US targets China's top chipmaking plant after Huawei Mate 60 Pro, sources say

Entegris

21/02/2024 16:16

(Adds Entegris share price)
    By Alexandra Alper and Karen Freifeld
       WASHINGTON, Feb 21 (Reuters) - The Biden administration
is turning up the heat on China's top sanctioned chipmaker by
cutting off its most advanced factory from more American imports
after it produced a sophisticated chip for Huawei's Mate 60 Pro
phone, three people familiar with the matter said.
    Late last year, the Commerce Department sent dozens of
letters to U.S. suppliers to Semiconductor Manufacturing
International Corp (SMIC), suspending permission to sell to its
most advanced plant, said two people familiar with the matter
who requested anonymity because they were not authorized to
speak publicly about the matter.
    While many companies had already stopped selling to SMIC
South, as the unit is known, the letters halted millions of
dollars worth of shipments of chipmaking materials and parts
from at least one supplier, Entegris, one of the people said. 
    Reuters found no evidence that Entegris had violated any
U.S. laws or regulations.
    Entegris, whose shares fell 1.9 percent on Wednesday, said
it made the shipments in accordance with a valid export license
and halted them after receiving letters from the Commerce
Department suspending permission to send products to SMIC South.
   The Massachusetts-based company, which produces filters,
gases, chemicals, and products for handling wafers, the building
blocks for making chips, said it monitors and complies with the
"rapidly evolving regulatory requirements" for international
trade affecting the chip industry.
        SMIC did not respond to a request for comment. Huawei,
the White House and the Commerce Department declined to comment.
    "This is out-and-out economic bullying and will inevitably
backfire," said a spokesperson for the Chinese embassy in
Washington.  "We urge the U.S. side to stop overstretching the
concept of national security and abusing the state power to
suppress Chinese companies.
    The license suspensions by the Commerce Department, first
reported by Reuters, show the Biden administration has taken
action against SMIC amid rising pressure from Republican China
hawks to stem the flow of U.S. technology to the company and
degrade its ability to make sophisticated chips. 
    That pressure has built since August, when sanctioned
Chinese telecoms giant Huawei shocked the world with a new phone
powered by a sophisticated chip. The Huawei Mate 60 Pro was seen
as a symbol of the China's technological resurgence despite
Washington's ongoing efforts to cripple its capacity to produce
advanced semiconductors.  
        The phone also prompted a review by the Biden
administration to learn the details behind the chip that powers
it, the most advanced semiconductor China has so far produced. 
    Critics say the round of letters don't go far enough.
Republican Congressman Michael McCaul, who chairs the Foreign
Affairs Committee, said the Commerce Department should have
acted sooner. "This was negligent work by [the agency] and casts
further doubt on its ability to fulfill its national security
mission," he added in a statement to Reuters this month.    
        Commerce declined to comment on McCaul's allegations of
negligence.  
    
    RISING RESTRICTIONS
    The United States has charted a slow course towards
depriving SMIC and Huawei of access to advanced U.S. technology.
    Huawei was added to a trade restrictions list in 2019 by the
Trump administration over alleged sanctions violations. SMIC was
added to the same list in 2020 for alleged ties to the Chinese
military industrial complex. Both companies have previously
denied wrongdoing. 
    Being added to that list usually bars U.S. companies from
selling to the targeted firms, but Trump gave the green light to
shipments of certain items to Huawei and SMIC, allowing billions
of dollars in U.S. goods to flow to them over the last few
years.
    The Biden administration unveiled new rules in October,
2022, which effectively banned U.S. suppliers from sending
semiconductor tools and materials to advanced Chinese-run
chipmaking factories in China including SMIC South.
    But U.S. rules allowed companies with preexisting licenses
-- which generally are valid for four years -- to keep supplying
the facility.
    Entegris shipped chipmaking parts and materials to SMIC
South between October 2022 and the end of last year, a person
familiar with the matter said. 
    China accounted for 16% of Entegris’ net sales of about $3.5
billion in fiscal 2023, the company said in its annual report,
noting that recent U.S. export regulations “have reduced our
ability to sell our products in China and it is possible future
regulation could further reduce demand for our products.”
    Lita Shon-Roy, CEO of market research firm Techcet, said
SMIC South could likely turn to Chinese, Taiwanese, Japanese and
Korean sources for most chemicals and parts used in the
chipmaking process. 
        However, if SMIC’s top facility “saw its United States
supply chain suddenly cut off, that could potentially interrupt
their production for 3 to 9 months depending on inventories,”
she said. She noted it would take time to find and conduct
rigorous testing of new suppliers unless SMIC South had done so
in advance. 
    Experts assert that SMIC South is the only SMIC factory with
the capability of making the Mate 60's 7 nanometer chip.
Analysis firm Techsights also said in September a teardown of
the phone revealed SMIC built the advanced processor to power
it.
    "I don't think there's any doubt that it's that  factory ,"
said Doug Fuller, a chip industry expert with the Copenhagen
Business School. 
    Reuters reported in December how a chip designer part-owned
by SMIC still enjoys access to state-of-the art U.S. chip design
software.  

 (Reporting by Alexandra Alper and additional reporting by
Eduardo Baptista in Beijing; editing by Chris Sanders and Anna
Driver)
 ((Alexandra.Alper@thomsonreuters.com; +1(202)354-5865; Reuters
Messaging: alexandra.alper.thomsonreuters.com@reuters.net - https://twitter.com/alexalper?lang=en))