U.S. Blacklists China’s Top Chip Maker, Escalating Tech Fight

The

Trump

administration is adding China’s largest manufacturer of computing chips to an export blacklist, restricting the company’s access to high-end technology over its alleged links it to the Chinese military.

Semiconductor Manufacturing International Corp.


SMICY 4.06%

, or SMIC, will be added alongside more than 60 other Chinese institutions to the entity list, the Commerce Department said. The designation restricts companies from exporting U.S.-origin technology to the listed firms without a license, with a provision that effectively prohibits SMIC from acquiring technology to build chips with 10-nanometer circuits and smaller, the industry’s top class of chips.

The move raises the pressure significantly on the chip maker, a national champion that has received billions of dollars in state backing and is central to Beijing’s drive to improve the country’s self-sufficiency in critical technologies. It comes during the waning weeks of the Trump administration and follows a string of actions against Chinese tech companies.

Two days ago, the chip manufacturer said it was looking into reports that one of its two co-chief executives had suddenly decided to step down, a disclosure that sent its shares tumbling.

Commerce Department officials said they applied the restriction on SMIC because of what they said was the company’s cooperation with Chinese military-linked entities. The Trump administration has grown more concerned about Beijing’s practice of leaning on civilian companies to advance its military goals, an effort known as military-civil fusion.

A SMIC representative didn’t immediately comment. SMIC has repeatedly denied any links to China’s military and has said that it produces chips solely for commercial and civilian use.

“Entity List restrictions are a necessary measure to ensure that China, through its national champion SMIC, is not able to leverage U.S. technologies to enable indigenous advanced technology levels to support its destabilizing military activities,” Commerce Secretary

Wilbur Ross

said in a statement provided to The Wall Street Journal. The blacklisting was first reported by Reuters.

The restrictions directly target the company’s ambitions to catch up with industry leaders in producing the world’s most advanced chips. Under the new rules, the export of all U.S.-origin technology to SMIC will require a Commerce Department license. Applications to support the production of chips at “advanced technology nodes” of 10 nanometers or smaller will be treated with a presumption of denial, while other applications will be evaluated on a case-by-case basis, according to the department.

A senior Commerce Department official told the Journal the policy was designed to prevent SMIC from using U.S. technology to produce the most cutting-edge chips for advanced military applications such as drones, military aircraft and exoskeletons.

“We’re taking this action to address a national-security concern by using a very targeted action that we believe will hopefully begin to move SMIC in a better direction,” the official said, adding that the department has been communicating with SMIC to address its concerns.

Shares of SMIC fell 5% by midafternoon in Hong Kong on Friday.

The Trump administration’s action against SMIC is likely to be one of its last in a series of moves to clip the wings of numerous Chinese tech champions. It threatens to further inflame relations with Beijing, and involve potential retaliation, as the administration of President-elect

Joe Biden

prepares to take over.

It is unclear whether Biden officials will take a similarly hard-line approach to Chinese firms or unwind any of the current administration’s orders. Under President

Obama,

Commerce Department officials applied export restrictions more narrowly, typically penalizing companies that ran afoul of U.S. law, and sometimes removing them if corrective action was taken.

Since January 2017, the Trump administration has added more than 300 Chinese entities to its export blacklist.

Previously, a blacklisting could be a death sentence, with sanctioned companies finding themselves cut off from American suppliers almost overnight. In 2018, Chinese telecom firm

ZTE Corp.

was forced to shut down for a time after it was stripped of export privileges, and only survived after the restrictions were lifted three months later.

In recent years, U.S. companies have found ways to continue selling to entity-listed companies, such as shipping chips or other goods to a sanctioned company whose goods are made overseas. This allowed China’s Huawei Technologies Co. to continue buying huge amounts of American chips despite its entity listing in May 2019. Trump officials later tightened export rules on Huawei, blocking it even from foreign-made chips.

“Commerce’s entity list designations have had uneven effects,” said

Dan Wang,

technology analyst at Gavekal Dragonomics. “SMIC is more likely to suffer more rather than less given its dependence on U.S.-origin equipment.”

The effects of SMIC’s blacklisting will likely be felt by the handful of U.S. companies that dominate the market for chip-manufacturing and testing equipment. They include firms such as

KLA Corp.

,

Lam Research Corp.

and

Applied Materials Inc.

The companies didn’t immediately respond to requests for comment.

Currently, SMIC is capable of producing chips commercially at 14 nanometers, but is working on more advanced production lines to compete with industry leaders such as

Taiwan Semiconductor Manufacturing Co.

Write to Dan Strumpf at [email protected]

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