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Let the chips fall where they may: US Commerce dept whacks Middle Kingdom firm SMIC on naughty list

At the SMIC of a flitch, biggest China semi foundry's on the entity list

The US government has added SMIC — China's largest domestic semiconductor foundry — to a Treasury Department entity list.

This action, which the Treasury Department said was intended to protect US national security interests, will prevent SMIC from acquiring certain US technologies. Any business hoping to export to SMIC will first have to apply for a licence to sell to the company.

Moreover, items that will allow SMIC to produce chips at a node of 10 nanometers or below will be subject to a "presumption of denial", in order to prevent them from ending up in the hands of China's military.

The Treasury Department attributed its decision to China's "military-civil fusion" doctrine. This has been described by the State Department's spokeswoman Jenny Bavisotto as "an attempt to deliberately erase the line between China's military and civilian sectors."

"Under military-civil fusion, private companies in China that develop new technologies have little ability to refuse incorporating them into military programs. Cooperation is required by Chinese national security law," Bavisotto said.

In addition, the Treasury Department claimed to have evidence of collaboration between SMIC and "entities of concern in the Chinese military industrial complex."

In a statement, Commerce Secretary Wilbur Ross said: "We will not allow advanced US technology to help build the military of an increasingly belligerent adversary.  Between SMIC's relationships of concern with the military industrial complex, China's aggressive application of military civil fusion mandates and state-directed subsidies, SMIC perfectly illustrates the risks of China's leverage of US technology to support its military modernization."

"Entity List restrictions are a necessary measure to ensure that China, through its national champion SMIC, is not able to leverage US technologies to enable indigenous advanced technology levels to support its destabilizing military activities," Ross added.

Industry talk that SMIC would end up on a US entity list has swirled since September, when the US Department of Defence said it was investigating the firm.

Drone downer

More Chinese manufacturers are also being caught up in the banning frenzy it seems.

DJI, the Chinese drone maker that has become very popular in recent years, is reportedly on the ban list too, a senior Commerce department official claimed. The claims of a possible ban on the drone maker caused DJI to undergo a voluntary security audit and install a "local data" mode, but it appears that wasn't enough.

SMIC, which stands for Semiconductor Manufacturing International Corporation, has repeatedly found itself in the crosshairs of departing president Donald Trump's Administration. This attention has coincided with the imposition of sanctions against fellow Middle Kingdom firm Huawei, which is forced to find alternatives to its long-time suppliers.

In September, the Commerce Department introduced some of its first sanctions against SMIC. These new rules mandated suppliers of certain US-origin kit seek prior approval prior to export, but did not represent a wholesale embargo against the company.

Another blow landed early in December, when the Defence Department designated SMIC as owned or otherwise controlled by the Chinese military. Unlike the earlier Commerce Department sanctions, these weren't intended to limit SMIC's access to the supply chain. Nor did they impose any specific financial penalties. However, this designation will ultimately legally prohibit US investors from buying securities issued by the chipmaker.

SMIC has strenuously denied the existence of any ties with Chinese military, and insists it's an independent private company.

Ironically, SMIC was previously listed on the New York Stock Exchange between 2004 and 2019. This 15-year tenure ended in order to allow SMIC to re-IPO on the Shanghai Stock Exchange in July, where it raised $7.57bn, with the funds intended to help it modernise its manufacturing processes.

Collectively, this bevy of sanctions will make it difficult for SMIC to become a viable alternative to other contract foundries, like TSMC and Samsung. The entity list prevents the business from acquiring new equipment. Meanwhile, the Department of Defence designation will limit SMIC's ability to raise capital via future share issuances.

Alongside SMIC, the Commerce Department added a further 60 businesses to the Treasury Department's Entity List. These include companies accused of human rights abuses, helping China's militarisation and territorial expansion in the South China Sea, as well as businesses accused of IP theft and sanctions busting.

The Register has asked SMIC for comment. ®

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