Active Stocks
Fri Jul 19 2024 15:43:47
  1. Tata Steel share price
  2. 157.75 -5.17%
  1. NTPC share price
  2. 364.50 -3.51%
  1. Infosys share price
  2. 1,792.85 1.92%
  1. Power Grid Corporation Of India share price
  2. 332.20 -2.58%
  1. ITC share price
  2. 474.30 0.89%
Business News/ Technology / Blacklisted Chinese Chip Maker Does a Thriving Business With U.S.
BackBack

Blacklisted Chinese Chip Maker Does a Thriving Business With U.S.

wsj

SMIC’s role in America’s semiconductor industry is fueling a debate on whether technology restrictions are tough enough.

Last year a fifth of SMIC’s overall sales was from U.S. semiconductor-design companies.Premium
Last year a fifth of SMIC’s overall sales was from U.S. semiconductor-design companies.

China’s largest semiconductor maker has been declared a Chinese military supplier by the Pentagon, blacklisted by the Commerce Department and added to a Treasury Department list banning Americans from trading its shares.

Still, its business with the U.S. is booming.

Semiconductor Manufacturing International Corp. last year grabbed a record $1.5 billion in revenue—a fifth of its overall sales—from American semiconductor-design companies that hire SMIC to make their chips. In May, droves of U.S. semiconductor industry executives packed a celebratory opening of the Chinese state-backed company’s office in Irvine, Calif.

“I still hope that one day we will see SMIC will build a fab right here in the United States," said Roawen Chen, a senior vice president at the chip-design company Qualcomm, referring to a chip-making plant. His comment drew applause from the crowd and a “thank you" from SMIC’s co-chief executive, according to a video of the event.

The comment was made in jest, a Qualcomm spokeswoman said. The video was originally posted on YouTube by an events company, and, after The Wall Street Journal inquired about it, the settings were changed to restrict who could view it.

Despite being blacklisted, SMIC plays an integral role in the U.S. semiconductor industry, with the Commerce Department, which administers export controls, granting licenses to the American companies to work with the Chinese company. That dynamic puts SMIC at the center of a debate over where to draw the line between protecting U.S. national security and doing business with China.

SMIC is a linchpin in China’s ambitions to build a leading semiconductor industry and end reliance on imports. The company churns out older generations of chips and buys significant amounts of specialized chip-making machinery from the U.S. But SMIC aspires to join the sector’s advanced ranks—a goal U.S. restrictions are meant to hobble.

Security hawks, including influential members of Congress, argue that current U.S. restrictions are porous. By allowing SMIC access to American technology, know-how and money, they say, the U.S. is helping the company acquire cutting-edge capabilities and produce chips that China’s military could use to fight the U.S. and its allies.

The Biden administration counters that the restrictions keep leading technologies out of the hands of SMIC, and that the U.S. should balance national security with allowing other business to go unimpeded.

Both camps got a jolt in recent weeks when Huawei Technologies—another blacklisted Chinese company—released a new smartphone that industry analysts say is powered by an advanced chip made by SMIC. While SMIC hasn’t said how it produced the 7-nanometer chip, it is the kind of breakthrough the U.S. controls were designed to forestall.

In the aftermath, the Republican heads of four House committees scolded the Commerce Department for not closing loopholes in restrictions and urged “full blocking sanctions" on SMIC and Huawei.

“The circumstances before us demonstrate the need for additional pressure and more effective export controls on our adversaries," they wrote in a letter to the department.

Commerce Secretary Gina Raimondo told a congressional panel last month that she was upset when she learned about the new phone. She added that the U.S. doesn’t have evidence SMIC can make the chip in quantity.

The Commerce Department is “working to obtain more information on the character and composition of the purported 7nm chip as well as whether the capability exists for such chips to be produced at scale," an agency spokesman said in response to questions. “Export controls are just one tool in the U.S. government’s toolbox to address the national security threats presented by" China.

SMIC first fell in the crosshairs of the Trump administration, which in 2020 designated the chip maker a Chinese military company and placed it on the Commerce Department’s entity list, subjecting it to export controls. Last year the Biden administration tightened those restrictions.

None of Washington’s various measures bars U.S. companies from doing business with SMIC. While the Commerce Department’s entity list is often called a “blacklist," being listed doesn’t prohibit transactions with the company. Rather, it requires U.S. companies to seek licenses from the department to sell to the listed entities.

The department has granted plenty. It approved U.S. companies’ requests to sell tens of billions of dollars of goods to SMIC from Nov. 9, 2020, through April 20, 2021, according to normally nonpublic Commerce Department data that was released by Congress in 2021.

SMIC didn’t respond to requests for comment.

Aside from Qualcomm, SMIC customers who attended its Irvine office-opening party included Silicon Labs, Monolithic Power Systems and MaxLinear. Those companies didn’t respond to requests for comment.

SMIC has built its business over the years by making older-generation chips at lower cost and with thinner profit margins than many of its competitors. It is aided, according to analysts, by Chinese government subsidies. SMIC had a 20% gross profit margin in its most recent quarter, compared with over 50% for Taiwan Semiconductor Manufacturing Co., the world’s largest contract chip maker.

SMIC’s revenue from U.S. customers has climbed over the years and reached a record last year, although its sales are on pace to fall this year in the midst of a slowdown in big markets for chips including personal computers and smartphones.

U.S. semiconductor designers and toolmakers have long said that doing business with Chinese entities such as SMIC helps their bottom lines, and that enables them to invest in making further advances. These companies have also said that they aren’t hurting national security because they don’t sell SMIC the most-advanced equipment nor rely on it to execute the most cutting-edge designs.

U.S. officials have designed China technology policy around those same premises. In response to reports that SMIC produced the advanced chip in the Huawei phone, national security adviser Jake Sullivan said the administration’s approach wouldn’t change.

“What it tells us, regardless, is that the United States should continue on its course of a ‘small yard, high fence’ set of technology restrictions focused narrowly on national-security concerns, not on the broader question of commercial decoupling," said Sullivan at a recent media briefing. “That is where our emphasis has been. That is where it is going to continue, sort of, regardless of the outcome."

James Mulvenon, the author of a report that prompted the U.S. to blacklist SMIC in 2020, said the government’s narrow focus on protecting the most-advanced chips while leaving SMIC’s older chips—which have many defense applications—largely unscathed is problematic.

SMIC’s sales of less-advanced chips also enable the company to generate revenue to fund the development of more-advanced chips, said Mulvenon, a defense contractor and China technology analyst.

“It is not an exaggeration to predict that allowing SMIC to remain highly profitable and heavily engaged in cutting-edge R&D over the coming years could materially alter the odds that the U.S. prevails in a hypothetical military conflict with China," Mulvenon wrote in a recent report on SMIC.

To make the new chip, SMIC used inferior machinery since export restrictions prevented it from accessing the latest lithography tools, according to Dan Hutcheson, vice chair of TechInsights, a semiconductor-analysis company that examined the phone and chip.

“It is a great geopolitical challenge to the countries who have sought to restrict [China’s] access to critical manufacturing technologies. The result may likely be even greater restrictions than what exist today," he wrote in a post about the findings.

Sarah Krouse contributed to this article.

Write to Kate O’Keeffe at kathryn.okeeffe@wsj.com and Asa Fitch at asa.fitch@wsj.com

3.6 Crore Indians visited in a single day choosing us as India's undisputed platform for General Election Results. Explore the latest updates here!

Next Story footLogo
Recommended For You