Semiconductor Manufacturing International Co. (Semiconductor Manufacturing International Co., 0981.HK, 688981.SH) Smic has been included in the list of Chinese military-related enterprises by the US Department of Defense, on the entity list by the US Department of Commerce, and on the list of stocks that are not allowed to be traded by US investors by the US Department of Treasury.
Still, China's largest semiconductor maker is doing brisk business with the United States.
Last year SMIC earned a record $1.5bn in revenues, or a fifth of its total sales, from the US semiconductor design companies that employ it to make chips. In May, the Chinese state-backed company held an opening ceremony at its Irvine, Calif., offices packed with crowds of American semiconductor executives.
Roawen Chen, a senior vice president at chip designer Qualcomm (QCOM), said he still hoped to one day see SMIC build a foundry to make chips in the United States. His words drew applause and SMIC's co-chief executive thanked the crowd, according to a video of the event.
'This is a joke,' a Qualcomm spokesman said. The video was originally posted on YouTube by an events company, and after The Wall Street Journal inquired about it, the Settings were changed and access to the video was restricted.
Despite the blacklisting, the Commerce Department, which administers export controls, issued licenses to U.S. chip industry companies to work with SMIC, which continues to play an integral role in the U.S. semiconductor industry. The situation has also placed SMIC at the centre of a debate over where to draw the line between protecting US national security and doing business with China.
Smic is key to building China's leading semiconductor industry and ending its dependence on imports. The company makes mature process chips and buys a lot of specialized chip-making equipment from the United States. Smic aspires to be at the forefront of the chip industry, which is what the US restrictions seek to prevent.
National security hardliners, including influential members of Congress, argue that the current U.S. restrictions are riddled with loopholes. By giving SMIC access to American technology, knowledge and money, they say, the United States is helping the company acquire cutting-edge capabilities and produce chips that the Chinese military could use against the United States and its Allies.
The Biden administration countered that the restrictions prevented SMIC from accessing leading-edge technology and that the United States should strike a balance between national security and allowing other businesses to operate unimpeded.
Both camps have been rocked in recent weeks by the release of a new smartphone by Huawei Technologies Co., another Chinese company blacklisted; Industry analysts say the phone uses an advanced process chip made by SMIC. Although SMIC did not say how it produced the 7-nanometer chip in the phone, it was exactly the kind of breakthrough the US restrictions were designed to prevent.
In the aftermath, the Republican heads of four US House of Representatives committees accused the Commerce Department of failing to close loopholes in the restrictions and urged the imposition of "comprehensive blocking sanctions" on SMIC and Huawei.
"The case before us demonstrates the need for greater pressure on our adversaries and more effective export controls," they wrote in a letter to the Commerce Department.
U.S. Commerce Secretary Gina Raimondo told a congressional panel last month that she was disturbed to learn of Huawei's release of the new phone. Mr Raimondo also said there was no evidence in the US that SMIC could mass-produce the chip.
In response to questions, a Commerce Department spokesman said the department was "working to obtain more information to understand the characteristics and composition of the chip, which is said to be a 7-nanometer process, and whether China has the capability to produce such chips on a large scale." "Export controls are only one of the tools the U.S. government has to address the national security threat posed by China," the spokesman said.
Smic was targeted by the Trump administration, which in 2020 identified it as a Chinese defence company and placed it on the Commerce Department's "entity list", placing export controls on it. Last year the Biden administration tightened those restrictions.
None of the various measures in Washington have barred American companies from doing business with SMIC. While the Commerce Department's "entity list" is often referred to as a "blacklist," placing a company on the blacklist does not prohibit U.S. businesses from doing business with the company, but requires U.S. businesses to apply to the Commerce Department for a license to sell products to the listed entities.
The Commerce Department has issued a large number of permits. From November 9, 2020 to April 20, 2021, the Commerce Department approved applications by U.S. companies to sell tens of billions of dollars worth of products to SMIC, according to Commerce Department data that is usually not publicly available and released by Congress in 2021.
Smic did not respond to requests for comment.
In addition to Qualcomm, customers such as Silicon Labs(SLAB), Monolithic Power Systems(MPWR) and MaxLinear(MXL) attended the opening of SMIC's Irvine office. None of the companies responded to requests for comment.
Smic has built its business for years by making chips with more mature processes at lower costs and margins than many of its rivals. Some analysts say SMIC has benefited from subsidies from the Chinese government. Its gross profit margin in the most recent quarter was 20 percent, compared with more than 50 percent for Taiwan Semiconductor Manufacturing Co., the world's contract chipmaker.
Smic's revenues from US customers have been rising for years, reaching a record last year, although they are likely to fall this year given the slowdown in key chip markets such as personal computers and smartphones.
American semiconductor designers and equipment makers have long said that doing business with Chinese companies like SMIC helps boost profits and allows them to invest in deep development. The companies also said they would not sell the most advanced equipment to SMIC or rely on it to execute the most sophisticated designs, and thus would not compromise U.S. national security.
U.S. officials base their technology policy on the same preconditions. In response to reports that SMIC manufactures advanced process chips used in Huawei phones, U.S. National security Adviser Jake Sullivan said the U.S. government's approach would not change.
"In any case, what this tells us is that the United States should continue to pursue the 'small yard, high fence' route of technical restrictions, addressing only national security concerns rather than overall commercial decoupling," Sullivan said at a recent media briefing. "That's what we've been focusing on. Whatever the outcome, in a sense, that's what we're going to continue to do."
Mr Mulvenon said the US government's focus on protecting only the most advanced process chips, leaving SMIC's many mature process chips with defence applications largely untouched, was problematic. Mulvenon authored a report that prompted the United States to blacklist SMIC in 2020.
Mulvenon, a defense contractor and China technology analyst, said sales of SMIC's mature process chips could also generate revenue for the company to fund the development of more advanced chips.
'It is not an exaggeration to predict that keeping SMIC highly profitable and heavily engaged in cutting-edge research and development over the next few years could materially change the odds of the U.S. winning a potential military conflict with China,' Mr. Mulvenon wrote in a recent report on SMIC.
Dan Hutcheson, vice chairman of TechInsights, a semiconductor analysis firm that studies phones and chips, said SMIC used relatively backward equipment for the new chip because export restrictions prevented it from obtaining the latest lithography tools.
"This is a huge geopolitical challenge for countries seeking to limit [China's] access to critical manufacturing technologies," Hutcheson wrote in an article outlining the findings. The result could be tighter restrictions than are in place now."