U.S. Aims to Chart New Course for Chip Industry

The Commerce Department said it would impose requirements to help ensure that billions of dollars in taxpayer funding is spent wisely and that the funding will meet national security goals to counter the technology advances by China.

Some of the terms also reflected the administration’s social and economic priorities, such as diverse workforce and the use of union labor. 

Companies receiving incentives will be required to share part of their profits with the government and limit stock buybacks and dividends. Companies are also expected to use union workers, as well as U.S.-made iron and steel for the construction of facilities, while providing affordable child care for workers.

In a move that could limit their business potential for one of the world’s largest chip markets, the government puts tough limits on the expansion of companies’ operations in China for a decade. 

“In giving out the funding, we’ll be implementing a number of safeguards to ensure companies that receive funding are holding up their end of the bargain,” Commerce Secretary

Gina Raimondo

said at a press briefing. “We are not writing blank checks.”

The Chips Act is the latest example of Washington’s efforts to bolster the domestic economy and industries with taxpayer funds and directives, a reversal of a free trade policy that for decades encouraged U.S. businesses to pursue efficiency by moving production overseas where costs are lower. The other programs include the Inflation Reduction Act, which allocated nearly $400 billion for the shift to clean energy.

“The U.S. is moving very solidly into an aggressive and outward facing industrial policy,” said Todd Tucker, director of industrial policy and trade at Roosevelt Institute, a think tank. “It’s also doing it in a way that is an attempt to reconcile the need to onshore the supply chains with the broader economic and social agenda of the Biden administration.”

The Chips Act was approved by Congress and signed by President Biden last year as chip shortages exacerbated by the pandemic and supply chain snags hobbled auto makers, appliance makers and other manufacturers reliant on semiconductors. Lawmakers were also spurred by increasing tensions with China, which is investing heavily in its semiconductor industry and its military.

The program includes manufacturing incentives totaling $39 billion to be given to companies to help invest in domestic semiconductor manufacturing. More than $13 billion will fund research and development, as well as workforce advancement.

The government aims to target the funds to create at least two manufacturing clusters for leading-edge chips by 2030. Top candidates for receiving funds for advanced chip-making plants to anchor such hubs are

Taiwan Semiconductor Manufacturing Co.

, Intel Corp., and South Korea’s Samsung Electronics Co., the three companies that currently mass-produce such chips. They have already unveiled plans to build facilities in states including Arizona, Texas and Ohio. 

Some of the conditions listed Tuesday, such as limits on stock buybacks, expansion in China and the use of union workers, have been known for months because they were part of the legislation. Such conditions didn’t prevent companies from expressing interest in applying for funds.

Yet, an extensive list of requirements, particularly the rules on profit-sharing and workforce, had some economists raising questions. 

“There appear to be even more restrictions, or more conditions, in this funding than what the law demands,” said

Scott Lincicome,

a trade and economics expert at Cato Institute, a libertarian policy group. He noted that rules on child care and “Buy America” requirements will raise the costs for the participants and could slow down the projects

Economists say, however, that the large amounts of subsidies, which could amount to several billion dollars in some cases, could make it easy for companies to comply with those conditions. Some large tech companies already offer child care to their employees. Intel scaled back dividend payouts and stock buybacks as it geared up to expand its domestic plants.

“The question will be whether companies are willing to do all that as a condition for getting the federal money,” said

William Reinsch,

a senior adviser at the Center for Strategic & International Studies, a Washington think tank. “The only way to find out is to put this out there and see if anybody applies.”

Compared with countries in Asia and Europe, the U.S. has generally stayed away from industrial policy under which the government targets public resources to prop up select industries. That, Biden administration officials have said, led to the decline in domestic production and increases in dependency on imported chips, which made the Chips Act necessary.

One big exception to the U.S.’s government intervention stance is the national security-related areas, such as the defense, aerospace and communications industries, where Washington has long provided ample public funds. U.S. officials say the semiconductor industry now falls in this category, an idea that draws bipartisan support. 

The Pentagon will have secure access to leading-edge semiconductors manufactured at facilities receiving funding from the Chips Act, Ms. Raimondo said, ensuring the industry can supply the military with the advanced chips it needs for modern weapons systems.

In an interview, Ms. Raimondo framed the Chips Act is a national security initiative. The U.S. buys more than 90% of its advanced chips from Taiwan, she said, calling that “a national security vulnerability that is untenable.” 

“Every single piece of sophisticated military equipment, every drone, every satellite, relies on semiconductor chips,” Ms. Raimondo said. 

The condition that has raised most concerns among industry executives is the program’s impact on their operations in China, a huge source of profits for many companies.

The Commerce Department said recipients of funds must agree not to engage in “certain significant transactions” involving expanding chip manufacturing capacity in China, or “countries of concern,” for 10 years. Applicants will also be asked to return the full amount of an award if they knowingly engage in any joint research or technology licensing effort with a foreign country that raises national security concern. 

Industry executives have been closely watching how the Commerce Department will define the limit on expansions in China, particularly which types of advanced chips will be covered by the prohibition. The department said it would soon release further information on the China-related rules. 

The Commerce Department will also require subsidy recipients to provide child care for workers, a measure the administration has said is necessary to ensure qualified workers are able to participate in the program.

To ensure U.S. taxpayers share in the program’s success, companies receiving more than $150 million in grants are required to pay the government a portion of their profits if their facilities turn out to be more profitable than projected, a Commerce Department official said. 

The proceeds will then be used to help the government’s further efforts to strengthen the U.S. semiconductor industry, according to a fact sheet to accompany the application for the grants released Tuesday. 

The program also restricts participating companies’ ability to conduct stock buybacks, a key condition sought by progressives in the Democratic Party including Sen. Elizabeth Warren (D., Mass.) while the legislation was debated at Congress. 

The Commerce Department said applicants will be prohibited from using Chips Act grants for dividends or stock buybacks and will be asked to detail their intentions for stock buybacks over five years including whether they intend to refrain from or limit them. 

Commerce Department officials will then “consider the extent of the applicant’s commitments to refrain from stock buybacks in the application review process.”

Many chip-makers in line for potential government funding have made significant stock buybacks in recent years, including

Texas Instruments Inc.,

which repurchased $848 million worth of shares in the fourth quarter.

Intel has a buyback program under which it could repurchase up to $7.2 billion in shares, although the company has scaled back its buyback activity significantly since Chief Executive

Pat Gelsinger

took over in 2021. Its last buyback was in June of that year, when it repurchased $114 million of shares.

Intel also last week cut its dividend by two-thirds, seeking to shore up its cash position as it spends billions of dollars on new manufacturing projects in Ohio, Arizona and Europe at a time when the market for its products has taken a nosedive.

While Chips Act funding includes a prohibition on expansion of manufacturing capacity in China for a decade, many chip-makers have dialed down their Chinese investments in recent years amid rising tensions between Washington and Beijing. Intel reached a deal to sell its flash-memory manufacturing business centered in Dalian, China, in 2020 for $9 billion. 

But other companies in line for U.S. grants still have a sizable presence there, and couldn’t contemplate further expansion in China for years if they took the money. They include Taiwan Semiconductor Manufacturing Co., which has facilities in Nanjing and Shanghai, and

Samsung Electronics Co.

, which operates two chip facilities in the country. 

TSMC is building a new chip factory in Arizona, while Samsung is building a factory in Texas—large-scale projects that hinge on government incentives.

In a move that has worried industry executives amid the current tight labor market, the program expects the use of union workers for construction of the facilities through a requirement to pay prevailing wage, which is often the union wage. 

Companies are also encouraged to use project labor agreements, which are usually collective bargaining agreements between building trade unions and contractors. 

The Semiconductor Industry Association, the industry’s trade group, said it was reviewing the provisions but called the program a “historic opportunity.”

 “We stand ready to work with Secretary Raimondo and leaders in the Commerce Department’s CHIPS Office to ensure the new law is implemented effectively, efficiently, and expeditiously,” said

John Neuffer,

SIA’s president and chief executive.

Al Thompson, vice president of U.S. Government Affairs at Intel, said the program will help “American semiconductor companies to be globally competitive and will help to restore balance in the global chipmaking industry.”

The application process for Chips Act funds will stretch over several months. Commerce opened the application process Tuesday for chip-making and packaging plants, which assemble chips for shipments to users. That will be followed by material and equipment facilities later in the spring and research and development projects in the fall. 

Award funds will be disbursed in tranches tied to construction and operational milestones, rather than in lump sum payments upfront.  

The Commerce Department will have in place a group of financial professionals to review applications and negotiate with the companies. Todd Fisher, a veteran of private-equity firm

KKR

& Co., will lead the team, assisted by Sara O’Rourke, a former McKinsey & Co. partner, as head of operations and his chief of staff. 

Write to Yuka Hayashi at Yuka.Hayashi@wsj.com