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The US firm’s subsidiary sold electronics to the Chinese defense firm linked to the spy balloon program


Mar 6, 2023

When the US blacklisted six Chinese entities last month in response to an alleged spy balloon traversing the country, a little-known tech company in Northern California had reason to pay special attention.

AXT Inc. has extensive ties to China that go beyond its manufacturing facilities there. The company owns an 85% stake in a Chinese subsidiary that produces semiconductor materials and has counted a giant state defense firm linked to Beijing’s surveillance balloon program as one of its main clients, according to AXT presentation to the Securities and Exchange Commission in August.

A division of the defense firm, China Electronics Technology Group Corp., or CETC, was among the Chinese companies blacklisted by the Biden administration for providing «support» to the People’s Liberation Army’s aerospace programs. That was just the latest move by the US government against CETC: at least 20 of its subsidiaries and divisions have been added to the so-called entity list since 2018.

The entity list identifies foreign companies that are considered to pose a risk to US national security and places severe restrictions on US companies applying for licenses to export goods to them.

It is unclear whether the AXT subsidiary sold materials directly to any of the blacklisted CETC parties.

AXT’s SEC filing does not specify which divisions of CETC its subsidiary dealt with, and the company did not respond to multiple requests for comment.

There is no indication that AXT is violating any US laws, but its previously unreported ties to the Chinese defense conglomerate highlight the broader challenge of preventing US technology and know-how from ending up in the hands of the chinese army.

“The two economies are very intertwined in a way that others aren’t right now,” said Emily Benson, a senior fellow at the Center for Strategic and International Studies, a Washington think tank. «And so the more intertwined they are, it necessarily means the more complex it is to enact controls and really force separation in a bilateral supply chain.»

Even the most robust and well-funded operation would have a hard time tracking the flow of goods entering China and moving through a sprawling military contractor like CETC.

In the US, the laborious task of tracking the movement of electronics that could be used by the Chinese military falls to the Commerce Department’s Bureau of Industry and Security, which often lacks the resources to sift through reams of data. export and publicly owned records, Benson said. saying.

“It is up to a very skeletal staff at the Bureau of Industry and Security to basically track irregularities in the supply chain to look for violations,” he said.

China Electronics Technology Group is one of China’s «core» state defense companies, with a vast global network, said Emily de La Bruyère, a senior fellow at the Foundation for Defense of Democracies, a Washington think tank.

“It’s a huge entity,” he said. “One of the ways it operates is through this huge network of subsidiaries, whether they are large research institutes, joint ventures, investment players or wholly owned subsidiaries. And those have a large number of associations in the international system.”

Last year, CETC was classified 233 in Fortune Magazine’s Top 500 Global Companies.

The technical director of AXT’s Beijing Tongmei subsidiary, Ren Diansheng, worked for CETC for 15 years before joining AXT in 2005. according to US securities filings.. Ren, who lives in China, could not be reached for comment.

The China Electronics Technology Group Corporation (CETC) booth at the Beijing International High-Tech Expo in 2019.
CETC’s booth at the Beijing International High-Tech Expo in 2019.Cai Qun/VCG via Getty Images file

The Commerce Department did not provide further details about CETC’s role in China’s alleged balloon surveillance activities. A spokesperson for the department told NBC News that an analysis of the debris recovered from the downed balloon «is ongoing and we do not have a definitive analysis at this time.»

The Chinese government has claimed it was a civilian weather balloon blown off course.

AXT, formerly known as American Xtal Technology TK, started in 1986. In its early years, it achieved $2 million in seed capital from the Department of Defense to develop technology and products. about 20 years ago, AXT moved its manufacturing to China and established facilities in various locations. As of 2021, the company employed 28 people at its California headquarters and nearly 1,400 in China. in accordance with the values ​​statements.

AXT manufactures wafers, small discs with a high level of purity that are vital to semiconductors. The materials are used in electronics as Satellite solar cells, lasers and sensors..

The Biden administration said the Chinese balloon that floated over the US in early February was 200 feet high, with a load of electronic devices weighing more than 2,000 pounds. US officials say the balloon was able to pick up radio signals for eavesdropping.

After the balloon episode, the Commerce Department last month blacklisted six Chinese organizations, including the 48th CETC Research Institute. according to their websiteThe institute manufactures and supplies microelectronic equipment such as wafers, cells and solar panels to customers in China and abroad.

CETC did not respond to requests for comment.

The signing is part of what China calls its «military-civilian fusion strategy» designed to remove barriers between commercial and defense research and production to bolster the country’s military might, said Grant Parks, a China analyst at C4ADS. , a nonprofit organization based in Washington. world security organization

CETC oversees a company that US officials say is linked to an elaborate surveillance operation against the country’s mostly Muslim Uyghur minority. Human rights groups say Chinese authorities have carried out a crackdown on the Uyghurs, and the US government says China’s actions amount to genocide.

The Global Times, a tabloid owned by the ruling Chinese Communist Party, posted a story last year about a «powerful» space surveillance radar that was developed by one of CETC’s research arms.

Executive orders from former President Donald Trump and President Joe Biden prohibit US citizens from investing in CETC. In 2010, a Massachusetts company was convicted of illegally shipping military electronic components to CETC. At the time, the Justice Department said CETC was responsible for «the procurement, development, and manufacturing of electronic products for the Chinese military.»

In 2020, the Department of Commerce blacklisted four CETC entities for assisting the Chinese People’s Liberation Army in building and “militarizing” artificial islands in the disputed waters of the South China Sea.

Some experts say Chinese conglomerates are often one step ahead of sanctions and blacklisting efforts in Washington because they use a sprawling network of smaller units.

“One of the biggest weaknesses of the existing export controls and other regulatory regimes is that you leave all these loopholes if you don’t say that the entire corporate network of the company is covered,” de La Bruyère said.

The potential threat posed by the exploitation of American technology by China’s defense industry is now high on Washington’s agenda. A new House select committee on China has vowed to focus on the issue in upcoming hearings.

Last month, the Democratic president and the ranking Republican on the Senate Intelligence Committee warned that the flow of US technological know-how to the PRC created «dangerous vulnerabilities.»

“U.S. technology, talent, and capital continue to contribute, through legal and illegal means, including theft, to the PRC’s development of critical military-use industries, technologies, and related supply chains. said Sen. Mark Warner, D-Va. , and Marco Rubio, Republican of Florida, wrote in a letter Treasury Secretary Janet Yellen.

China has rejected accusations that it has stolen intellectual property or carried out industrial espionage.

China is also interested in reducing its dependence on foreign markets and Western manufacturing technology, following what it calls a «dual circulation» policy to bolster economic and technological self-sufficiency.

In October, the Biden administration introduced unprecedented export restrictions on shipments of certain semiconductor chips and chip-making tools to China, with the goal of blocking the Chinese military’s access to crucial technology.

China’s Foreign Ministry criticized the move as an abuse of trade policy that was designed to give the United States «technological hegemony.»

To tighten new US export controls, Washington has tried to join forces with Japan and the Netherlands, which are home to major chip-making companies, to restrict advanced chip-making equipment to China.

If the three governments can reach an agreement on the export restrictions and enforce them, it would be an important step and offer a new model for future efforts, said Benson of the Center for Strategic and International Studies.