The Trump administration is weighing whether to place export restrictions on China’s most advanced manufacturer of semiconductors, a move that could cut to the heart of China’s ambitions to become self-reliant on critical technologies.
The step is the same one that U.S. officials imposed on Chinese telecom equipment maker Huawei. The decision to add Huawei Technologies Co. to the entity list, along with later steps to close off loopholes and further starve the company of components, has threatened its business and worsened U.S. relations with China.
Any decision to impose export controls on SMIC would mark a major escalation in the administration’s crackdown on Chinese tech companies. It could also frustrate the U.S. companies that collectively sell billions of dollars worth of chip-making technology to Chinese manufacturers.
Among the issues being considered is whether SMIC aids China’s defense establishment, people briefed on the discussions said. A research report produced last month by U.S. defense contractor SOS International LLC argues that it does.
The report says the company has worked with one of China’s largest defense conglomerates and that researchers at universities linked to China’s military have designed their work to fit SMIC technology. They include a Chinese military academy that the Commerce Department placed on an export blacklist in 2015 for its alleged work designing chips used in supercomputers that simulate nuclear tests.
“A series of PLA university and defense industrial complex researchers use SMIC processes and chips to conduct their research, indicating that this research is tailored to SMIC production specifications, making it impossible for them to manufacture their chips at another foundry,” according to the report, which cites references to use of SMIC chip technologies in work published by researchers at what it describes as military-affiliated universities. PLA refers to China’s armed forces, the People’s Liberation Army.
The SOS International report has been shared with officials at several agencies in the Trump administration, including with the Commerce Department’s Bureau of Industry and Security, the people briefed on the discussions said. The agency is responsible for overseeing restrictions on exports of sensitive U.S. technology.
A SMIC spokeswoman denied the report’s findings, saying in an email that SMIC “has made full commitment of no military use since the company was established.”
On Saturday, the company posted a lengthier statement to its
social-media account, saying it manufactures semiconductors “solely for civilian and commercial end-users and end-uses.” It said the Commerce Department has granted numerous export licenses for the company over the years.
“The Company is in complete shock and perplexity to the news,” the statement said. “Nevertheless, SMIC is open to sincere and transparent communication with the U.S. Government agencies in hope of resolving potential misunderstandings.”
The comments followed a Reuters report that the Defense Department is working with other agencies to determine whether SMIC should be added to the entity list.
The Commerce Department can require suppliers to obtain licenses before exporting certain U.S.-origin technology to companies like SMIC by adding them to the entity list or deeming them to be advancing China’s military aims.
A Commerce Department spokesman declined to comment.
Founded in 2000 by a veteran of U.S. and Taiwanese chip companies, SMIC grew to become China’s largest contract manufacturer of chips and was at one time a major producer for North American chip companies. It has since become a national champion, as China pours billions of dollars into developing its domestic chip industry. SMIC counts several state-owned entities as major shareholders, and Chinese companies accounted for nearly 60% of its $3.1 billion in revenue last year.
Like virtually all chip makers, SMIC relies on American manufacturing technology to build and test its chips. U.S. firms account for 45% of the global market for chip manufacturing equipment, according to industry group SEMI. For some highly specialized processes, American companies are all but indispensable, according to industry analysts.
“The U.S. still has the stranglehold on the technology that they need,” said Paul Triolo, head of the global technology policy practice at political risk consulting firm Eurasia Group.
Mr. Triolo, who had reviewed the SOS report, described the military links it alleged as tenuous. “I’m not sure if this is a justification for tarring them as a military company,” he said. The report doesn’t say what share of SMIC’s revenue comes from military uses of its technology and doesn’t allege that SMIC sells chips directly to the Chinese military.
James Mulvenon, director of intelligence integration at SOS International, confirmed the company’s authorship and said the report was internally funded.
“They are deeply embedded in defense-industrial military research projects and are widely regarded as the national champion for integrated-circuit fabrication across the entire national security space,” Mr. Mulvenon said.
SMIC was traded on the New York Stock Exchange for more than a decade but pulled its listing last year citing costs and low trading volumes. In July, amid growing tensions between China and the U.S., it raised an additional $7.7 billion on China’s technology-heavy STAR market. It received billions of dollars of fresh state funding in May to work on advanced chip manufacturing.
China’s self-sufficiency drive has taken on added urgency following the restrictions placed by the Commerce Department on technology exports to Huawei, the world’s largest maker of telecom equipment and leading Chinese designer of chips. Huawei was one of SMIC’s largest customers, accounting for about 20% of its revenue last year, according to research firm
The Trump administration has taken an increasingly broad approach to its use of the entity list. Though listings have been used traditionally against companies violating export-control rules, administration officials have increasingly justified listings on broader national-security grounds. Chinese companies have become frequent targets.
Earlier this year, the Trump administration gave Commerce Department officials more power to stop exports of sensitive U.S. technologies that aid China’s military, part of its effort to hobble China’s strategy of leaning on private companies to advance its military ambitions, an effort known as “military-civil fusion.”
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