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Samsung’s chip plant in Xi’an, China. (Yonhap)

The US government ultimately did not accept the requests of Seoul and South Korean corporations to ease the guardrails for the CHIPS and Science Act, which have the potential to worsen the competitive edge of South Korean chip factories operating in China, restricting production capacity expansion in China in the next 10 years to 5% as originally outlined.

Based on this development, Samsung Electronics and SK Hynix will inevitably have to modify their strategy despite having invested trillions of won to build factories in China.

Regarding the finalized guardrails for the CHIPS and Science Act released on Sunday, Kim Yang-paeng, a senior researcher at the Korea Institute for Industrial Economics and Trade, commented that the fact that they did not get worse than the original plan proposed in March amid intensifying conflict between the US and China is a “relief,” noting, “While maintaining the present production capacity in factories in China would be possible, the prospect of South Korean companies expanding investments in China in the future has become uncertain.”

Earlier, Shim Kyeong-seok, a researcher at KB Financial Group, wrote in a report published on Wednesday that South Korean companies should “seek out new strategies to slowly reduce memory production in China until the point new factories are built in other countries to substitute production output in China” due to tightening technology regulation by the US, pointing out that an exit strategy should be sought out.

Samsung Electronics and SK Hynix did not put out official statements. A chip industry official who spoke on the condition of anonymity pointed out that “initially outlined regulations such as the rule to apply restrictions to transactions over US$100,000 have been made more flexible,” adding, “At the same time, there’s the issue that a ban has practically been placed on building more factories in China. Detailed countermeasures should be laid down based on an analysis of the proposed guardrails.”

Published on Friday, the US Department of Commerce’s finalized guardrails for the CHIPS and Science Act included measures that would allow the US to “claw back” incentives granted if recipients expand production capacity above approved standards in “foreign countries of concern,” including China.

The US plans on providing US$39 billion in subsidies for chip production and US$52.7 billion in loans and guarantees for semiconductor research, development, manufacturing and workforce development. Because Samsung is building a factory in the US, it qualifies for these subsidies. SK Hynix is weighing whether to invest in America as well.

A closer look at the specifics of the guardrails shows allowances for production expansion of up to 5% when it comes to advanced facilities, and up to 10% for legacy facilities — that is, those made with 28 nm equipment. This same standard applies to expansions of physical space such as packaging facilities and clean rooms.

An initial rule that had capped spending on investments at US$100,000 was dropped.

Following the publishing of proposed rules in March, South Korea’s government and semiconductor sector had requested that the cap on increasing production within China be increased to 10%, which the US has effectively rejected in its finalized regulations.

The US government had previously granted a one-year grace period to Korean companies when it came to prohibitions on the export of semiconductor equipment to China, but this moratorium only runs through October, and whether it will be extended remains to be seen.

It appears likely that these investment restrictions will prolong uncertainty about the competitiveness of Samsung and SK Hynix factories in China.

Samsung Electronics currently produces 128-layer NAND flash memory at its line in Xi’an, while it does packaging and back-end processing at its plant in Suzhou. SK Hynix produces 96- and 144-layer NAND flash at its plant in Dalian, and mid-10-nm DRAM in Wuxi.

With the fierce competition for market share largely depending on a given chipmaker’s ability to keep pace with changing technology, those who are unable to quickly transition their existing facilities to cutting-edge processes are likely to find themselves out of contention.

By Ock Kee-won, staff reporter

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