A Chinese chip firm powered by U.S. tech and money avoids Biden’s crackdown. A Chinese chip company that relies on American technology and funding avoids Biden’s crackdown. The most reputable chipmaker in China owns a portion of the chip designer, who is also receiving financial support from the United States and purchasing software from them. These ties highlight the difficulty that Washington confronts in implementing new restrictions intended to prevent the United States from providing help to Beijing’s semiconductor industry.
According to the findings of a Reuters investigation into business statements, regulatory filings, contracts, and academic publications written by academics and institutes affiliated with the People’s Liberation Army (PLA), Brite Semiconductor provides chip design services to at least six Chinese military suppliers.
Chipmaker SMIC, its second-largest shareholder and key supplier, was placed on the so-called U.S. entity list due to allegations that it has links to Beijing’s military. This essentially prevents it from acquiring certain commodities from U.S. suppliers.
Despite its partnerships with other organizations, the records indicated Brite had continued access to critical U.S. technology from two software businesses in California, Synopsys and Cadence Design. Brite has received funding from a venture capital firm in the United States that receives support from Wells Fargo and a Christian organization. According to Reuters ‘ findings, Brite’s contacts with American companies have not been found to breach any restrictions.
The Biden administration, which has received support from both parties, has made significant efforts to halt the flow of technology and investment into Beijing’s chip sector. In October of last year, the administration announced rules that would prevent certain U.S. exports of chips and tools for chipmaking to China. In August, the administration announced it would prohibit certain new investments from the United States in the industry. In addition, it has included dozens of Chinese firms on the list of entities, many of which have connections to the Chinese military.
Brite’s attempts to comment were not met with a response. The Department of Commerce and the White House have declined to comment. The Chinese Embassy in Washington did not make any statements regarding Brite. Still, they did condemn the United States for engaging in “blatant economic coercion and bullying in the field of technology.”
Although not an apparent breach of any U.S. rules, Brite’s access demonstrates the challenges facing Washington’s bid to keep U.S. equipment and money from being used to advance China’s military ambitions. It suggests the U.S. will struggle to succeed unless it targets many more companies that have slipped under its radar.
The results that Reuters collected on Brite were described as “concerning” by Republican Senator Marco Rubio, a member of the foreign relations committee known for his strong stance against China.
It is unacceptable for businesses related to China’s military supply chain to have access to American technology and opportunities for investment. It is evident that the haphazard strategy used by the Biden administration regarding export controls and investment restrictions is not working,” he stated.
Others have stated that Brite is an example of Beijing’s ability to circumvent American export limitations on large-name Chinese enterprises by employing low-profile companies.
“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, general director of Datenna, an open-source intelligence organization. In other words, the SMIC and the PLA could receive the technology.
None of these organizations responded to inquiries regarding China’s military ministry and SMIC’s connections to Brite. Links to the Military Semiconductor Manufacturing International Corporation (0981. H.K….) (SMIC), which owns a 19% share in Brite, have been in the sights of the National Security Administration for a considerable time. The “military end users” list was expanded to include it in November 2020 by the administration of President Trump.
The following step was to include SMIC on the “entity list” because it appears to have connections to the Chinese military-industrial complex. SMIC has previously said that it develops chips and provides services “solely for civilian and commercial end-users and end-uses.” This statement was made in response to allegations that the company had no connections to the Chinese military.
Long-standing connections to SMIC may be traced back to Brite Semiconductor, established in 2008 as a partnership between venture investors from the United States and Chinese companies.
Up until the previous year, SMIC was Brite’s most significant stakeholder. A presentation that can be accessed on Brite’s website states that the acquisition of this interest transformed the company into “a bridge between China’s no. 1 foundry, SMIC,” and other businesses that have a need for chip design. There is also a mention in the 2021 presentation that the co-CEO of SMIC is also the board chairman for Brite.
According to SMIC’s initial public offering (IPO) prospectus for October, about 85 percent of the money that Brite Semiconductor spent on all of its suppliers for products and services in the previous year flowed to SMIC.
In addition to its connections with SMIC, Brite provides its chip design services to ComNav Technology, which is based in Shanghai. ComNav Technology is responsible for the production of satellite navigation systems for the Navy and the Strategic Support Force, the PLA unit in charge of information, electronic, and cyber warfare. Reuters reviewed articles written by PLA researchers and military tenders to gather this information.
At the end of the previous year, Brite was responsible for more than 71% of ComNav’s total prepaid procurement cost, which refers to payments made to suppliers in advance. This information was provided in a prospectus that ComNav submitted in June.
According to the information on its website, ComNav depended on Brite to outsource the packaging, testing, and manufacture of a chip utilized in the K8 high-precision GPS product line. This chip was built for various applications, including machine control, robotics, and drones.
Reuters studied scholarly material written in Chinese and published within the previous two years. The investigation revealed that two PLA academics had used the ComNav-developed K8 technology. Any inquiries for feedback from ComNav were not met with a response.
ACCESS TO TECHNOLOGY IN THE UNITED STATES
According to public data, Brite has never been subjected to limitations of this kind, even though Chinese technology businesses with connections to the Chinese military are frequently included in the entity list.
After reviewing the Reuters results, it seems they would be a candidate for an entity listing, according to Emily Kilcrease, a former trade official currently working for the Center for New American Security.
To prevent American suppliers from sending technology to Chinese businesses involved in developing sophisticated semiconductors, the United States has imposed additional impediments. This is the case even when the Chinese companies are not officially listed.
After SMIC was added to the entity list, Brite’s suppliers in the United States were required to get a license to operate in the United States before they could export things to SMIC that were utilized for creating chips. If the things were intended to be used in the design of sophisticated chips that were to be manufactured by Chinese manufacturers, then Brite would not have been allowed to get them under the new laws that were implemented the previous year.
According to the prospectus Brite submitted in October for its first public offering on the Shanghai market, the company has maintained its partnerships with leading chip design software vendors Cadence (CDNS.O) and Synopsys (SNPS.O). According to the demands of the new regulations, Reuters could not ascertain whether or not the American companies had been granted permission to transport equipment to Britain. Both businesses have said that they are in accordance with the regulations of the United States.
The company spent 14 million yuan, or $2 million, on Synopsys-sold software from January to June. This placed the American company among its top five suppliers. Additionally, Cadence was rated one of Brite’s top five suppliers the previous year. According to the prospectus, Brite spent 11.8 million yuan, equivalent to $1.6 million, on Cadence’s proprietary chip design software.
Even though Synopsys discloses its commercial contacts with Brite on its website, Cadence and Synopsys have stated that they completely comply with the export restrictions the United States carries out. Neither company has confirmed or denied its partnership with Brite.
THE FINANCIAL LINKS
The United States government issued an executive order in August of last year that targeted investments from the United States in sophisticated Chinese chipmaking and other technology companies. The White House was concerned that the cash and expertise might wind up assisting Beijing in strengthening its military.
Norwest Venture Partners, which has a 99.7% stake in the company and receives funding from Wells Fargo Bank, is the largest American investor in Brite.
In addition to holding a board seat until 2020, Norwest was involved in at least four capital fundraisers totaling more than $66 million. This gave the company insight into Brite’s business plans and some influence over those strategies. Based on the initial public offering price that Brite is aiming for, its ownership may be worth close to 34 million dollars. When asked for a comment, Wells Fargo declined.
It has been 15 years since Norwest made its first investment, and the company has said that it has been “held in compliance with applicable laws.” The company continued, saying, “The regulatory environment is changing, and we are committed to following new regulations as they become effective throughout our operations.”
Biola University, a Christian university in California, owns 5.43% of Brite. According to his LinkedIn page, Promod Haque, a managing partner at Norwest who was on Brite’s board until 2019, has also been a member of Biola’s board of trustees since 2007.
Requests for comment about Haque’s connections to Brite and Biola were not met with a response from Haque. The company did not comment on the investment that Biola made in Brite.
Lawyers who are specialists in foreign investment regulations have stated that Norwest and Biola University will not violate the new rules, broadening the limitations on investments in China. This is because the new regulations will not affect investments already made.
The connection that Brite has with SMIC may potentially have an impact on the company’s financial prospects in China. According to the prospectus, Brite, which reported a 36% increase in revenue to 1.3 billion yuan ($178.83 million) in the previous year, is looking to offer its shares on the Shanghai Stock Exchange.
However, in October, the exchange halted getting further information on Britain’s autonomy from SMIC before continuing. Whether or not SMIC is overcharging Brite for its products by taking advantage of its position as Brite’s leading supplier and owner of parts is the question at hand.
Brite was requested to explain why SMIC supplied its wafers, also known as silicon discs, at a price that was much more than the norm. The exchange is scheduled to evaluate Brite’s listing on December 18. Wafers are highly customizable goods, and Brite stated in the filing that the quantity of a transaction and changes in supply and demand impact their pricing.
When asked for comment on Brite’s initial public offering (IPO) procedure, the Shanghai stock market did not provide a response.
Despite adding SMIC to the list of entities, Brite will likely continue to have access to domestic technology and investment opportunities, regardless of the stock market’s final decision.
“It is time to reimagine our economic policy toolkit,” said Greg Levesque, CEO of Strider Technologies. This security company analyzes open-source data to find foreign technology that China might try to steal. Strider Technologies is a company that focuses on international technology. “We are good at putting names on lists, but we need to be more aggressive in identifying and combating this behavior,” said the administrator.
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