Biden is going to require chip companies that win subsidies to share excess profits

WASHINGTON, Feb. 28 (Reuters) – The Biden administration said on Tuesday it will require companies raising funds from its $52 billion US semiconductor manufacturing and research program to share excess profits and explain how they plan to provide affordable childcare.

The Commerce Department on Tuesday released its plans to begin accepting applications for a $39 billion manufacturing subsidy program by the end of June. The law also creates a 25% investment deduction for building chip factories valued at $24 billion.

The CHIPS Act plays a central role in the Biden administration’s efforts to bring semiconductor manufacturing back to the United States. Its success is essential to US ambitions to stay ahead of China in the global market. Semiconductor companies have already announced more than 40 new projects, including nearly $200 billion in private investment to boost domestic production.

Recipients receiving more than $150 million in direct funding “will be required to share with the U.S. government a portion of any cash flows or proceeds that exceed the applicant’s projections by an agreed-upon threshold,” the department said in its funding statement.

Commerce expects that “upside sharing will be material only in cases where the project significantly exceeds expected cash flows or revenues, and will not exceed 75% of the recipient’s direct funding award.”

Companies that raise funding are also not allowed to use chip funds for dividends or share buybacks, and must provide details of any plans to buy back their own shares over a five-year period.

The Department will consider an applicant’s commitments to refrain from buying back shares in the application review process in a five-step process.

Democratic lawmakers have noted that the largest U.S. semiconductor companies have poured hundreds of billions of dollars into stock buybacks in recent years, with Intel (INTC.O) having spent more than $100 billion on stock buybacks since 2005. Intel also pays a dividend.

Commerce Secretary Gina Raimondo said companies should submit a plan outlining staffing needs. Applicants seeking more than $150 million in direct funding must “submit a plan for how they will provide affordable and accessible childcare for their employees.”

White House economic adviser Heather Boushey said the announcement is “symbolic of using public incentives to simultaneously build strategic supply chains for our economic and national security while investing in our healthcare infrastructure.”

Applicants must address six priority areas of the program, including plans “to commit to future investments in the U.S. semiconductor industry, including building R&D facilities in the United States.”

Applicants must also “create opportunities for businesses owned by minorities, veterans and women; demonstrate climate and environmental responsibility; invest in their communities by addressing barriers to economic inclusion; and commit to using iron, steel and building materials use produced in the United States.”

The Semiconductor Industry Association said it was carefully reviewing the financing notice, which “outlines the rules of the road for companies to apply for the CHIPS Act manufacturing grants.”

Most direct funding awards are expected to range between 5% and 15% of the project’s capital expenditure. Commerce said it generally expects the total amount of an award, including any loan or loan guarantee, to not exceed 35% of the project’s capital expenditure.

“We’re going to show our own diligence. We’re not writing blank checks to a company that asks,” Raimondo said. “We’re getting companies to open their books.”

The initial funding opportunity seeks applications for leading semiconductor, current generation and mature node semiconductor projects. It will release funding opportunities for semiconductor materials and manufacturing equipment facilities in late spring and R&D facilities in the fall.

Raimondo noted that companies that win awards will be required to enter into agreements that limit their ability to expand semiconductor production capacity abroad, such as China, for 10 years after winning the funding. They cannot engage in joint research or technology licensing efforts with a foreign entity of concern involving sensitive technologies.

“We will be releasing very detailed rules in the coming weeks that will give companies a clearer picture of what the redlines are,” Raimondo said Monday ahead of the announcement.

Reporting by David Shepardson; Edited by Chris Sanders, Robert Birsel, Lisa Shumaker and Mark Porter

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