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Gina Raimondo, the current US secretary of commerce. (AP/Yonhap)

New application guidelines for semiconductor manufacturing subsidies released by the US Department of Commerce emphasize prioritizing shipments to the military and security sectors and banning new investments in China as a condition for receiving US government funding. That creates a dilemma for Samsung Electronics and other Korean chipmakers that would like to apply for subsidies, since they would basically have to forfeit business opportunities in China in order to meet the strict funding requirements.

In the guidelines, published Tuesday, the US Commerce Department explained the standards for assessing applications for US$39 billion in semiconductor manufacturing subsidies now that it has begun accepting investment plans.

The Commerce Department said in the guidelines that the economy and national security are the chief goals behind the subsidies and that the primary assessment criteria is whether applicants’ investments will bring the US Department of Defense and the security sector a steady long-term supply of semiconductors.

The department unveiled several requirements for the subsidies while explaining that decisions about whether to award subsidies will be made following a strict financial analysis.

The guidelines explained that companies that receive more than US$150 million in subsidies “will be required to share with the US government a portion of any cash flows or returns that exceed the applicant’s projections by an agreed-upon threshold,” according to Reuters.

“Companies winning funding are also prohibited from using chips funds for dividends or stock buybacks, and must provide details of any plans to buy back their own shares over five years,” Reuters reported.

The implication is that companies that plan to use their subsidies for a stock buyback may be at a disadvantage when their application is reviewed.

Other factors that the US government means to take into consideration are the applicant’s ability to acquire funding and its future investment plans, including the prospects for long-term operation of the chip plant.

In regard to workforce, the Commerce Department said that successful applicants will need to set up high-quality childcare facilities. They must also submit a plan for developing and acquiring skilled workers and for employing low wage earners.

The guidelines said that applicants are recommended to cooperate with local governments, educational institutions and labor unions for workforce development. They are also recommended to use renewable energy and US-made construction materials.

“Most direct funding awards are expected to range between 5% and 15% of project capital expenditures. [The Commerce Department] said it generally expects the total amount of an award including loan or loan guarantee, to not exceed 35% of project capital expenditures,” Reuters reported.

Applicants must pass through several stages before the final decision is made, submitting first a statement of intention to invest and then a preliminary application form, related data and the main application form.

The Commerce Department has also set strict “guardrails” on investment that could have a major impact on South Korean companies like Samsung Electronics and SK Hynix that do business in China. Subsidy recipients that are knowingly involved in joint research or technology licensing with countries presenting a national security concern would have to pay back all of the subsidies received.

Applicants must also agree not to expand their chipmaking capabilities in countries of concern for 10 years after winning subsidies. When used by the US, “countries of concern” is a reference to China.

Japan’s Nikkei newspaper said that these steps have further deepened the division between the US and China over semiconductors.

The Commerce Department has promised to soon release specific guidelines for the guardrails in the CHIPS and Science Act, which provides the legislative framework for these subsidies.

Samsung Electronics, which is investing US$17 billion to build a new chip plant in Texas, is reportedly looking into applying for the subsidies. That option is also being weighed by SK Hynix, which has unveiled a planned investment worth US$15 billion.

Last December, Taiwanese chipmaker TSMC announced that it will spend US$40 billion on projects in Arizona and other locations.

After the Commerce Department began accepting statements of intention to invest in semiconductors, Secretary Gina Raimondo said the US’ objective is to become the only country in the world in which all cutting-edge chipmakers can fully carry out their production activities.

“It’s no secret that we are in a [. . .] very heated global competition with China,” Raimondo said in an interview with CNN, arguing that it was inappropriate for cutting-edge semiconductor plants to be clustered in Taiwan, which is under threat from China.

“A big part of our strategy around being a global leader is investing in America: In our people, in our capacity to out innovate China and the rest of the world,” she said.

By Lee Bon-young, Washington correspondent

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