US to impose restrictions on supplying China's top chipmaker

Alonzo Simpson
September 27, 2020

The field of technology has become increasingly contentious as China takes aim at leading the world in certain sectors long dominated by the U.S. The Trump administration blacklisted Huawei, preventing the giant telecommunications provider from buying components from American suppliers and pressured allies to follow suit.

The Commerce Department on Friday notified USA companies that they will now need a license to export certain technology to Semiconductor Manufacturing International Corp., or SMIC, according to a copy of the Commerce Department letter reviewed by The Washington Post.

The move threatens to cut off China's biggest chipmaker from crucial U.S. software and chipmaking equipment.

SMIC started as a private company, but state investment has grown over time, and the state owned more than 45 percent of SMIC stock as of 2018, according to the OECD report. "This would be a tipping point for US-China relations", said Paul Triolo, head of tech policy analysis at consultancy Eurasia Group. As the requirement takes effect, SMIC becomes the second leading Chinese technology company to face US trade sanctions.

SMIC, a "national champion" that is vital to the federal government's hopes of attaining chip self-sufficiency, ended up being the nation's biggest going public for a years when it raised $7.6 bn in Shanghai previously this year.

The new restrictions are yet another blow to SMIC, which had already been affected by USA sanctions on Huawei, its top customer. The chipmaker had actually alerted of the danger of a worsening of USA sanctions in its IPO prospectus. Jefferies believes that half of SMIC's equipment comes from the USA and that the company, estimated to be worth approximately $29 billion according to the securities firm, does business with major US chipmakers including Qualcomm and Broadcom. Unlike SMIC, Huawei was added to the entity list in 2019.

A USA defense contractor, SOS International, claimed SMIC had worked with both one of China's largest defense firms and that university researchers linked to the military were designing projects based on SMIC technology.

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SMIC added it had not received any formal notification of the sanctions.

The issue was brought into stark relief earlier this year by the U.S. campaign to hobble Chinese telecom giant Huawei, which Washington fears could allow China's security state to tap into global telecoms networks. Last weekend, China's Ministry of Commerce announced that it will curb the operations of foreign companies deemed "unreliable".

Lawyers are anxious that Beijing's "unreliable entities list" might be utilized to penalize foreign business that perform sanctions versus Chinese business, putting such business in a bind in between United States and Chinese law.

In April, the administration announced a tightening of export rules aimed at preventing US companies from selling products that could strengthen China's military. Firms will need licenses in order to export technology products to SMIC, the paper said.

The Commerce Department instituted the de facto trade ban over claims SMIC technology could be used for Chinese military purposes.

As much as 50% of SMIC's equipment comes from the U.S., Jefferies estimated, and the company has a market value of more than $29 billion.

The Commerce Department declined to comment on the letter but said it is "constantly monitoring and assessing any potential threats to US national security and foreign policy interests" and "will take appropriate action as warranted". "While we can not comment on any specific matter, BIS, with its inter-agency partners, will take appropriate action as warranted".

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