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China Chip Company Escapes Biden's Crackdown Thanks To US Tech And Funding

China Chip Company Escapes Biden's Crackdown Thanks To US Tech And Funding
China's top sanctioned chipmaker owns a portion of a Chinese chip designer who is buying American software and has financial support from the United States. These links highlight the challenges Washington confronts in enforcing new regulations intended to prevent American funding of Beijing's semiconductor industry.
The People's Liberation Army (PLA) researchers and institutions found that Brite Semiconductor provides chip design services to at least six Chinese military suppliers. This information was gleaned from a report that examined regulatory filings, tenders, corporate statements, and academic journals.
Due to suspected links to Beijing's military, SMIC, the company's primary supplier and second-largest shareholder, was added to the so-called U.S. entity list, so preventing it from obtaining certain products from U.S. suppliers.
Despite these connections, records revealed that Brite has access to confidential U.S. technology from two software firms in California, Synopsys and Cadence Design, and has investment from a Christian university and a U.S. venture capital firm sponsored by Wells Fargo. Reuters has not discovered any proof that Brite's business dealings with American companies are illegal.
With support from both parties, the Biden administration has worked hard to stifle the flow of capital and technology to Beijing's chip industry. In October of last year, it unveiled regulations aimed at preventing some U.S. exports of chips and tools used in chip production to China, and in August, it announced a ban on certain new U.S. investments in the sector. Dozens of Chinese businesses, many of which have connections to China's military, have also been added to the entity list.
Requests for comment from Brite were not answered. Both the White House and the Commerce Department declined to comment. Although it refrained from commenting on Brite, the Chinese Embassy in Washington charged that the US was engaging in "blatant economic coercion and bullying in the field of technology."
Brite's access shows the difficulties Washington faces in trying to prevent American funds and equipment from being used to further China's military ambitions, even though there isn't a clear violation of any American regulations. It also suggests that the United States won't be successful unless it targets a lot more businesses that have escaped its notice.
The foreign relations committee member and prominent China hawk Senator Marco Rubio, a Republican, called Reuters' findings about Brite "concerning."
"Companies connected to China’s military supply chain should not have access to American technology and investment. The Biden Administration’s haphazard approach to export controls and investment restrictions clearly is not working," he said.
Others claimed that Brite is an example of Beijing's capacity to circumvent US export restrictions on well-known Chinese enterprises by using obscure businesses.
"Brite is a classic example of how a US-China joint venture could end up funneling valuable semiconductor technology to SMIC and the PLA," said Martijn Rasser, managing director of Datenna, an open-source intelligence company.
In response to inquiries concerning their connections with Britain, China's defence ministry and SMIC remained silent.
Washington has long had its sights set on Semiconductor Manufacturing International Corporation (SMIC), which owns a 19% share in Brite. In November 2020, the Trump administration included it in a list of "military end users".
SMIC's alleged ties to the Chinese military industrial complex led to its inclusion on the "entity list" later on. SMIC has previously refuted any connections to the Chinese military, asserting that its services and chip manufacturing are "solely for civilian and commercial end-users and end-uses."
SMIC has long been associated with Brite Semiconductor, which was established in 2008 as a joint venture between American venture capitalists and Chinese companies.
Up until last year, SMIC was the biggest shareholder in Brite. According to a presentation on its website, that stake made Brite "a bridge between China's no. 1 foundry SMIC" and other businesses with chip design needs. It is also mentioned in the 2021 presentation that Brite's current chairman of the board is SMIC's co-CEO.
As per the October IPO prospectus, SMIC received about 85% of the money that Brite Semiconductor paid to all of its suppliers for goods and services in the previous year.
According to a Reuters review of articles written by PLA researchers and military tenders, Brite sells its chip design services to Shanghai-based ComNav Technology, which produces satellite navigation systems for the Navy and the Strategic Support Force, the PLA unit in charge of information, electronic, and cyber warfare. This is in addition to its connections with SMIC.
According to a prospectus that ComNav filed in June, Brite was responsible for more than 71% of ComNav's entire prepaid procurement expenditure at the end of the previous year, which refers to payments made in advance to suppliers.
ComNav's K8 high-precision GPS product series, intended for machine control, robotics, and drones, among other applications, relies on Brite to handle the packaging, testing, and production of a chip.
Two PLA researchers reportedly employed ComNav's K8 technology, according to a Reuters analysis of scholarly Chinese-language material released in the previous two years.
Brite has never been subject to such limitations, according to public documents, despite the fact that Chinese IT businesses with ties to the Chinese military are frequently added to the entity list.
"It sure seems like they would be a candidate for an entity listing," said Emily Kilcrease, a former trade official now at the Center for a New American Security, after reviewing Reuters' findings.
Even in cases when they are not entity designated, the US has put up new barriers for US suppliers shipping technology to Chinese firms making cutting-edge electronics.
Brite's U.S. suppliers had to obtain a U.S. licence when SMIC was added to the entity list in order to supply it supplies used in the chip design process. Furthermore, if the items were intended to be used in the development of cutting-edge semiconductors that would be produced by Chinese companies, they would not have been permitted to be acquired by Britain under new regulations that were implemented last year.
According to Brite's October prospectus for its Shanghai exchange IPO, the company has not stepped back from its partnerships with suppliers of leading chip design tools, such as Cadence and Synopsys.
As required by the new regulations, it was impossible to ascertain whether the American corporations had licences to send equipment to Brite. Both businesses declared that they complied with US laws.
The corporation purchased software from Synopsys for 14 million yuan ($2 million) between January and June of this year, placing the American company among its top 5 suppliers. Additionally, the prospectus states that Brite spent 11.8 million ($1.6 million) yuan on Cadence's chip design software last year, placing it among the company's top five suppliers.
Although Synopsys' website highlights its commercial contacts with Brite, neither Cadence nor Synopsys confirmed or denied their relationships with Brite. Both companies stated they are in full compliance with U.S. export laws.
Fearing that the money and expertise would wind up helping Beijing strengthen its military, the White House released an executive order last August that targeted US investment in sophisticated Chinese chipmaking and other digital firms.
The largest U.S. investor in Brite is Norwest Venture Partners, whose 99.7% interest is backed by funding from Wells Fargo Bank.
With a board position held until 2020 and participation in at least four capital raising totaling over $66 million, Norwest had knowledge of and some influence over Brite's commercial plans. According to the IPO price that Brite is aiming for, its stake would be valued close to $34 million. Commenting was rejected by Wells Fargo.
15 years ago was when Norwest made its first investment, which it stated has been "held in compliance with applicable laws." The company continued, "We're committed to adhering to new regulations as they become effective because the regulatory environment is changing."
A further 5.43% of Brite is owned by the California Christian university Biola University. According to his LinkedIn page, Promod Haque, a managing partner at Norwest, was on the board of Brite until 2019. He was also on the board of trustees for Biola since 2007.
Lawyers who specialise in foreign investment legislation stated that Norwest and Biola University won't be in violation of the new regulations that tighten limitations on investments in China since such measures won't affect current investments.
Brite's financial prospects in China could also be impacted by its partnership with SMIC. According to the prospectus, Brite, which experienced a 36% increase in revenue to 1.3 billion yuan ($178.83 million) in the previous year, plans to offer its shares on the Shanghai stock exchange.
However, the exchange put a halt to the procedure in October in order to get further details regarding Brite's separation from SMIC. The question at hand is whether SMIC is overcharging Brite by abusing its position as the company's principal supplier and owner.
On December 18, the exchange, which will assess Brite's listing, requested that Brite provide an explanation for why SMIC charged a premium for the silicon discs, or wafers, that it purchased.
Wafers are highly customised goods whose costs are influenced by supply and demand as well as the quantity of a purchase, according to a filing made by Brite on Monday.
An inquiry on Brite's IPO procedure was not answered by the Shanghai Stock Exchange.
Even once SMIC is added to the entity list, Brite will probably still have access to American technology and investment, whatever of the stock exchange's ultimate judgement.
According to Greg Levesque, CEO of security company Strider Technologies, which looks through open source data to identify foreign technology that could be pilfered by China, "it is time to reimagine the economic policy toolkit that we have." "We are really good at putting names on lists, but we need to be more aggressive in identifying and combating this behaviour," he stated.

Christopher J. Mitchell

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