Decoupling Cuts Both Ways

Screenshot of SMIC web site

THE THREAT TO blacklist China’s largest contract chip-maker Semiconductor Manufacturing International Corp. (SMIC) fits squarely with the US administration’s efforts to hobble China’s technology development by denying it access to the US technologies that it will need until it can develop indigenous industries.

According to the Reuters news agency, the US Defence Department has proposed adding state-owned SMIC to the entity list, part of the US export-control regime that would prevent any US company doing business with it without a special licence from Washington.

The nub of the threat that poses to SMIC’s business is that one-half of the company’s chip-making equipment is US-made. A blacklisting would deny it the servicing and maintenance that the equipment will inevitably need, even if production is kept going in the short-term.

More significantly, it would make it impossible for SMIC to buy the equipment that is required to make the more advanced chips that it does not yet manufacture but which Chinese tech firms such as Huawei and HikVision will need as Washington chokes off their US sourcing. SMIC was already vulnerable to US sanctions.

The recent extra-territorial expansion of US export controls against Huawei barred any company from selling it chips without a US licence if those chips were designed using US software or manufactured using US equipment. SMIC is a Huawei supplier.

Like Huawei, SMIC is also accused of endangering US national security and of having links to the People’s Liberation Army. Although SMIC denies this, it is more than likely that its chips do get used in hardware that gets sold to the military, however indirectly. A US defence contractor claims that researchers at PLA-affiliated universities use SMIC chips and processes and that there are business links between SMIC and China Electronics Technology Group (CETC), a state-owned defence electronics research contractor.

Thus the race is on to develop an indigenous chip-making industry before the US administration destroys Chinese tech firms’ supply chains.

Meanwhile, US President Donald Trump gave a further airing to his musings on decoupling the US and Chinese economies over the long holiday weekend in the United States. He spoke of making the United States a manufacturing powerhouse that was not dependent on China.

Driving out SMIC and other customers for US products would create the mirror image of that.

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Filed under China-U.S., Technology

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