SMIC’s Boom Shows Last Year’s Export Controls Haven’t Properly Limited the PRC’s Semiconductor Capabilities

A year ago on October 7, the U.S. government seemed like it was getting tough when it issued  long-awaited export controls targeting the Chinese chip sector. But, one year in, it is now evident that these restrictions have not been adequate to stop China from making major chip advances or positioning itself to dominate the global semiconductor space.

As Kate O’Keefe and Asa Fitch report in the Wall Street Journal, Chinese semiconductor maker SMIC is under some form of sanctions from the Department of Defense, the Department of Treasury, and the Department of Commerce. But it still took in $1.5 billion in 2022 from American semiconductor design companies. That revenue can be plowed back into SMIC’s research and development process that produces innovations for the Chinese military.

Similarly, SMIC’s lawful purchase of semiconductor manufacturing technology from American companies Applied Materials, KLA, and Lam Research are advancing Chinese military capabilities and the country’s desire to control the legacy chip market. Tech security expert James Mulvenon told the Journal: “It is not an exaggeration to predict that allowing SMIC to remain highly profitable and heavily engaged in cutting-edge R&D over the coming years could materially alter the odds that the U.S. prevails in a hypothetical military conflict with China.”

Last year, CTT and many analysts applauded the October 7, 2022 controls as a step in the right direction for stopping American technology from building up the Chinese military. For example, Apple’s decision to halt plans to use YMTC chips was an undisputed win for American national and economic security. (For more background see CTT’s study: “Silicon Sellout: How Apple’s Partnership with YMTC Threatens National Security.”

But after the initial excitement after the controls, what’s happened? The Department has still not imposed controls targeting CXMT, a top Chinese memory chip maker (and still hasn’t). And last month, Huawei unveiled a phone with a 7nm chip made by SMIC—a technological breakthrough that happened without the benefit of the most advanced U.S chipmaking lithography tools, according to TechInsights’ Dan Hutcheson. Recognizing the negative security implications of this advancement, Congressmen Michael McCaul, Mike Gallagher, and eight others asked BIS Under Secretary Alan Estevez to fix “loopholes in BIS rules” that fail to “restrict technology to Huawei and SMIC.”

The October 7, 2022 controls have also pushed Chinese companies to focus on legacy-node chips (those 14nm and above in size). As scholars at CSIS wrote, in March 2023, “An unintended consequence of U.S. export controls on advanced chip technology to China may be a wave of state-backed investment leading to overproduction and, potentially, Chinese dominance of global legacy chip production.” That’s exactly what’s happening, as the Chinese government doled out $282 million to SMIC in 2022, and again boosted subsidies for the legacy-node sector this summer.

A SMIC-dominated legacy space will also deal a painful blow to major chip producers. As it has done with solar panels and electric vehicles, the Chinese government will have successfully used subsidies to kill off competition and concentrate production of a world-critical product inside China. As CTT advisor and former Assistant Secretary for Industry and Analysis Nazak Nikakhtar told EE Times, “SMIC is building major capacity to flood the markets with cheap chips.” Technology analyst Dan Wang has written in the New York Times , “…a world in which Chinese companies dominate the production of mature chips — driven directly by American policy — hardly looks like a victorious outcome for the United States.”

So what’s the plan to confront Chinese chipmakers of all sizes as the one-year anniversary of the landmark advanced controls draws near? Since the October 7 export controls, we’ve seen much more talk than action. During a panel discussion at the American Enterprise Institute this summer, Commerce Secretary Gina Raimondo said, “The amount of money that China is pouring into subsidizing what will be an excess capacity of mature chips and legacy chips — that’s a problem that we need to be thinking about and working with our allies to get ahead of.” But Commerce hasn’t done anything to restrict companies such as Applied Materials, KLA, and Lam Research from selling their high-tech wares to America’s greatest adversary. (Read how the three companies have flourished by supporting PRC chipmakers in CTT’s joint study with the Coalition for a Prosperous America, “Ca$h Over Country.”)

Reportedly, the Biden Administration is preparing to update last year’s controls to close certain loopholes and tighten access to certain AI chips. That must happen, given SMIC’s technological achievements and BIS’ penchant for rubber stamping almost all exports of American technology to SMIC. But we now know that focusing only on high-tech chips is not enough: Barring American firms from strengthening China’s legacy chip sectors must be part of the next package as well (and our latest report has some recommendations on how to do it, including a presumption of denial policy for all semiconductor technology bound for China). American national security and prosperity depend on refining the rules laid down a year ago, and creating new ones.

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