US mulls ban on SMIC, China's largest chipmaker

Placing SMIC on the Entity List would require US suppliers to obtain a licence before trading with the company

The US government is considering blocking deals with China's largest chipmaker Semiconductor Manufacturing International Corp (SMIC) in a move that would significantly escalate the ongoing trade war focused on the tech sector.

According to the Wall Street Journal, the US Defense Department (DoD) and other government agencies are discussing whether to add SMIC to the Commerce Department's Entity List, of companies with which US companies are not permitted to trade.

Chinese tech companies on the Entity List include Huawei, ZTE and China Electronics Technology Group Corp (CETC). In August, 38 Huawei affiliates were added to the list and there are reports that the Chinese company is struggling to maintain its supply lines.

A Pentagon source told the WSJ that the mooted ban is due to suspicions about SMIC's links with the Chinese military, an accusation the chipmaker has rejected. In a statement released on Saturday, SMIC said: "Any assumptions of the company's ties with the Chinese military are untrue statements and false accusations. The Company is in complete shock and perplexity to the news. Nevertheless, SMIC is open to sincere and transparent communication with the US Government agencies in hope of resolving potential misunderstandings."

The accusations against SMIC came after US defence contractor SOS International claimed that SMIC researchers were designing technology for the Chinese military, an activity that would be impossible using chips created elsewhere.

Any ban, which at this stage is by no means certain, would force US suppliers to seek a special licence before shipping products to SMIC. Few of these licences are granted, and the move would certainly hurt the Chinese chipmaker which uses US-made equipment in its manufacturing processes. The decision would also hit other suppliers to the firm, including Dutch photolithography machine maker ASML Holding, which accounts for 11 per cent of SMIC's capital expenditure.

The largest customers for SMIC products include Huawei and Qualcomm, the US manufacturer whose chips are used in Apple, Motorola and Samsung smartphones. SMIC made up 3.9 per cent of Qualcomm's cost of goods sold as of August 14, according to the South China Morning Post.

As a result of the possible blacklisting, shares in SMIC dropped 11.29 percent on the Shanghai Stock Exchange today.