Last month, a little-known Northern California tech firm drew particular attention when six Chinese entities were blacklisted in response to a US espionage balloon sweeping through the country.
AXT Inc. The company has extensive ties to China beyond its manufacturing facilities there. The company owns 85% of a Chinese subsidiary that makes semiconductor materials and counts the giant state defense firm involved in Beijing’s surveillance balloon program as one of its biggest customers, according to AXT’s filing with the Securities and Exchange Commission. August.
A division of defense firm China Electronics Technology Group Corp. or CETC, was one of the Chinese companies blacklisted by the Biden administration for “supporting” the People’s Liberation Army’s aerospace programs. This was just the latest move by the US government against CETC – since 2018, at least 20 of its subsidiaries and affiliates have been added to the organization’s list.
The Enterprise List identifies foreign firms that pose a threat to US national security and imposes strict restrictions on US companies seeking licenses to export goods to them.
It is not known whether the AXT subsidiary sold materials directly to any part of the CETC blacklist.
AXT’s SEC filing does not specify which units 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 US laws, but its previously undisclosed ties to a Chinese defense conglomerate highlight the broader challenge of preventing US technology and know-how from falling into the hands of the Chinese military.
“The two economies are very closely linked, and the others are not,” said Emily Benson, a senior fellow at the Center for Strategic and International Studies, a Washington think tank. “So that means the more closely connected you are, the more difficult it is to declare control and actually enforce separation in a two-way supply chain.”
Even the most robust and well-funded operation would attempt to control the flow of goods into China and go through a vast military contractor like CETC.
The burdensome task of tracking the movement of electronics that could be used by the Chinese military in the U.S. falls to the Commerce Department’s Bureau of Industry and Security, which often lacks the resources to sift through export data and government ownership records, Benson said. said.
“The skeleton staff of the Bureau of Industry and Security will monitor violations 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 global reach, said Emily de La Bruyere, a senior fellow at the Foundation for Defense of Democracies, a Washington think tank.
“It’s a big organization,” he said. “One of the ways it works is through a large network of subsidiaries, whether they are large research institutes or joint ventures or investment players or wholly owned subsidiaries. And they have many partnerships in the international system.
Last year, CETC was ranked 233rd in Fortune magazine’s list of the 500 best global companies.
Ren Diansheng, CTO of AXT’s Beijing subsidiary in Tongmei, worked at 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 Commerce Department did not elaborate on CETC’s role in China’s alleged balloon surveillance activities. A department spokesman told NBC News that the analysis of debris from the downed balloon “is ongoing and we don’t have a definitive analysis at this time.”
The Chinese government said the civilian weather balloon had deviated from its course.
AXT, formerly American Xtal Technology Inc. known as, started working in 1986. In the first years, he received 2 million dollars from the Ministry of Defense for the development of technologies and products. About 20 years ago, AXT moved its production to China and set up facilities in several locations. As of 2021, the company employed 28 people at its California headquarters and about 1,400 people in China, according to the Securities and Exchange Commission.
AXT produces high purity wafers, small disks, which are very important for semiconductors. The materials are used in electronics such as satellite solar cells, lasers and sensors.
The Biden administration said in early February that a Chinese balloon that hovered over the United States contained a 200-foot-tall, more than 2,000-pound payload of electronics. US officials say the balloon was able to pick up radio signals for eavesdropping.
Following the balloon episode, the Commerce Department last month blacklisted six Chinese entities, including CETC’s 48th Research Institute. According to its website, the institute manufactures and supplies microelectronic equipment such as solar wafers, cells and panels to customers in China and overseas.
CETC did not respond to requests for comment.
The firm is part of China’s “military-civilian integration strategy,” which aims to break down barriers between commercial and defense research and production to strengthen the country’s military power, said Grant Parks, a China analyst at Washington-based nonprofit C4ADS. global security organization.
The CETC is tracking a firm that US officials have been linked to a surveillance operation targeting the country’s predominantly Muslim Uyghur minority. Human rights organizations say that the Chinese authorities have carried out a campaign of repression against the Uyghurs, while the US government considers China’s actions to be genocide.
The Global Times, a tabloid newspaper owned by the ruling Chinese Communist Party, published a story last year about a “powerful” space surveillance radar developed by one of CETC’s researchers.
Executive orders from former President Donald Trump and President Joe Biden prohibit US citizens from investing in CETCs. In 2010, a Massachusetts firm was convicted of illegally shipping military electronic components to the CETC. At the time, the Justice Department said CETC was responsible for “acquiring, developing and manufacturing electronics for the Chinese military.”
In 2020, the Commerce Department blacklisted four CETC entities for helping China’s People’s Liberation Army build and “militarize” artificial islands in the disputed waters of the South China Sea.
Some analysts say Chinese conglomerates are often one step ahead of Washington’s sanctions and blacklisting efforts because they use a vast network of smaller units.
“One of the biggest weaknesses of the current export controls and other regulatory regimes is that if you don’t say that the entire corporate network of a company is covered, you’re leaving all these loopholes,” de La Bruyère said.
The potential threat posed by China’s defense industry’s use of US technology is now high on the agenda in Washington. The new House Select Committee on China has promised to focus on the issue in upcoming hearings.
Last month, the Democratic chairman and Republican on the Senate Intelligence Committee warned that the flow of American technological know-how to the People’s Republic of China had created “dangerous vulnerabilities.”
“U.S. technology, talent and capital continue to contribute to the development of the PRC’s military-critical industries, technologies and related supply chains through legal and illegal means, including theft,” Sen. Mark Warner, D-Va. , and Marco Rubio, R-Fla., in a letter to Treasury Secretary Janet Yellen.
China has denied allegations of intellectual property theft or industrial espionage.
China is also keen to reduce its dependence on foreign markets and Western technology, pursuing a “dual circulation” policy to strengthen its economic and technological independence.
In October, the Biden administration imposed unprecedented export restrictions on certain semiconductor chips and chip-making tools to China in an effort to block the Chinese military’s access to critical technology.
China’s foreign ministry described the move as an abuse of trade policies designed to give the US “technological hegemony”.
To bolster new US export controls, Washington has sought to join forces with Japan and the Netherlands, which host major chipmakers, to restrict advanced chip-making equipment to China.
If the three governments can reach an agreement on export restrictions and implement them, it would be an important step and could provide a new model for future efforts, said Benson of the Center for Strategic and International Studies.