China restrictions issued on companies getting chip funds

The Biden administration announced final restrictions Friday on expansion in China by semiconductor companies that will receive federal funds to build plants in the U.S.

It’s the last regulatory hurdle before the Commerce Department hands out more than $100 billion worth of federal aid intended to boost domestic chipmaking while containing China’s technological advancement.

The Chips Program Office, which is preparing to give out $39 billion in grants and $75 billion in loans and loan guarantees, will bar firms that win that money from substantially growing their output or expanding their physical manufacturing space in China. They will be limited to a 5% increase for advanced chips and 10% for older technology of 28 nanometers or more mature.

Indiana is among the states competing to land semiconductor plants.

“Chips for America is fundamentally a national security initiative, and these guardrails will help ensure companies receiving U.S. government funds do not undermine our national security as we continue to coordinate with our allies and partners to strengthen global supply chains and enhance our collective security,” Commerce Secretary Gina Raimondo said in a statement.

However, the Commerce Department removed a stringent curb in the initially proposed terms. Previously, the agency included a $100,000 spending cap on investments in advanced capacity in China, which would effectively prevent companies getting federal funding to grow output for chips more advanced than 28nm at all.

The $100,000 cap on China investment was the proposed definition for a “significant” transaction that’s barred by the Chips Act statute. Commerce will now define “significant” as it weighs awards to individual companies rather than through rulemaking, a senior Commerce official who briefed reporters on the rule’s evolution on condition of anonymity said.

That removal came after the Information Technology Industry Council, a powerful industry group that represents Intel, Taiwan Semiconductor Manufacturing and Samsung Electronics among others, spoke out against it. All three chipmakers are expected to secure federal incentives for new facilities on American soil.

At the same time, the Commerce Department expanded the final rule to limit the build out scale of chipmakers’ facilities in China, in addition to original restrictions that are based only on production capacity. The curb is the binding constraint of the national security guardrails, according to the Commerce official.

The amendment reflects company feedback that production capacity can vary widely from month to month, making clean room and other facility expansion a better gauge, the official said.

“This threshold is intended to capture even modest transactions to expand manufacturing capacity but allows funding recipients to maintain their existing facilities through normal course-of-business equipment upgrades and efficiency improvements,” the Commerce Department said in a news release.

Critics are concerned that allowing firms winning federal grants to continue to grow capacity in China may help the Asian nation bulk up its muscle in the race against the U.S. for tech supremacy.

“Since money is fungible, it makes no sense to fund new fabs built in America while allowing grant recipient companies to also continue to expand operations in China and help them attain chips self-sufficiency to fulfill the goals of Made in China 2025,” said Dmitri Alperovitch, chairman of Silverado Policy Accelerator.

The Commerce Department also outlined other measures, including a list of chips classified as critical to national security, subjecting them to tighter restrictions. It also added wafer and substrate production to the definition of semiconductor manufacturing, expanding the scope of restricted activity.

The rule clarifies that some joint research and licensing activities with China and other foreign entities of concern that don’t affect national security are permitted, such as international standards and patent licensing.

The U.S. can claw back the full amount of federal grants if a recipient violates the rules, the Commerce Department has said. The department will continue to administer the guardrails as awards are disbursed over time, the senior official said, including a requirement that companies notify the department before expanding legacy chip facilities.