Trump Kneecaps Chip Giant SMIC Over 'Concerns' US Exports Being Shared With Chinese Military

Tyler Durden's Photo
by Tyler Durden
Saturday, Sep 26, 2020 - 01:25 PM

Investors expect a ruling on ByteDance's request for an injunction against the Trump Administration order banning TikTok by the end of the weekend (a hearing has been scheduled for Sunday), but in the meantime, it appears the White He is already moving on to its next action item in the ongoing economic war against China.

As was previewed a couple of weeks ago, the Trump Administration is moving to cut off Semiconduct Manufacturing International  Corporation - or SMIC - China's biggest producer of microchips, with wafer fabrication sites all across the mainland, off from US-made supplies. A letter obtained by the FT dated on Friday orders American companies not to send any more products to SMIC.

The administration argued that the products pose an "unacceptable risk" of being diverted to "military end use," according to a copy of the letter seen by the Financial Times. Just like sanctions on Huawei, the move threatens to cut off China’s biggest chipmaker from crucial US software and chipmaking equipment. Any companies that do want to export to SMIC will need to secure a special license from the Commerce Department.

"It all depends on how the US implements this. In the worst-case scenario, SMIC is completely cut off, which would severely set back China’s ability to produce chips. This would be a tipping point for US-China relations," said Paul Triolo, head of tech policy analysis at consultancy Eurasia Group.

It's clear that the administration's move goes beyond national security, with the goal of knee-capping another Chinese 'national champion'. SMIC, a "national champion" that is crucial to Beijing's aims of achieving chip self-sufficiency, recently oversaw country’s biggest domestic IPO in a decade, when it raised $7.6 billion in Shanghai earlier this year.

The administration's sanctions against Huawei have already seriously impacted SMIC. The rules appeared almost explicitly designed to stop SIMC from supplying certain chips to its largest customer, Huawei.

But US chipmakers will also feel some blowback: Qualcomm, which uses SMIC's foundries to fabricate some of its chips, will need to find a new partner, which means the Trump Administration might also rob SIMC of its second-largest customer after Huawei.

On Saturday, SMIC said that it was engaging with the Department of Commerce about the new rules. The company reiterated that it "has no relationship with the Chinese military, and does not manufacture for any military end users or end-uses."

To be sure, Chinese law requires all companies to cooperate with intelligence and military forces if so ordered by Beijing

SMIC added it had not received any formal notification of the sanctions.