China's mission to become self-sufficient in semiconductors to power its future tech ambitions has just been put in jeopardy by the United States. Dozens of Chinese companies, including Semiconductor Manufacturing International Corporation (SMIC) and drone maker DJI, were added to the Commerce Department's so-called Entity List, which effectively cuts them off from crucial US software, chip-making equipment and technology. Companies now require licences to export such products to SMIC. Analysts believe SMIC is completely cut off, which would severely set back China’s ability to produce chips.
"We will not allow advanced US technology to help build the military of an increasingly belligerent adversary," US Commerce Secretary Wilbur Ross said in a statement last month, adding that the company perfectly illustrates the risks of China using US technology to modernise its military as the outgoing Trump administration continues to pile pressure on Chinese firms during its final weeks.
The US Department of Defence added the firm to a list of companies the agency claims are owned or controlled by the Chinese military. That decision means Americans are banned from investing in SMIC. According to US government sources, the proposal to blacklist SMIC had been made by the Pentagon because it was worried the company was enabling the technological advancement of China’s military.
US pressure has prevented SMIC from buying the equipment needed to make cutting-edge chips, such as the kind that Huawei needs, but can no longer buy, for its smartphones. SMIC, a “national champion” that is crucial to the government’s hopes of achieving chip self-sufficiency, became the country’s biggest initial public offering for a decade when it raised $7.6 billion last year. The US pressure is seriously threatening the development of advanced technology at SMIC.
The move could create serious problems for Chinese firms, which like many global chipmakers relies on American software, machinery and other equipment to design and manufacture semiconductors. Chinese smartphone maker and 5G network supplier Huawei, for example, has seen its sales growth slow significantly since it was added to the list last year. SMIC has already been hit by the tightening of US sanctions on Huawei.
That resulted in SMIC could no longer serve its largest customer, which generates a fifth of its revenues. The sanctions also affected Qualcomm, the US chip designer that uses SMIC to fabricate some of its chips. Qualcomm was SMIC’s second-largest customer after Huawei.
SMIC plays a critical role in powering China's technological ambitions. Much of China's supply of chipsets come from foreign companies, which power everything from Chinese smartphones and computers to telecommunications gear. According to government statistics, last year the country imported $306 billion worth of chips or 15 per cent of the value of the country's total imports. The company, whose major shareholders are state-owned companies, said earlier this year that it wants to invest in technology and catch up with rivals. But SMIC remains three to five years behind industry leaders Intel of the US, South Korea’s Samsung and Taiwan’s TSMC.
Analysts say that SMIC has a long way to go to be a global competitor. Pressure from Washington threatens to make it even tougher for the company to catch up to foreign rivals. New rules further dented its ambition as it aimed at preventing exports of US technologies that might support the development of military systems in countries Washington sees as hostile were announced by the Department of Commerce in April last year.
They drastically broadened military end-user restrictions in existing export control regulations, and specifically sought to counter China’s efforts to support weapons development with civilian companies through its “military-civilian fusion” strategy. The new regulations drastically expanded the scope of products subject to military end-user licensing, and broadened the definition of military use to include things that might not be components of the final product, such as items used to support development or production.