A report published by the Financial Times on Friday revealed that South Korean tech firms who enrolled in the CHIPS and Science act funding designed to boost US science and technology innovation are alarmed by a clause that was unveiled this week by Washington's commerce department. 

Applicants who receive more than $150 million in direct funding from the $39 billion fund are required to share part of their profits with the US government. 

The matter is of serious concern for companies such as SK Hynix and Samsung which are planning to relocate from the US to China and are required to cease manufacturing operations in China for the next ten years as part of the application's requirements. 

Former trade minister Yeo Han-koo said that the clause about profit-sharing was "problematic" and that it was an "unprecedented move charting a new territory that we haven’t seen in recent years."

"Many companies may cry out on this. It may set a worrisome precedent for other countries who may follow suit," he was quoted saying by the news agency. 

The condition on profit-sharing was announced on Tuesday by the commerce department. Companies that report profits above original projections are required " to share with the U.S. government a portion of any cash flows or returns that exceed the applicant’s projections by an agreed-upon threshold," the department said.

The report states that the condition has been introduced as part of a safeguard program to ensure that the fund is not abused.

Samsung is reportedly building a $17bn foundry in Texas, while SK Hynix is planning to build a chip packaging plant in the US.

"We’re perplexed by these unexpected conditions. We’ve never seen anything like this for state incentives," said an industry executive. "It is unclear how they will calculate excess profits. They want to take some of our profits when the business is booming but they won’t return our money when the industry is in a downturn. This will be a key point of contention."

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Yeo Han-koo warned that the profit-sharing clause would have immense implications for the industry, noting that it is "a complex matter how to define excess profits. This will give the regulator a huge discretionary power in implementing it, while companies will be incentivized to set the threshold higher."

The CHIPS act includes "guardrails" provisions that prevent recipients from engaging with foreign competitors - in particular China - where SK Hynix’s Wuxi plant in eastern China accounts for nearly half of its Dram memory chip production.

As for Samsung, the company's plant in Xian takes about 40% of its Nand flash memory output, estimates suggest. 

"Now that Pandora’s box is open, this will deepen Korean chipmakers’ anguish over their future investment plans," said Lee Jae-min, a law professor at Seoul National University and an expert in international trade disputes. "They will be worried that their sensitive R&D and financial information will fall into the hands of a foreign government."

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