Raimondo Email Hacked, Huawei-SMIC Teaming Up – China’s Not Slowing Down

Yesterday, news broke that Chinese cyberspies hacked into emails at the U.S. Commerce and State Departments. Commerce Secretary Gina Raimondo was among those affected. According to The Washington Post, officials said the hackers were “looking for information useful to the Chinese government” and “had access to the email accounts for about a month before the issue was discovered and access cut off.” This brazen intrusion isn’t surprising, since Commerce has gotten tougher on China with export controls to protect our national security, most notably through its October 2022 action to restrict China’s advanced semiconductor capabilities.

Ironically, The New York Times Magazine published a lengthy piece the same day the hacker story broke called “‘An Act of War’: Inside America’s Silicon Blockage Against China.” The article poses an important question at the outset: “Could the plan backfire?” To be clear, “the plan” is in reference to the Biden administration’s efforts to “preserve America’s technological primacy by cutting China off from advanced computer chips.” There’s a lot to unpack here, but here are three observations:

  1. U.S. export controls are impactful, but we can’t check the box and move on. If anyone thinks we can, they’re seriously underestimating China. Consider Huawei. It got added to the Entity List in 2019. As NYT Magazine says, “Without access to U.S. semiconductors, software and other essential supplies, Huawei, the largest telecommunications-equipment producer in the world, was left struggling to survive.” The following year, the U.S. “tightened the screws further” by making Huawei subject to the Foreign Direct Product Rule, and its “revenues plunged.” Huawei didn’t wave the white flag, and it’s showing. Now NYT Magazine warns “it could emerge from American sanctions stronger and more resilient than ever.” The Biden administration is reportedly considering additional action targeted at Huawei. That’s good, but the administration should also look at other companies in a similar situation. SMIC is just one example. Like Huawei, it was added to the Entity List. After initial struggles, it has since rebounded with record revenues and remains a threat. In fact, Huawei is reportedly going to use chips from SMIC to “overcome U.S. sanctions,” per an article today from Tom’s Hardware. Without measures like strict export controls premised on a blanket presumption of denial policy, Chinese companies will continue to obtain the technologies they need. So will the Chinese military.

  1. U.S. export controls can’t turn a blind eye to legacy chips. NYT Magazine focuses on advanced chips, a reasonable story angle given Commerce’s 2022 export controls. But the media – like the U.S. government – should broaden its focus. Legacy chips are critical to defense systems, critical infrastructure, automobiles, and more. While the U.S. government turns a blind eye to them, China sees an opportunity and is working to dominate in that space. Now a looming Chinese monopoly with legacy chips threatens our national security, and SMIC specifically is already becoming a powerhouse looking to displace Western companies. Learn more at EveryChipMatters.com.

  1. U.S. companies are critical to the success of export controls, but they’re not focused on national security. Thea Rozman Kendler, BIS Assistant Secretary of Export Administration, sees industry as “our primary line of defense.” Per the NYT Magazine piece, “American industry will need to engage in actions that are, at least in the short-term, self-sabotaging, shutting off a piece of the lucrative Chinese market. Companies will have ample reason to operate as close to the edge of legality as possible, and their Chinese counterparts will have every incentive to game the system and feed them the information needed to approve a sale.” American semiconductor manufacturing equipment companies like Lam Research are cashing in and giving China the means to dominate the global semiconductor business. Instead, they need to put patriotism over profits and honor national security in their business decisions.

China isn’t slowing down in its quest to dominate the semiconductor market. The U.S. government and business community need to be wise to the game and act accordingly with tougher export controls and a broader whole of government approach. For some of our recommendations, visit EveryChipMatters.com.

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