Biden administration wants to impose financial restrictions on chipmakers

WASHINGTON — Companies receiving federal subsidies from a $39 billion program to support semiconductor manufacturing must meet strict financial conditions, including in some cases sharing unanticipated profits with the government, according to a document seen by The New York Times.

The new guidelines, to be released Tuesday morning by the Commerce Department, will also require companies applying for money to detail their share buyback plans over the next five years. That information will be weighed as part of their filing, with the chipmakers outlining more aggressive plans to buy back shares — which may enrich shareholders, including company executives — and likely receive less funding.

Funding will also be awarded in tranches to companies as they meet certain project milestones, though the Commerce Department may be able to suspend or claw back funds if those targets aren’t met, according to the document.

The restrictions are part of a program aimed at revitalizing semiconductor manufacturing in the United States. Last summer, lawmakers from both parties passed legislation that will bring in $52 billion for domestic manufacturing and research, plus additional tax credits for building new factories.

The goal is to reduce America’s dependence on foreign suppliers, which today produce most of the chips needed for cars, appliances, electronics and defense technology.

The process is now entering a crucial phase as the Biden administration prepares to accept and evaluate applications from chipmakers and their suppliers. Another 11 billion US dollars for research facilities are to be released later this year.

The government’s focus on protecting taxpayers’ dollars highlights a major risk of the initiative: that funds given to companies could end up being squandered.

Some lawmakers from both left and right have questioned the wisdom of giving taxpayer dollars to the chip industry, which is generally profitable.

Executives have countered that the high cost of operating in the United States — and the subsidies offered by foreign governments — make it cheaper for semiconductor companies to manufacture their products abroad.

Since American researchers invented integrated circuits in the late 1950s, the US share of global manufacturing has steadily declined to around 12 percent.

In a speech last week at Georgetown University, Secretary of Commerce Gina Raimondo outlined an ambitious vision to reverse the trend, arguing that the United States needs to invest to rebuild “a self-propelled engine of innovation and production.”

She added that the chip program would ultimately train tens of thousands of workers and spur the creation of at least two manufacturing “clusters” in the United States to produce the most advanced types of chips by 2030.

Ms Raimondo acknowledged that history would judge the effort on whether it rebuilt the semiconductor industry and sparked a new “wave of innovation”, but also whether the government was “good stewards of taxpayers’ money”.

The program is a “public investment in private industry of a size and magnitude without recent precedent,” she said. “And the people of America deserve transparency and accountability.”

The next few months will provide the first test of how the Department of Commerce accomplishes this task. In an interview on Friday, Ms Raimondo said companies need to open their books to their team, which will include those with significant experience in the industry, to assess applications.

According to the application, companies that have secured other private sources of capital should be “strongly preferred”. And applicants must have received an incentive from their state or local government to be eligible for funding.

The Commerce Department said it would view state and local incentive programs that create “spillover benefits” for communities, such as investments in labor, education or infrastructure, more favorably than measures such as direct tax breaks that benefit a company.

The Department of Commerce also plans to give preference to applicants who “credibly” commit to investing in the domestic semiconductor industry and refrain from share buybacks. Share buybacks aim to increase a stock’s price by reducing the number of shares outstanding, thereby rewarding existing shareholders.

Applicants are also barred from using government funds directly for share buybacks or dividends, although analysts have stressed that company finances are fungible, potentially making the practice difficult to monitor.

Companies applying for awards must submit detailed financial models for the proposed projects. And for projects receiving more than $150 million in direct funding, companies must share a portion of cash flows or returns that exceed their projections above a set threshold, the document said. Terms will be determined on a case-by-case basis, and all proceeds will be used to support chip program purposes, the department said.

The provision would encourage companies to be accurate in their financial forecasts, Ms Raimondo said. “We don’t want to spend a dollar more than necessary to make these projects a reality,” she said.