China’s Biggest Chip Maker Hit With U.S. Sanctions

The Trump administration has imposed on China's Manufacturing International Corporation (SMIC), China's largest and most advanced producer of semiconductor chips. Executives at China's chip-making companies had earlier this year voiced concerns about being in the crosshairs for fresh U.S. trade sanctions. The New York Times' Ana Swanson and Raymond Zhong report on the U.S. government's rationale for placing new restrictions:

In a letter on Friday, the Department of Commerce told American companies in the chip industry that they must first acquire a license to sell technology to SMIC and its subsidiaries. The department said it was taking the action after a review in which it determined that the Chinese company “may pose an unacceptable risk of diversion to a military end use in the People’s Republic of China.” [Source]

Direct sanctions on SMIC represent a second major blow to the company in the space of this year alone. The Financial Times' Yuan Yang, Kathrin Hille, and Qianer Liu report that the company was hit hard when the U.S. government tightened sanctions on Huawei earlier this year:

SMIC has already been hit by the tightening of US sanctions on Huawei. This meant that SMIC could no longer serve its largest customer, which generates a fifth of its revenues. The chipmaker had warned of the risk of a worsening of US sanctions in its IPO prospectus.

The sanctions will also affect Qualcomm, the US chip designer that uses SMIC to fabricate some of its chips. Analysts believe that Qualcomm is SMIC’s second-largest customer after Huawei. [Source]

But some analysts in the have expressed hesitancy about the U.S. government's move. Semiconductor supply chains span many countries and are highly interconnected. Dan Strumpf at the Wall Street Journal reports that the restrictions are likely to hurt U.S. companies, which do considerable business with SMIC:

The Commerce Department’s latest restriction is likely to fall heaviest on U.S. makers of equipment used in the manufacture and testing of semiconductors. American companies account for 45% of the global market for chip-manufacturing equipment, according to industry group SEMI. They include companies such as KLA Corp. , Lam Research Corp. and Applied Materials Inc. A spokeswoman for KLA declined to comment. Lam and Applied Materials didn’t respond to a request for comment.

A risk for U.S. policy makers is that such restrictions divert sales to non-U.S. companies or spur China to accelerate the development of its own replacement technology—though analysts say Chinese companies are still highly reliant on foreign companies for equipment used to manufacture advanced chips. [Source]

For Bloomberg Opinion, tech columnist Tim Culpan criticizes the Trump administration's "risk of military end use" rationale for imposing sanctions:

[…] In reality, anything sold to any company could end up having a military use: from an operating system developed by a software maker (armies use computers), to rubber and chemicals made by industrial giants (military trucks have tires).

Despite the increased rhetoric from the Trump administration, the U.S. doesn’t apply arbitrary rules to its definition of military end use. In fact, the bureau has a set of guidelines on the topic. In April, it broadened its definition while adding China to a small cohort of nations — Russia and Venezuela being the others — for which a specific set of Export Administration Regulations apply. It outlined the likely result:

This expansion will require increased diligence with respect to the evaluation of end users in China, particularly in view of China's widespread civil-military integration.

A month later, the department added 24 groups to its entities list because of a risk that they would support “procurement of items for military end-use in China.” SMIC wasn’t among them. [Source]

Irrespective of whether SMIC technology is being directed towards military purposes or not, the Chinese government has ramped up its use of militaristic language as the U.S.-China tech rivalry has escalated. Over the weekend, Reuters reported on an op-ed in the nationalistic Chinese tabloid the Global Times, written in response to the fresh sanctions:

China must engage in a new “long march” in the technology sector now that the U.S. has imposed export restrictions on Semiconductor Manufacturing International Corp, the country’s largest chip manufacturer, Chinese state-backed tabloid the Global Times wrote on Sunday.

The unnamed author of an op-ed in the paper here argues that the U.S' dominance of the global semiconductor industry supply chain is a "fundamental threat" to China. [Source]

Earlier this month, Bloomberg News reported that Beijing was preparing sweeping measures to boost China's domestic chip sector:

Beijing is preparing broad support for so-called third-generation semiconductors for the five years through 2025, said the people, asking not to be identified discussing government deliberations. A suite of measures to bolster research, education and financing for the industry has been added to a draft of the country’s 14th five-year plan, which will be presented to the country’s top leaders in October, the people said. [Source]

For the South China Morning Post, Cissy Zhou wrote a detailed account of Beijing's push to achieve self-sufficiency in China's semiconductor production, such that it may reduce its reliance on global supply chains. In particular, Zhou highlighted the significance of China's "whole country" mobilization, as well as the risks:

The flurry of activity in the semiconductor industry has even fanned talk that China is at risk of repeating earlier mistakes in its development, namely the errors of the Great Leap Forward.

[…] China’s latest rush to develop indigenous technology has also stirred memories of Beijing’s development of its atomic bomb in the early 1960s, when the government again sought to mobilise the whole country.

Sheng Linghai, an analyst at research and advisory firm Gartner, said China’s “whatever it takes” approach to developing the chip industry showed tolerance for waste and inefficiency.

“The current market is a bit overheated. There is no way for China to counter the US on the chip market except investing more in the industry,” he said. [Source]

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