SMIC has a way out of the latest US restrictions, but it may not help

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The US Department of Commerce is going after SMIC’s alleged connections to the Chinese military rather than placing it directly on the entity list, potentially offering SMIC a way out of its current predicament.

On 25 September, the US Department of Commerce communicated new restrictions on the export of certain products to SMIC. Companies that wish to export products covered by a list of categories will now have to apply for a license to export their products.

These are likely to be very hard to obtain where the products cannot be sourced from sources outside of the US, which in semiconductor manufacturing is a significant number.

This is one step away from being on the entity list (like Huawei), as being on the entity list means that all exports from US companies must have a license to export to Huawei.

The US Department of Commerce stated that that certain exports to SMIC represent an “unacceptable risk” of being used to make products that have a “military end-use”. However, this would appear to give SMIC a way out of this mess if it can clearly demonstrate that it has no links with the Chinese military and that its products are exclusively for civilian use.

SMIC has again reiterated that it “has no relationship with the Chinese military, and does not manufacture for any military end-users or end uses”, but it is clear that the US does not believe a word of it.

The problem is that a simple search with a browser raises questions that SMIC has yet to address. One of SMIC’s shareholders, customers and board members is Datang Telecom, a Chinese state-owned enterprise that supplies telecom equipment to both civilian companies and the People’s Liberation Army.

In my opinion, the fact that Datang Telecom is a shareholder with a seat on the board provides a fairly strong link to the military which seems to contradict SMIC’s own repeated statements.

There have also been incidents where SMIC has been accused of misappropriating intellectual property which I think undermines the credibility of any statements that the company makes.

Consequently, I think that SMIC is now in a very tight spot.

The world of silicon chip manufacturing is a series of mini-monopolies where the supply of equipment for each stage of manufacturing is often controlled by one company. These companies are predominantly from Japan, the US and the Netherlands, but because it’s a linear process, no one can make a silicon chip without using a piece of equipment or software from a US company.

This applies to all geometries, meaning that in order to function, SMIC needs access to US technology. Without access to US technology, SMIC faces a severe curtailment on its activities potentially putting the company out of business.

I think that like Huawei, the US is not actively seeking to put SMIC out of business, but that its real intent is to put pressure on the Chinese government when it comes to negotiating the overall terms of their long-term relationship.

Hence, I would expect that if a second-stage deal is struck between the two, some relief for both Huawei and SMIC would be part of that.

However, this is looking increasingly unlikely, as the relationship is rapidly deteriorating with little movement on either side. I certainly would not expect this to change before the US election in November. SMIC could very well fall much further which will make Huawei feel fortunate that it has not gone to IPO.

This article was originally published on RadioFreeMobile

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