperation relationships among Chip4 member countries. South Korea has attracted investments from U.S. equipment companies Applied Materials (AMAT) and Lam Research in Gyeonggi Province. However, compared to investment cooperation between the U.S. and Taiwan (such as the tripling of TSMC's investment in Arizona), the U.S. and Japan (such as the business agreement between Japanese company Rapidus and U.S. company IBM on 2nm process technology), and Taiwan and Japan (such as TSMC's plan to establish a second plant in Kumamoto Prefecture, Japan), South Korea's scale and substance are considered insufficient.

The Ministry of Trade, Industry and Energy maintains that it has achieved notable results by establishing cooperation frameworks such as the Korea-U.S. Supply Chain Industry Dialogue (SCCD), formed during U.S. President Joe Biden's visit to South Korea in May last year. An official from the ministry stated, "We are discussing cooperation plans with the U.S. across semiconductor research and development (R&D) and investment," adding, "Rather than immediately comparing with the achievements of Taiwan and Japan, we will focus on strengthening Korea-U.S. cooperation."

There are industry rumors that both Samsung Electronics and SK Hynix will apply for U.S. subsidies. However, both companies have stated that they "cannot confirm" whether they will apply for subsidies or which products will be prioritized in negotiations.