The US government is considering restricting American exports to Semiconductor Manufacturing International Corporation (SMIC), China’s largest semiconductor manufacturer. Reuters was the first to report on the development. The government is reportedly considering adding SMIC, a partially state-owned company, to the US department’s list of entities that are restricted from using technology and software produced in the US.

Blacklisting SMIC would further escalate the tech war between the United States and China. Only last month, the US Department of Commerce added Huawei and its affiliates to the entity list, essentially starving these companies from crucial technology supplied to them by American companies. In case Huawei or any other company on the list wishes to use American technology, they have to go through a lengthy process to obtain licenses from the Department of Commerce. Huawei is SMIC’s biggest customer, accounting for 18.7% of its revenue, according to a report in the South China Morning Post.

Since the news broke, SMIC shares have taken a beating on stock markets. The company’s share price on the Hong Kong stock exchange fell by over 19% on Monday.

US govt looking into SMIC’s possible ties with Chinese military

The US Department of Defense is trying to ascertain whether SMIC works with the Chinese defense establishment, reported the Wall Street Journal. A research report last month by SOS International, a US defense contractor, had reportedly claimed that SMIC has worked with one of China’s largest defense conglomerates. Universities linked to China’s military also reportedly designed their work around SMIC’s technology. This includes a Chinese military academy that the US commerce department placed on an export blacklist in 2015 for allegedly designing chips used in supercomputers that simulate nuclear test.

SOS International’s director of intelligence integration confirmed the report’s findings to WSJ, adding that SMIC was a “national champion for integrated-circuit fabrication across the entire [Chinese] national security space”.

‘Complete shock’: SMIC’s reaction to accusations

Meanwhile, SMIC has denied the allegations in a statement issued on its website. The company said that it complies with all laws and rules in all jurisdictions it has business in, and that it does have any ties to the Chinese military.

It read: “The Company manufactures semiconductors and provides services solely for  commercial end-users and end-uses. We have no relationship with the Chinese military […] Any assumptions of the Company’s ties with the Chinese military are untrue statements and false accusations. The Company is in complete shock and perplexity to the news.”

SMIC said it played an important role in the global semiconductor supply chain, and that it has worked with US-based companies for many years. It said it was open to a “sincere and transparent” communication with the US government to resolve “potential misunderstandings”.

American tech crucial for semiconductor manufacturers

The move would reportedly affect major US companies that supply chipmaking equipment to SMIC, including Lam Research, KLA Corp and Applied Materials, reported Reuters. The global semiconductor manufacturers relies largely on American manufacturing technology. According to industry group Semiconductor Industry Association (SIA), US companies have a long-standing lead in research and development (R&D) spending. In 2019, US had a market share of 47% in the semiconductor market.

According to the South China Morning Post, restrictions on SMIC will have a major cascading effect on many companies across the globe. Ten of the top 30 supplies of SMIC are US-based companies, including Lam Research. Qualcomm, whose chips are used by major phone manufacturers, is SMIC’s biggest customer in the US. Sales to Qualcomm reportedly made up 8.6% of SMIC’s revenue.

America-US ‘tech war’, 5G, and Huawei

The US government’ restrictions on Huawei are part of a greater tech war against Chinese telecom companies. In June this year, US’ Federal Communications Commission had designated Huawei and ZTE as national security threats. The country’s former national security advisor John Bolton said China was trying to assert its hegemony over Asia by taking control of 5G-based telecommunications systems which will eventually replace existing systems.

Huawei and ZTE are under the scanner in India as well. Although both companies had been allowed to participate in 5G trials, subsequent border clashes with China in June have made the India government reconsider the decision. In August, the Department of Telecommunications told the Parliamentary Standing Committee on IT that the decision to allow the companies in 5G trials would be discussed with the Ministry of Home Affairs.

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