Don’t Ignore Chinese Legacy Chips as an Economic and Security Threat
The Biden administration must address the threat of “legacy” Chinese chips from companies like Semiconductor Manufacturing International Corporation.
On February 24, Commerce Secretary Gina Raimondo launched the Biden administration’s vision for implementing the CHIPS Act, encouraging semiconductor companies to apply for a piece of the $39 billion which has been devoted to reinvigorating America’s domestic chipmaking capacity. Coupled with the Commerce Department’s stringent export controls issued last fall, which targeted leading chipmakers with ties to the Chinese military such as YMTC, it’s clear that the Biden administration is serious about semiconductor competition with China. But every chip matters to national and economic security, not just the leading-edge variety. But as a new paper from China Tech Threat argues, the administration must now address the threat of “legacy” Chinese chips from companies like Semiconductor Manufacturing International Corporation (SMIC).
Also known as mature chips, legacy chips—either fourteen or twenty-eight nanometers in size or larger, depending on your definition—are the semiconductors that go into commonplace technologies such as cars, refrigerators, and washing machines. More importantly, defense systems make frequent use of them—Gina Raimondo has told the U.S. Senate, “We have reports from Ukrainians that when they find Russian military equipment on the ground, it’s filled with semiconductors that they took out of dishwashers and refrigerators.” While they don’t get as much attention as leading-edge chips, which are associated with advanced technologies, legacy chips are everywhere. And with the adoption of 5G networks fueling the rise of “smart” objects, the demand for all types of semiconductors will only increase. Unfortunately, the Commerce Department’s Bureau of Industry and Security (BIS), which administers export controls, has only targeted China’s advanced semiconductor-making capacity.
Chinese companies, perhaps recognizing how the West has underestimated the importance of legacy chips, have decided to increase their output of these critical products. John Lee, the director of the consulting firm East West Futures, told the MIT Technology Review in January that China’s role in supplying these “indispensable chips … is becoming bigger rather than smaller.” Leading that effort is SMIC, China’s largest chipmaker. The Commerce Department placed SMIC on the Entity List in late 2020 with the intent to kill its ability to make leading-edge chips. But SMIC’s legacy business remains unaffected. The company recently posted a record $7.2 billion in revenue and announced expansion plans, despite uncertainty in the broader semiconductor sector. When the company’s four new production fabs come online, it will more than triple the company’s output, estimates Samuel Wang, a chip analyst with the consulting firm Gartner.
A deluge of Chinese legacy chips will spell lots of pain for the global chip market. Because SMIC and other Chinese semiconductor companies have benefitted from billions of dollars in Chinese government subsidies, SMIC is positioned to undercut prices, threaten Western competitors’ existence, and increase American and global dependence on China. China has already poured subsidies into its domestic solar panel industry to become the world’s leader in production. Beijing is poised to run that playbook again with legacy chips.
SMIC is also a threat because of its ties to the Chinese military apparatus. James Mulvenon, an expert on the Chinese military and Chinese cyber issues, has extensively documented these ties, including SMIC’s relationship with China Electronics Technology Group Corporation, “a state-owned defense conglomerate specializing in the research and production of military-use electronics, defense electronic information infrastructure, and military-use software.” Multiple other Chinese entities focused on applied research for military purposes also use SMIC products in their work. The United States shouldn’t allow U.S. technologies to support Beijing’s military buildup. Nor should Chinese chips of any kind be allowed in any U.S. military equipment out of sabotage and cybersecurity concerns. But the risk of compromised American weapons increases if there is no alternative to a China-controlled supply.
Lawmakers on Capitol Hill are sounding the alarm about the economic and national security concerns SMIC poses. Senator Bill Hagerty has confirmed SMIC’s “very close ties” to the Chinese military and highlighted reporting that SMIC may be jointly developing a $10 billion chipmaking facility with Entity-Listed Huawei. Senator Marco Rubio and Representative Michael McCaul, chair of the House Foreign Affairs Committee, have also observed, “Although SMIC’s designation on the Entity List is hampering its ability to make the most bleeding-edge semiconductors, it is having little to no effect on its overall production capability.”
The duty of plugging this leak in export control policy falls to the Department of Commerce. BIS under secretary Alan Estevez and his team should expand the current restrictions on SMIC so that American technologies cannot be used in the production of legacy chips manufactured by SMIC or any other Chinese-owned and operated chip firms. There’s nowhere to go but up: in the span of just a few months in 2020 and 2021, BIS approved $41 billion in licenses for American companies looking to sell their technologies to SMIC.
Leaders on Capitol Hill also have their own levers to pull. According to former National Security Adviser Robert O’Brien, “The idea that ‘made in China’ chips are embedded in U.S. defense and intelligence systems, national critical infrastructure, and government networks is both absurd and, unfortunately, our reality.” This year’s National Defense Authorization Act should include an expansion of Section 5949 to completely bar federal contractors from using Chinese chips in their equipment. Doing so will better safeguard American military systems and U.S. critical infrastructure that China is virtually certain to target for a cyberattack in the event of an invasion of Taiwan.
As a geostrategic imperative, the CHIPS Act is a generational step toward bringing advanced chip manufacturing back to America. Ideally, the United States will one day reclaim its status as a world-leading manufacturer of legacy chips. But if we fail to counteract SMIC and other Chinese legacy chipmakers now, that opportunity may never come.
Retired U.S. Army Major General James “Spider” Marks is a principal at China Tech Threat. His final posting in uniform was as the Commanding General of the U.S. Army Intelligence School in Fort Huachuca, Arizona.