[Peace&Chips] "Semiconductor Support Act will only increase market share by 1-2%p"... US skepticism rises

Outlook Uncertain... US Demands Accurate Forecasts
Submission of Sensitive Facility Data Like Teen Customers Also Difficult
"Global Supply Chain Replacement Impossible," Skepticism Even in US

Editor's NoteSemiconductors, known as the rice of modern industry. Although it's a term we hear every day, it's often hard to explain. Peace & Chips will make the complex concepts and overall trends of the semiconductor industry easy to digest. Just place your spoon and enjoy.

March marks the beginning of spring. Many people welcome the noticeably warmer weather, but there are still places where the cold winter winds blow fiercely. That place is the semiconductor industry. As the US and China engage in a power struggle in the semiconductor sector, innocent domestic companies are suffering significant damage.

On the 28th of last month (local time), the US announced its plan to distribute subsidies under the CHIPS Act. The CHIPS Act includes provisions to support companies building related facilities to increase semiconductor production in the US with subsidies, R&D funding, and tax credits. Among these, a roadmap was released on how to distribute $39 billion in facility investment subsidies.

The US Department of Commerce presented six evaluation criteria for companies applying for subsidies. They imposed stringent conditions such as sharing excess profits beyond expectations and disclosing various financial indicators and production facility information. While nothing is free, several clauses could be fatal to business operations.

From the third person on the left, U.S. President Joe Biden and President Yoon Suk-yeol are seen touring the Samsung Electronics Pyeongtaek campus factory in May last year.
[Image source=Yonhap News]

In particular, the sharing of excess profits has become controversial. The US Department of Commerce stated, "Companies receiving subsidies exceeding $150 million must share with the US government a portion of cash flow or profits that significantly exceed the estimates provided in their application." This means that if a company earns much more than the projected revenue stated in its application, it must return up to 75% of the subsidy.

If Samsung Electronics and SK Hynix apply for subsidies, they could be subject to excess profit sharing. Samsung Electronics plans to invest $17 billion, and SK Hynix $15 billion, to establish semiconductor facilities in the US. By simple calculation, based on investment amounts, Samsung Electronics could receive at least $850 million, and SK Hynix $750 million in subsidies. The US explained that the subsidy amount per company ranges between 5% and 15% of capital expenditure (CAPEX), not exceeding 35%.

The US will disclose detailed plans regarding excess profit sharing this month. The impact will vary depending on where the threshold for exceeding estimates is set, but there are already many critical voices within the industry. Some argue that expecting precise forecasts is incompatible with the nature of the industry.

The semiconductor industry is cyclical. Market conditions fluctuate like waves, improving and worsening. In the past, cycles lasted 4 to 5 years, making forecasts somewhat possible, but now, with multiple market variables influencing the sector, it is said to be difficult even to predict the next quarter. The US increasing sanctions against China also adds to market uncertainty.

The US also requires applicants to provide "information on products produced at each facility, the top 10 customers for these products, production scale, and production capacity" in their subsidy applications, which poses many problems. Semiconductor production facilities are highly sensitive and heavily secured. Requesting facility information is tantamount to asking companies to reveal their technological capabilities or competitiveness.

Especially for Samsung Electronics' foundry (semiconductor contract manufacturing) plants in the US, submitting customer information could be even more difficult. The foundry business produces products based on orders from fabless (semiconductor design) companies, so customer trust is crucial. No fabless company would want to place orders with a factory where their information might leak.

Notably, skeptical opinions also arise within the US. US investment bank Goldman Sachs and The New York Times stated that subsidies alone cannot replace Asian production capacity. They forecast that the US share of total semiconductor production will increase by only 1 to 2 percentage points. They also evaluated that Asian production is advantageous in various aspects such as factory construction and production costs.

The UK Financial Times said, "The White House needs to clarify whether its goal is semiconductor self-sufficiency or enhancing supply chain resilience through friendshoring." It added, "Even if US customers prefer domestic semiconductors, the latter is more desirable." Friendshoring refers to building supply chains with allied countries. The CHIPS Act, which prioritizes national interests alone and puts allies in a difficult position, seems very different from friendshoring.