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Taiwan chip maker halts business with US-blacklisted Phytium

Alchip says it will seek license to supply Chinese supercomputer developer

Taiwan chip developer Alchip says it has halted operations with China's Phytium after the latter was blacklisted by the U.S. (Source photos by screenshot from Alchip and Phytium websites) 

TAIPEI -- A major Taiwanese chip designer has suspended business with Phytium Technology after Washington blacklisted the Chinese company over alleged military links, underscoring how global companies continue to be caught up in the U.S.-China tech war.

Taipei-listed Alchip Technologies provided chip design services and intellectual property to Phytium and helped it outsource chip production to Taiwan Semiconductor Manufacturing Co., the world's biggest contract chipmaker. Phytium develops central processing units for use in supercomputers as well as personal computing devices and is one of the companies at the heart of China's campaign to boost its self-reliance on critical chip components.    

"This is the first time a client of ours has been added to the Entity List," Alchip CEO and President Johnny Shen told investors on Tuesday, referring to Washington's trade blacklist. "All of our business with Phytium ... including chip production with [TSMC], has been put on hold."

"I must admit that Alchip is facing a very big challenge," he added. 

Alchip's stock plunged by the daily limit of 10% for three consecutive trading days after the U.S. Department of Commerce on April 8 added seven Chinese supercomputer developers, including Phytium, to its trade blacklist. Phytium contributed 39% of Alchip's total revenue in 2020.

The Taiwanese company's announcement is another example of the U.S. using export controls to rein in Beijing's technology ambitions by blocking Chinese companies' access even to non-U.S. suppliers.

Shen said the products and services that Alchip provided to Phytium are designed for general, rather than military, use.

"The chips are not capable of operating under extreme conditions," he said. Alchip furthermore has documents signed by Phytium pledging that those products and services will not be used in military applications, he added.

Losing Phytium's business will knock around 25% off Alchip's revenue this year, though it said it could still grow 20% for all of 2021.

The Phytium case will not affect Alchip's dealings with its other Chinese customers, Shen said, from whom he expects rapid growth this year. Nearly all of Alchip's engineering team is based in China.

Alchip said it will seek an export license from the U.S. Bureau of Industry and Security to resume its business relations with Phytium, but said it cannot estimate when or if it will receive such a permit.

The Commerce Department claimed Phytium and the six other companies it added to the Entity List on April 8 are "involved in building supercomputers used by China's military actors, its destabilizing military modernization efforts, and/or weapons of mass destruction programs."

Suppliers must apply for an export license in order to provide these companies with any products containing more than 25% American content -- the so-called de minimis rule -- according to export control lawyers and the BIS.

But that minimum level can be lowered or even scrapped. The U.S. added China's biggest tech company Huawei Technologies to the Entity List in 2019 and cut the applicable de minimis percentage from 25% to 0% last year, in effect forbidding all global suppliers from using any American technology to service Huawei. This tighter rule cut off Huawei's access to vital chip supplies, including from TSMC and Samsung.

Harry Clark, a trade specialist and partner at Orrick, a U.S. law firm, told Nikkei Asia that suppliers should be aware that export control laws can change suddenly. Clients should "establish and rigorously and consistently implement compliance arrangements" to avoid their products end up in Chinese military, he said. "Depending on the circumstances, it may, for example, be advisable to secure diligence input from a capable investigatory firm. ... At the same time, there is not necessarily a need to hold off on supply arrangements that are legally compliant."

China's top chipmaker Semiconductor Manufacturing International Co., Hikvision, the world's biggest surveillance camera maker, and global No.1 commercial drone maker DJI have all been placed on the trade blacklist by the Commerce Department.

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