|FROM ||Ruben Safir
|SUBJECT ||Subject: [Hangout - NYLXS] China chips and security risks
U.S. Weighs Export Controls on China’s Top Chip Maker
The Trump administration is weighing whether to place export
restrictions on China’s most advanced manufacturer of semiconductors, a
move that could cut to the heart of China’s ambitions to become
self-reliant on critical technologies.
The step is the same one that U.S. officials imposed on Chinese telecom
equipment maker Huawei. The decision to add Huawei Technologies Co. to
the entity list, along with later steps to close off loopholes and
further starve the company of components, has threatened its business
and worsened U.S. relations with China.
The tech battle between the U.S. and China has battered TikTok and
Huawei and startled American companies that produce and sell in China.
WSJ explains how Beijing is pouring money into high-tech chips as it
wants to become self-sufficient. Video/Illustration: George Downs/The
Wall Street Journal
Any decision to impose export controls on SMIC would mark a major
escalation in the administration’s crackdown on Chinese tech companies.
It could also frustrate the U.S. companies that collectively sell
billions of dollars worth of chip-making technology to Chinese
Among the issues being considered is whether SMIC aids China’s defense
establishment, people briefed on the discussions said. A research report
produced last month by U.S. defense contractor SOS International LLC and
circulated widely among officials involved in the review argues that it
The report says the company has worked with one of China’s largest
defense conglomerates and that researchers at universities linked to
China’s military have designed their work to fit SMIC technology. They
include a Chinese military academy that the Commerce Department placed
on an export blacklist in 2015 for its alleged work designing chips used
in supercomputers that simulate nuclear tests.
“A series of PLA university and defense industrial complex researchers
use SMIC processes and chips to conduct their research, indicating that
this research is tailored to SMIC production specifications, making it
impossible for them to manufacture their chips at another foundry,”
according to the report, which cites references to use of SMIC chip
technologies in work published by researchers at what it describes as
military-affiliated universities. PLA refers to China’s armed forces,
the People’s Liberation Army.
The SOS International report has been shared with officials at several
agencies in the Trump administration, including with the Commerce
Department’s Bureau of Industry and Security, the people briefed on the
discussions said. The agency is responsible for overseeing restrictions
on exports of sensitive U.S. technology.
A SMIC spokeswoman denied the report’s findings, saying in an email that
SMIC “has made full commitment of no military use since the company was
On Saturday, the company posted a lengthier statement to its WeChat
social-media account, saying it manufactures semiconductors “solely for
civilian and commercial end-users and end-uses.” It said the Commerce
Department has granted numerous export licenses for the company over the
“The Company is in complete shock and perplexity to the news,” the
statement said. “Nevertheless, SMIC is open to sincere and transparent
communication with the U.S. Government agencies in hope of resolving
The comments followed a Reuters report that the Defense Department is
working with other agencies to determine whether SMIC should be added to
the entity list.
The Commerce Department can require suppliers to obtain licenses before
exporting certain U.S.-origin technology to companies like SMIC by
adding them to the entity list or deeming them to be advancing China’s
A Commerce Department spokesman declined to comment.
Founded in 2000 by a veteran of U.S. and Taiwanese chip companies, SMIC
grew to become China’s largest contract manufacturer of chips and was at
one time a major producer for North American chip companies. It has
since become a national champion, as China pours billions of dollars
into developing its domestic chip industry. SMIC counts several
state-owned entities as major shareholders, and Chinese companies
accounted for nearly 60% of its $3.1 billion in revenue last year.
Like virtually all chip makers, SMIC relies on American manufacturing
technology to build and test its chips. U.S. firms account for 45% of
the global market for chip manufacturing equipment, according to
industry group SEMI. For some highly specialized processes, American
companies are all but indispensable, according to industry analysts.
“The U.S. still has the stranglehold on the technology that they need,”
said Paul Triolo, head of the global technology policy practice at
political risk consulting firm Eurasia Group.
Mr. Triolo, who had reviewed the SOS report, described the military
links it alleged as tenuous. “I’m not sure if this is a justification
for tarring them as a military company,” he said. The report doesn’t say
what share of SMIC’s revenue comes from military uses of its technology
and doesn’t allege that SMIC sells chips directly to the Chinese military.
James Mulvenon, director of intelligence integration at SOS
International, confirmed the company’s authorship and said the report
was internally funded.
“They are deeply embedded in defense-industrial military research
projects and are widely regarded as the national champion for
integrated-circuit fabrication across the entire national security
space,” Mr. Mulvenon said.
SMIC was traded on the New York Stock Exchange for more than a decade
but pulled its listing last year citing costs and low trading volumes.
In July, amid growing tensions between China and the U.S., it raised an
additional $7.7 billion on China’s technology-heavy STAR market. It
received billions of dollars of fresh state funding in May to work on
advanced chip manufacturing.
China’s self-sufficiency drive has taken on added urgency following the
restrictions placed by the Commerce Department on technology exports to
Huawei, the world’s largest maker of telecom equipment and leading
Chinese designer of chips. Huawei was one of SMIC’s largest customers,
accounting for about 20% of its revenue last year, according to research
The Trump administration has taken an increasingly broad approach to its
use of the entity list. Though listings have been used traditionally
against companies violating export-control rules, administration
officials have increasingly justified listings on broader
national-security grounds. Chinese companies have become frequent targets.
Earlier this year, the Trump administration gave Commerce Department
officials more power to stop exports of sensitive U.S. technologies that
aid China’s military, part of its effort to hobble China’s strategy of
leaning on private companies to advance its military ambitions, an
effort known as “military-civil fusion.”
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