White House ban on US chip cash going into China ruffles South Koreans

Pretty awkward for Samsung, SK Hynix and their Middle Kingdom fabs

A requirement barring recipients of America's $53 billion CHIPS subsidies from expanding their operations in China for a period of 10 years is proving to be a sticking point for the South Koreans.

As reported by SK media, the nation's Minister of Trade, Industry, and Energy has expressed concerns over the so-called guardrail clause outlined by the US Commerce Department this week.

The CHIPS and Science Act was initially billed by its proponents as a way to bolster US semiconductor manufacturing capacity and rebalance the global supply chain in the wake of the COVID-19 pandemic and ensuing semiconductor shortage. However, with the addition of the guardrail provision [PDF], it's clear the Biden Administration plans to use the $39 billion in funds laid out by the bill to convince chipmakers to back US efforts to stifle the Chinese chip industry.

Specifically, the rules require recipients to forgo investments and business deals with "a foreign entity of concern" over the next decade. And for most chipmakers, that means China and what little Russia has of a chip industry. Silicon slingers who flout these rules will be required to return the funds, which for a company like TSMC or Samsung will likely amount to billions of dollars, depending on the scope of their planned US investments.

In response to the rules, South Korea's Ministry of Trade, Industry, and Energy reportedly said the agency would consult with the appropriate US authorities to ensure the nation's interests are reflected in the agreement.

This isn't the first time South Korea has found itself at odds with the Biden Administration on the issue. Last fall, Samsung and SK Hynix, two of the largest memory manufacturers, found themselves in the crosshairs of US restrictions on the export of equipment and software used to produce DRAM chips below 18nm, NAND silicon with more than 128 layers, or logic processors below 14nm.

The US eventually granted both companies a one-year exemption to the rule. Even so, the restrictions threaten the company's substantial investments in China. For instance, SK Hynix is in the process of acquiring Intel's NAND manufacturing plant in China's Dalian province. Meanwhile, Samsung operates two memory fabs in Xi'an and Suzhou, China.

Now, CHIPS funding could force the two — who we note have already announced billions in American investments in anticipation of the funds expected to flow from the US government — to pick sides in an already turbulent trade-war with China.

However, as we've previously reported, while the US can limit the sale of US chips and manufacturing equipment to China, it needs the support of its allies - principally Japan, South Korea, Taiwan, and The Netherlands - to effectively blockade the advanced Chinese chip industry. But tying CHIPS funds to this agenda could end up backfiring if chipmakers decide to relocate planned fabs to other countries where funding has fewer strings attached. 

It's not just South Korean leaders taking issue with Biden's use of the bill to advance his agenda. Earlier this week, the Semiconductor Industry Association (SIA) isn't exactly thrilled with environmental provisions tied to the funding rules.

It's no secret that chip production often involves the use of highly toxic materials and has a huge carbon footprint. However, the SIA argues the bill's requirement could end up stalling projects and proving burdensome for chipmakers and wants the rules relaxed for CHIPS-funded projects. ®