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Indecent exposure in critical supply chains

Employees wearing protective equipment work at a semiconductor production facility
Associated Press/Mark Schiefelbein
Employees wearing protective equipment work at a semiconductor production facility for Renesas Electronics during a government organized tour for journalists in Beijing, on May 14, 2020.

In 2016, China’s Hefei Province launched a high-profile but cryptic and closely guarded industrial project: The “506 Project.” It leveraged some 54 billion RMB of provincial funds, backed by the Chinese central government’s integrated circuit investment fund, and the expertise of leadership from SMIC, one of China’s top state-owned semiconductor companies, which was placed on the Department of Commerce’s Entity List in 2020. The 506 Project’s goal was simple: To develop a Chinese domestic state champion in DRAM, or dynamic random access memory  — part of a larger effort to shore up indigenous capacity across the semiconductor value chain.

In 2018, the 506 Project became ChangXin Memory Technologies (CXMT), a part of the “Made in China 2025” national strategy and China’s Science and Technology National Key Projects. In 2019, CXMT started mass production. Today, the company is closely integrated into China’s military and surveillance systems; supplies and partners with a “Who’s Who” of Chinese military and government players including DJI, Hikvision, China Telecom, and Huawei; and co-invests with Chinese government and military players. “CXMT has fired a resounding shot,” reported Chinese media in 2022, “in the chokehold counterattack.”

CXMT is an arm of China’s government and that government’s industrial offensive. It is military-tied and strategically motivated. It is, one would assume, the kind of company that the U.S. would be wary of incorporating into defense and other crucial or sensitive value chains — or, really, any value chains at all. That assumption would be wrong.

Congress is negotiating a final defense authorization bill. A provision in the Senate version of the bill would ban government procurement of chips made by high-risk Chinese companies — namely CXMT, as well as YMTC and SMIC — and encourage federal contractors to do the same. This would be the most basic of defensive responses to China’s industrial chokehold offensive.

But that provision faces an uphill battle. A campaign is being waged on Capitol Hill to neuter it by delaying implementation, building in loopholes, or removing it altogether. And this campaign cannot be attributed to China. It is spearheaded by U.S. industry and the U.S. defense industry, intent on preserving today’s frictionless, profitable (in the short term) status quo at the expense of U.S. economic and national security.

Beijing sees today’s geopolitical competition as an industrial one determined by critical supply chains. Leverage in these grants influence and even control. If the U.S. military and U.S. industry rely on Chinese inputs, how much can the country actually compete with China? Plus, those inputs risk granting Beijing access to U.S. technologies, and perhaps even control over them. Accordingly, the Chinese Communist Party has spent the past decades building up domestic industrial self-sufficiency while undermining that of the U.S.: This is what the Made in China 2025 national strategy is about, and also the Belt and Road Initiative and Beijing’s larger architecture of subsidies and other non-market practices.

The U.S. is not playing defense, let alone competing. Rather, the U.S. government risks caving to a U.S. industry so focused on today’s quarterly returns that it has lost sight of what tomorrow’s will look like if Beijing’s industrial offensive goes unaddressed.

The problem extends well beyond the semiconductor value chain. It’s pervasive across the U.S. industrial and defense industrial bases. Take rare earths, for example: The engines of Lockheed Martin’s F-35 jets require Chinese rare earth alloys. This reality runs afoul of U.S. procurement laws — and of U.S. security interests. But rather than resolve it, Lockheed has secured a waiver from the Department of Defense. As China’s state-owned Global Times put it in October: “U.S. waiver for Chinese alloy in F-35 jets exposes dependence on rare-earth production from China.”

The Chinese Communist Party can, and will, exploit this dependence. That much has been clear for over a decade: In 2010, to force Tokyo’s hand during a territorial dispute over the Senkaku Islands, Beijing cut off exports of rare earths to Japan. The October Global Times piece calls on China to apply the same approach to the U.S. today.

Beijing is competing over and through international supply chains. That makes them a matter of national security. It makes their vulnerabilities threats to national security. As long as industry fails to address those vulnerabilities, industry is sabotaging American security.

Nathan Picarsic and Emily de La Bruyère are senior fellows at the Foundation for Defense of Democracies (FDD) with a focus on China policy, and the co-founders of Horizon Advisory, a consulting firm focused on the implications of China’s competitive approach to geopolitics.

Tags China Great power competition Rare earths superconductors supply chains

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