The CHIPS Act Has Strings Attached: Can’t Invest or Produce Advanced Chips in China
U.S. semiconductor companies can’t spend capital on developing advanced factories or producing chips in China for the U.S. market.
U.S. semiconductor companies that accept incentives as part of the $280 billion CHIPS and Science Act will be barred from investing in China. The latest development comes directly from commerce secretary Gina Raimondo who briefed reporters at the White House yesterday.
CHIPS, or Creating Helpful Incentives to Produce Semiconductors for America Act, which makes up $52 billion of the $280 billion, is a part of the federal government’s effort to revitalize domestic semiconductor manufacturing where the U.S. lags behind Taiwan and China.
As such, tech companies that receive federal funding under the CHIPS Act will be prohibited from conducting business in China for ten years. Raimondo described the measure as “guardrails to ensure those who receive CHIPS funds cannot compromise national security.”
“They’re not allowed to use this money to invest in China, they can’t develop leading-edge technologies in China, they can’t send the latest technology overseas.” Beijing voiced its opposition to the legislation in August and termed it a result of a “Cold War mentality.”
The prohibition implies that companies can’t spend capital on developing advanced factories in China or producing chips in the eastern country for the American market. However, tech companies can expand their existing chip production facilities in China only if the output is intended for the Chinese market alone.
“If they take money and then do any of those things, we’ll claw back the money,” Raimondo responded to another reporter. Raimondo affirmed that American companies are willing to abide by these stated prohibitions.
These prohibitions’ granular details and specifics will be ironed out by February 2023. Still, the overall strategy, Raimondo clarified, hovers around protecting the national security of the U.S. So it is unclear at this point whether companies already invested in China and have announced advanced node production in the country would need to roll back their plans.
The Commerce Department has the funding and resources needed to assemble a team of negotiators.
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“We’re going to have folks who have a history of hard-nosed negotiation from the private sector, people who are semiconductor industry experts, and we’re going to negotiate these deals one at a time and really putting 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.”
Since the CHIPS Act, a rare bipartisan legislation, was signed into law in August, Micron announced a $40 billion investment through the end of the decade for U.S-based manufacturing.
Qualcomm and GlobalFoundries announced a $4.2 billion partnership to boost semiconductor production in the latter’s New York facility. Previously, Samsung (Texas and Arizona) and Intel (New Mexico) announced multi-billion USD investments in chip manufacturing plants.
Of the $52 billion earmarked for the CHIPS Act, $39 billion is allocated as manufacturing incentives, $13.2 billion for R&D and workforce development, and the remaining $500 million for semiconductor supply chain activities. It also brings into effect a 25% investment tax credit for capital expenses used to manufacture semiconductors and related equipment.
As of 2021, semiconductor manufacturing is a $555.9 billion industry, of which 34.6% ($192.5 billion) of the revenue goes to China, according to the Semiconductor Industry Association (SIA). However, Chinese fabricators still rely on U.S. semiconductor design and tech, but manufacturing is a different ball game. Semiconductor fabrication requires years of setting up the supply chain and expensive equipment such as extreme ultraviolet lithography systems.
To overcome the challenges, foreign governments, including China’s, have consolidated the industry and consistently offered chip manufacturing incentives, leading to a decline in U.S. semiconductor manufacturing capacity from 56.7% in 2013 to 43.2% in 2021. Still, U.S-based chip production is just 10% of the global total.
The CHIPS Act and the move to prohibit investment in China can also help spur U.S-based chip manufacturing. SIA’s data indicates that in 2021, 56.7% of the chip manufacturing base of U.S-headquartered companies was located outside the country.
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