Co-Authored by Sharath Patil

Last week, the U.S. Department of Commerce’s Bureau of Industry & Security (“BIS”) informed some U.S. semiconductor manufacturers via a confidential letter that they would require export licenses before exporting certain products to China’s largest semiconductor manufacturer, Semiconductor Manufacturing International Corporation (“SMIC”). Although the letter is not available for public view, a September 28, 2020 Wall Street Journal article that broke the story said that the Commerce Department was concerned about high risks of diversion to a military end use. This additional export license requirement is part of a broader pattern of increased export restrictions, particularly to China.

Background

SMIC is China’s largest manufacturer of semiconductor products. SMIC is headquartered in Shanghai and operates large-scale fabrication plants across China. With recent annual revenues as high as $3.4 billion and a workforce of over 18,000 employees, SMIC has become a significant player in the global semiconductor market with notable customers such as Qualcomm, Broadcom, and Texas Instruments.

Recent Developments

In the private letter BIS transmitted to U.S. semiconductor manufacturers, the Bureau notified the manufacturers that increased export restrictions would apply for shipments of particular products to SMIC. By requiring export licenses for shipments to SMIC, BIS’ latest action threatens to cut off SMIC from accessing equipment required to manufacture semiconductor chips. The souring of relations between the U.S. government and China also threatens SMIC’s export market because the U.S. alone accounts for 45% of the global semiconductor market. In the letter, BIS explained that shipments to SMIC pose an unacceptable risk of diversion to a military end use.

Reaction in China

Formerly, SMIC had a relatively positive reputation in the global semiconductor marketplace with notable U.S. and international companies as customers. However, now, SMIC’s ability to source critical manufacturing equipment from the U.S. may severely harm SMIC’s operational capacity. In responding to these recent developments, SMIC stated in a press release that it “manufactures semiconductors and provides services solely for civilian and commercial end-users and end-uses. The Company has no relationship with the Chinese military and does not manufacture for any military end-users or end-uses.” The Chinese government reacted sternly, stating in a September 28 press conference: “China firmly opposes the unjustified suppression against non-U.S. companies by abusing the U.S. state power under the weakest pretext of national security, breaching the principles of market economy and fair competition, violating international trade rules, and abusing export restrictions. China will continue taking necessary measures to uphold the legitimate rights and interests of Chinese companies.”

Top Tips When Exporting

This latest BIS action is part of a broader pattern of increased export restrictions which are increasingly characterizing U.S.-China trade. In this era of greater export restrictions, it’s more important than ever that your supply chain complies with U.S. trade and customs laws. To ensure that you are adhering to relevant U.S. laws and optimizing your operations, be sure to follow the following tips:

  • Ensure you have a formal written compliance program
  • Train employees on program and ongoing export compliance (ensure all training is documented)
  • Ensure you meet recordkeeping requirements
  • Always petition penalties – never pay without a fight!

For more information, check out our Top 10 Tips When Exporting to Ensure Compliance. If you have any questions or need any assistance with export compliance or other trade and customs matters, be sure to contact us at info@diaztradelaw.com.

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