By Steve Coonen
A top U.S. semiconductor manufacturing equipment manufacturer, Lam Research, released its most recent quarterly results last week, and the numbers clearly indicate that U.S. export controls are not working. As Nikkei Asia reports:
Despite the semiconductor-related export curbs first announced in October 2022 that barred American companies from shipping advanced chip equipment to China without a license, the country remains Lam’s largest revenue contributor, contributing 48% of the total in the three-month period, up from 30% a year ago and 26% in the previous quarter.
That’s right, Lam’s China revenues are rising as a percentage of company revenue, not falling.
Lam’s leadership doesn’t foresee its China business dropping off, either. Referring to new export controls released last week, CEO Tim Archer said on the earnings call, “We’ve reviewed the regulations and our early assessment is we don’t see any materially impactful forecasts in business.” Additionally, Archer said, “I see a level of sustainability in China as we go into next year and frankly beyond. They have long-term objectives.”
What are those “long-term objectives” Archer seems eager to accommodate? To put it bluntly: It is China’s unabashed quest to globally dominate the semiconductor market. Xi’s statement three years ago clearly reveals his intentions: “We must tighten international production chains’ dependence on China, forming powerful countermeasures and deterrent capabilities based on artificially cutting off supply to foreigners.” Just as China has done with electric vehicle batteries, 5G equipment, and solar panels, Xi has an explicit plan to subsidize China’s legacy semiconductor industry, make foreign users dependent upon it, and then use leverage over global supplies to gain political, economic, or military concessions.
China is running the score board on us. As the U.S. sets an export control agenda focused on keeping China from advances with advanced chips, China focuses on the legacy segment. And by the way, China is having breakthroughs with advanced chips at the same time. What is the United States Government doing? More of the same.
As China Tech Threat spelled out in its Every Chip Matters report earlier this year, China is heavily subsidizing its legacy chip industry to eventually control the global market. If the U.S. military and businesses become dependent on China for these essential pieces of technology, then the U.S. will be exposed to incredible national security and economic risks.
Sadly, Lam seems content to help fuel this process. And it’s likely that U.S. firms will continue to sell their technology to companies such as SMIC, China’s leading legacy chip manufacturer. Kate O’Keefe of the Wall Street Journal has recently written, “China’s largest semiconductor maker has been declared a Chinese military supplier by the Pentagon, blacklisted by the Commerce Department and added to a Treasury Department list banning Americans from trading its shares.”
Despite SMIC’s ties to the Chinese military, and export controls which targeted the company in 2020, the company is booming. One reason is likely because the company is repurposing less advanced semiconductor manufacturing equipment to produce advanced chips, as its production of a 7-nm chip for a new Huawei 5G phone suggests. A new report from James Mulvenon states that tools devoted to fabricating 28-nm chips are “likely being rerouted to leading-edge production.” Douglas Fuller has written, “Despite Washington’s tech controls, SMIC managed to acquire the American equipment needed for advanced chip fabrication.” And one veteran engineer with a U.S. chip equipment maker told Nikkei Asia, “It’s not entirely impossible to use less-advanced tools to make more advanced chips. It’s very difficult to have a clear cutoff on which machine can do what.”
In response to the news of the SMIC-Huawei 7nm chip, ten members of the House of Representatives wrote to the Bureau of Industry and Security on September 14 with a list of recommendations for the Bureau to implement. I credit these members for trying to fix a massive problem. But I must take issue with two well-intentioned but flawed recommendations in the September 14 letter:
- “Implement a policy of denial for all items subject to the Export Administration Regulations (EAR) for Huawei and all of its subsidiaries and spin-off, and successors (e.g. Honor)”
- “Implement a policy of denial and remove all license exceptions for all items subject to the EAR, not just those below 14nm, to SMIC”
Here’s why these calls for action fall short:
First, if Huawei or SMIC need any U.S technology, almost any Chinese firm not on the Entity List can legally procure it and then divert it to them. BIS does not acknowledge that the PRC actively skirts entity list restrictions and that other Chinese firms will merely replace those entities that are added to the list. Additionally, the simple reality is that Chinese entities can easily and quickly change business names, individuals, and address subject to restrictions, create new businesses (such as Huawei’s spin-off Honor) to maintain the flow of needed U.S. technologies. As Greg Allen of CSIS recently commented, “Chinese companies have become real experts at setting up shell companies to evade American export controls.”
The U.S. needs a zero-trust approach when considering exports of semiconductor technology to China. Shihao Huang and Bill Drexel have recently written in Foreign Affairs, “Chinese companies will continue trying to vault over and tunnel under Biden’s high fence by any means necessary to replicate the capabilities being kept inside.” Unfortunately, as I observed personally during my years in the Defense Technology Security Administration, and wrote about in my report Willful Blindness, the U.S. export control regime is broken. It is captive to a bureaucracy with a head-in-the-sand mentality on Chinese military-civil fusion, and corporations like Lam Research lobbying to protect revenues earned in China (on that score, see also CTT’s report Cash Over Country). Consequently, as semiconductor analyst Dylan Patel remarked recently, “The U.S. is granting licenses like they’re candy.”
The U.S. must stop supporting China’s legacy chip ambitions, and equipping the Chinese military, to boot. Blanket policies of denial are the only responsible course of action to stop China from using American technology to create economic and military advantages.