The U.S. just undercut China’s best shot at semiconductor independence

September 28, 2020, 11:15 AM UTC

The U.S. has reportedly placed China’s largest semiconductor manufacturer, SMIC, on a list of foreign companies that U.S. suppliers need special permission to work with. The move is the latest in Washington’s attempts to wield U.S. dominance in semiconductors as a weapon over China.

Beijing is rushing to create its own semiconductor supply line and, as China’s most advanced semiconductor manufacturer, SMIC represents its best shot at chip independence. But news of the ban shows how vulnerable the company remains. SMIC’s Hong Kong–listed shares plummeted as much as 7.9% on Monday, after news of the ban broke on Saturday.

SMIC, for its part, says the restrictions haven’t happened yet.

“As of the date of this announcement, the company has not received such official information,” SMIC said in a statement on Sunday, noting that it has seen media reports on the U.S. restrictions but had yet to be notified by the Commerce Department directly. A spokesperson for SMIC confirmed Monday they had yet to receive any “confirmation” of new export restrictions.

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According to media reports, the Commerce Department wrote to representatives of the U.S. semiconductor industry on Friday, stating that exporting products to SMIC could “pose an unacceptable risk of diversion to a military end use.” Because of that risk, exporters of certain equipment will have to obtain a special license before selling supplies to SMIC. The Commerce Department didn’t respond to Fortune’s request for comment before publication.

In its statement, SMIC refuted the claims and said it “provides services solely for civilian and commercial end-users.” But independent market analyst Richard Windsor notes that one of SMIC’s major shareholders is Datang Telecom—a company that supplies technology to 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 statements,” Windsor said.

Speculation that SMIC would be the next target of the Trump administration’s export restrictions began in early September. The White House has already used such means to target numerous Chinese companies, including telecom equipment manufacturer Huawei Technologies, which Washington perceives as a threat to national security.

Huawei was initially placed on the Commerce Department’s Entity List in 2019. U.S. companies need to acquire permission from the department before dealing with any company on the Entity List.

According to Reuters, SMIC has not been placed on the Entity List. Instead, the Commerce Department has introduced a specific regulation limiting the export of some technology to SMIC.

In May, the Commerce Department made a similar special ruling for Huawei, after it was added to the Entity List. The regulation prohibited any company from selling chips to Huawei if U.S. technology is used at any stage of production. That ban was a blow for SMIC, which uses American-made equipment to manufacture chips for Huawei. Under the ban, SMIC could no longer serve Huawei, which is its largest customer by sales.

“We believe a ban on SMIC is only part of a greater Sino-American technological war,” said Morningstar equity analyst Phelix Lee. “More Chinese companies in the supply chain are at risk of being banned.”

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