The Ministry of Trade, Industry and Energy (MOTIE) announced on March 21 the U.S. Department of Commerce (DOC)’s release of the proposed rule for guardrails included in the CHIPS Incentives Program under the CHIPS and Science Act (Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022), limiting recipients of funding from investing in the expansion of semiconductor production capacity in “foreign countries of concern (China, North Korea, Russia, Iran)”.

The proposed rule for guardrails indicates that it is possible for South Korean firms to continue to maintain, partially expand and technologically upgrade their current production facilities in China.

According to the proposed rule, recipients of CHIPS incentives funds are restricted from increasing the production capacity of cutting-edge and advanced facilities in foreign countries of concern by more than five percent over a 10-year period. In the case of facilities producing legacy chips, which are made using the 28-nanometer process or larger, recipients are restricted from increasing the production capacity of these facilities in foreign countries of concern by more than 10 percent over a 10-year period.

Meanwhile, the proposed rule does not specify restrictions on investment in technological, process upgrades or equipment replacement of production facilities in foreign countries of concern, meaning these investments are permitted as long as they adhere to the facilities’ production capacity expansion caps stated above, of either five or 10 percent.

As for technological collaboration, recipients of CHIPS incentives funds are restricted from conducting joint R&D or technology licensing with “foreign entities of concern” on technologies and items on the “Commerce Control List” that are sensitive in terms of national security.

It is speculated that technological upgrades will enable companies to heighten their die-per-wafer yields via increased integration density, which in turn renders possible the additional production capacity expansions, depending on the company’s strategy.

The South Korean government will scrutinize the proposed guardrails while communicating with the industry, and hold further talks with the U.S. during the 60-day period in which public comment on the proposed rule will be accepted. Allies and other interested parties are to submit comment to inform the final rule to be published later on this year.

South Korean firms are expected to make investment and funding application decisions based on their global management strategies and overall analysis of the proposed rule, to which their Government will provide full assistance.

Communication on these matters with the U.S. has maintained consistent and thorough. Immediately following the CHIPS for America Incentives Program’s entry into force in August 2022, the South Korean government requested close consultation prior to release of the proposed guardrails and accordingly, received a briefing on major details of the proposed rule prior to release.

Further talks on the guardrails and Notice of Funding Opportunity (NOFO), which was announced February 28, will take place during the U.S.’ CHIPS for America Incentives Program working group visit to South Korea (March 23-).

The South Korean government will be placing utmost priority on continued communication with the U.S. DOC and relevant authorities to minimize the risk and burden on domestic semiconductor industries imposed by key issues like the NOFO and U.S.’ chip-related export controls on China.

As the semiconductor industry faces intensifying overseas investment risks and global competition, it is imperative that external trade issues be managed effectively and firms respond strategically in expanding domestic production and investment bases for greater industrial competitiveness.

To this end, the South Korean government aims to establish a semiconductor "mega cluster" incorporating the world’s largest single system chip complex, a KRW 300 trillion investment project to be completed by 2042 as part of a policy effort to strengthen the relatively vulnerable system chip ecosystem.