Taking CHIPS Act cash? You're banned from planting advanced fabs on Chinese soil

Rules apply for next decade, warns Commerce Department, which can claw back cash

US Commerce Secretary Gina Raimondo has warned that the US Commerce Department "has the ability to claw back money" if recipients of CHIPS Act semiconductor manufacturing grants "compromise national security" by developing leading-edge tech in China in the next decade.

Raimondo was speaking at a White House briefing yesterday talking up the strategy document [PDF] her department introduced that further outlines plans to implement the $50 billion in funding for the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, as we reported here.

"Companies who receive CHIPS funds can't build leading-edge or advanced technology facilities in China for a period of 10 years. Companies who receive the money can only expand their mature node factories in China to serve the Chinese market," Raimondo told press.

The US administration has already said that it will not allow recipients to use government funding for "stock buybacks or to pad their bottom line" – and also from adding advanced fabs in China. Yesterday's speech clarified that it would seem to be a 10-year moratorium, although it's hard to see how either would be enforced.

In 2020, the Commerce Department banned several Chinese businesses, including Semiconductor Manufacturing International Corp, from importing American chipmaking gear in an effort to prevent manufacturers from producing chips based on a 10nm or smaller process. Despite this, SMIC managed to produce 7nm chips, albeit using previous generation 193nm Deep Ultraviolet (DUV) process lithography.

Nonetheless, according to reports, the US already allows 94 percent of restricted tech exports to China in practical terms, reportedly granting a whopping 2,652 export licenses for restricted tech in 2020.

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Raimondo said the decade-long edict about China investment was another "guardrail," and will mean that those who receive CHIPS Act cash can't use it for chips that get made or are sold in China, unless they're for the Chinese market and use a mature-node process – for example, CMOS image sensors in smartphones and cameras, display driver ICs for panels, flash memory controllers, microcontrollers, power management ICs, etc.

This acknowledges the ongoing supply chain problems that cannot be cured by spending months and years building CHIPS-funded US fabs. Industries such as automotive manufacturing, for example, have been hit hard over the past year or two, with customers waiting months for new vehicles.

Who's got the leverage here?

What's still up for debate is whether the companies in question have more leverage than the department is openly admitting when it talks about the guardrails against buybacks and China investment, particularly in light of the seeming urgency of its work to play catch-up with the Middle Kingdom.

At the end of 2021, according to the Bloomberg newswire, Biden administration officials "strongly discouraged" reported plans by Intel to manufacture silicon wafers in a factory in Chengdu, China, by the end of 2022.

When asked about this "seeming tension" and whether companies were willing to meet those "stringent demands" – and specifically questioned about Intel's alleged Chengdu plans – the Commerce Secretary responded that the department plans to recruit a team of expert negotiators from the semiconductor industry to put "the screws to these companies to prove to us — we're going to need proof from them to us in the form of financial disclosures, in capital investment plans — prove to us the money is absolutely necessary to make these investments."

She added: "Micron is announcing a huge new facility.... onsemi is breaking ground on a new facility. Intel announced a new facility. These investments have been made by these companies because the CHIPS Act passed, and they have confidence now that the money will be put out the door."

Intel's Pat Gelsinger confirmed in March that he ended the company's multibillion share buyback scheme when he started his tenure, but it would be hard to see how the US can control other tech companies wishing to do the same, especially as they come under significant pressure from shareholders and activist investors for years after the CHIPS Act investment.

The Biden administration has attempted to tackle buyback regulation via proposed rules [PDF] in the fiscal 2023 Budget it presented in March. The proposal requires execs to hold onto company shares they receive for several years after they get them, and "prohibits them from selling shares in the years after a stock buyback."

The idea is meant to "discourage corporations from using profits to repurchase stock and enrich executives." However, the rule must be passed by both the House and Senate, a situation described by CNN as an "unlikely scenario." ®

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