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US-China tensions

China's top chipmaker SMIC hit by US export controls

Beijing-backed company denies Washington's claims of military links

U.S. companies would be required to receive government permission before exporting certain items to SMIC.   © Getty Images

TAIPEI -- The U.S. is tightening export controls on Semiconductor Manufacturing International Co., China's top chipmaker, citing an "unprecedented risk" posed by the company's alleged links to the military.

In a letter dated Sept. 25 and seen by the Nikkei Asian Review, the U.S. Department of Commerce instructs American companies to apply for licenses to ship certain controlled items to SMIC. The move further escalates the Trump administration's crackdown on Chinese tech companies and is likely to ratchet up tensions with Beijing.

According to the letter, the department's Bureau of Industry and Security "has determined that exports to SMIC or its subsidiaries may pose an unprecedented risk of diversion to a military end-use of the People's Republic of China." Accordingly, suppliers "must submit an application for an individually validated license prior to exporting, reexporting, or transferring in-country."

SMIC, China's biggest contract chipmaker, is at the heart of Beijing's ambition to build a competitive domestic semiconductor industry and reduce the country's reliance on foreign suppliers.

When presented with a copy of the letter by Nikkei, SMIC said it will "continue to engage constructively and openly with the U.S. Department of Commerce."

The company reiterated that "it manufactures semiconductors and provides services solely for civilian and commercial end-users and end-uses. The company has no relationship with the Chinese military and does not manufacture for any military end-users or end-uses."

Multiple industry executives told Nikkei that SMIC is aware of the risks of tighter U.S. export control rules and said the company has ramped up orders with Applied Materials, Lam Research, and several other U.S. suppliers.

Nikkei earlier reported that SMIC is speeding up efforts to build a non-U.S. production line using less-advanced 40-nanometer chipmaking technologies, and is looking to build a more advanced 28-nanometer production line in three years. SMIC relies heavily on U.S. chip equipment for its daily operations, and losing access to American suppliers could set the company's technological capabilities back 10 years.

Washington has already tightened its export control rules on Huawei, China's biggest tech company, by requiring all global suppliers to apply for licenses to ship to the company if their development or production involves any American technologies. Beyond Huawei and its affiliates, the U.S. government so far this year has put some 70 Chinese companies, organizations and universities on the so-called Entity List to restrict their use of American technologies, according to Nikkei's analysis. Last year, excluding Huawei, more than 40 Chinese entities were placed on the blacklist.

In August the U.S. Department of Commerce opened a 60-day window for public comment on whether to further tighten export control rules regarding chipmaking equipment and other sensitive technologies, such as lasers.

SMIC -- whose biggest client is Huawei -- recently made an extremely successful dual-listing on the Shanghai STAR tech board, the Chinese version of Nasdaq, and raised more than $6.55 billion in late July. Back in late 2017, it hired former Samsung and Taiwan Semiconductor Manufacturing Co. executive Liang Mong-song to be its co-CEO to help it upgrade technologies. SMIC also supplies to Qualcomm of the U.S. and many of China's local chip developers.

Nikkei reached out to the U.S. Commerce Department for comment.

"In general, the Bureau of Industry and Security (BIS) in the Department of Commerce is constantly monitoring and assessing any potential threats to U.S. national security and foreign policy interests. While we cannot comment on any specific matter, BIS, with its interagency partners, will take appropriate action as warranted," a BIS spokesperson said.

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