How China Could Replace all US Technology

U.S. Tried to Stop China Acquiring World-Class Chips. China Got Them Anyway.

Silicon Valley’s AMD gave Chinese partner ‘keys to the kingdom’—and sparked a battle over national security
Wall Street Journal

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Advanced Micro Devices Inc. transformed itself from a financially struggling company to an investor’s dream in just three years, a turnaround that began with a decision to help Chinese partners develop advanced computer-chip technology.

That deal may have helped save the company, but it alarmed U.S. national-security officials, who saw it as a threat to their goal to rein in China’s supercomputing industry. Last week, after years of friction, the Commerce Department issued an order that effectively bars several Chinese entities—including AMD’s partners—from obtaining American technology.

It looked as though the U.S. had succeeded in stanching the flow of cutting-edge computer technology to China. In reality, it was too late. Chinese versions of AMD chips already have been rolling off production lines. That technology is helping China in its race with the U.S. to build the first next-generation supercomputer—an essential tool for advanced civilian and military applications.

AMD’s Chinese partner, a military contractor, already used those chips to build what may prove to be the world’s fastest supercomputer, according to high-performance computing experts briefed on the project.

AMD said in a written statement that it “has and will continue to comply with all U.S. laws,” and that the technology transferred to China in the deal wasn’t as high-performing as other U.S. products commercially available there at the time.

Commerce Department officials said last week’s action was made in consultation with other agencies. It followed weeks of inquiries by The Wall Street Journal about AMD’s Chinese partnership and the belief of some government officials that AMD had plotted a sophisticated end-run around regulators.

This account of the protracted battle over the deal between AMD and the government is based on interviews with more than a dozen current and former government officials familiar with AMD’s China deal, senior chip-industry executives, lawyers and company and government filings in the U.S. and China.

The partnership with the Santa Clara, Calif.-based chip maker was a game changer for China, which has long been unable to match the U.S.’s supercomputing power because of its inferior chips, one product the country has so far struggled to master. The AMD deal gave China access to state-of-the-art x86 chips, which are made by only two companies in the world: AMD and Intel Corp. They are the most dominant processor technology in use today.

“It’s the keys to the kingdom,” said retired Brig. Gen. Robert Spalding, who served on the National Security Council in 2017 and 2018 and discussed strategies to stop the AMD deal with officials at other agencies. “Everything today is built on x86.”

When Lisa Su was named AMD’s chief executive in October 2014, the company was desperate for cash, its debts were mounting and its revenue was declining. Its stock had dipped to around $3 a share. Some analysts predicted it would seek bankruptcy protection.

Three weeks after getting the top job, Ms. Su, a Taiwan-born New Yorker, jetted to Beijing to meet officials at China’s Ministry of Industry and Information Technology. A Chinese vice minister urged her to partner with China “to achieve mutual benefits based on AMD’s technological strength,” according to a ministry press release at the time.

In February 2016, AMD reached a joint-venture deal involving a leading Chinese supercomputer developer, a state-backed military supplier called Sugon Information Industry Co., to make chips licensing AMD’s x86 processor technology.

“Making contributions to China’s national defense and security is the fundamental mission of Sugon,” its website read as recently as December 2016. Sugon also makes computers for civilian use.

In exchange, the Chinese government gave AMD a lifeline: $293 million in licensing fees plus royalties on the sales of any chips developed by the venture.

That April, AMD got another boost from Beijing. It said it would get a $371 million payout for selling an 85% stake in two of its semiconductor factories in China and Malaysia to an entity controlled by China Integrated Circuit Industry Investment Fund Co., a state-backed financier known as “the Big Fund.” Its mission is to develop China’s indigenous chip industry.

The U.S. and China are competing to develop the world’s first exascale computer, a next-generation supercomputer that would be capable of doing one quintillion—or one billion billion—calculations per second. While supercomputers are used in tasks such as weather forecasting and cancer research, they also are integral to the development of nuclear weapons, encryption, missile defense and other systems. The chips American companies produce to power supercomputers, including AMD’s x86, are superior to any China can make on its own.

“Semiconductors are a space where the U.S. still leads China and the rest of the world,“ says William Evanina, the U.S. government’s top counterintelligence official.

Shortly before AMD announced the Sugon deal, Defense Department officials learned of a presentation the joint-venture partners made in China talking up the deal’s potential to transform the country into a leader in processor technology.

Pentagon officials quickly began seeking ways to unwind the deal, according to people familiar with the matter. They questioned company representatives and repeatedly tried to get them to submit the deal to a review by the Committee on Foreign Investment in the U.S., or Cfius, according to those people.

Companies routinely seek approval from the committee for deals that raise national-security issues. The committee is led by the Treasury Department and includes the Defense, Commerce, Justice and Energy departments, among others. It can recommend that the president block foreign investments in U.S. assets for national-security reasons.

AMD didn’t submit the deal for committee review, arguing Cfius didn’t have jurisdiction to review that type of joint-venture, according to people familiar with the matter. The company also claimed it wasn’t turning over any state-of-the-art technology. Pentagon officials found that response at odds with how the joint-venture had portrayed itself in China.

Treasury officials, who have the final say on the consensus-driven Cfius panel, ultimately agreed with AMD’s assessment that the deal fell outside its remit. That left AMD and Defense officials at a stalemate through the end of the Obama administration and the first months of the Trump administration.
A Treasury spokesman declined to comment, as did the Defense Department.

Commerce Department officials also were investigating the deal for compliance with export controls. In June 2017, following a series of inquiries, they sent AMD an “is informed letter” that alerted the company they suspected the China deal violated export controls. AMD replied that it was complying with all regulations, according to people familiar with the matter.

In its statement to the Journal, AMD said that starting in 2015, it “diligently and proactively briefed the Department of Defense, the Department of Commerce and multiple other agencies within the U.S. government before these joint ventures were entered into, and we received no objections to their formation or the transfer of technology.”

Before the transfer of any technology, AMD said, the Commerce Department notified the company that it wasn’t restricted or otherwise prohibited from being transferred.

Current and former national-security officials said in interviews they believe AMD designed the deal’s complex structure, which involved the creation of two interlinked joint ventures, to sidestep U.S. regulations. AMD said the deal was structured for business and technological reasons and to comply with regulations, not to evade them.

AMD controls the first joint venture, which licenses the U.S. chip maker’s x86 intellectual property and manages production of the chips. The second venture, controlled by AMD’s Chinese partner, designs the devices that use the chips and sells the final products.

The arrangement enables AMD to share technology with China while retaining control over the entity working with its intellectual property. The creation of the second, China-controlled joint-venture allowed the parties to claim that the resulting product was indigenously developed in China, a key goal of the Chinese government.

While Cfius has jurisdiction to review foreign purchases of U.S. chip assets, it doesn’t have clear authority to review overseas joint ventures that don’t grant a foreign entity control over a U.S. business.

AMD didn’t have to seek an export license from the Commerce Department because it stripped out the parts of its x86 chip that would have required licenses, such as encryption technology, which China didn’t need anyway.

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The x86 chips under development for China, code-named Dhyana, are similar to AMD’s own EPYC chips, minus U.S. encryption technology that AMD omitted, say people familiar with the deal.

The joint venture’s U.S. managers stressed to employees that the Dhyana chip was being developed for commercial purposes, such as providing processing technology to Chinese tech giants such as

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Inc. or

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Ltd. , according to one of the people familiar with the deal.

Sugon, however, told state-run media that the x86 technology could serve China’s bid to build the world’s first exascale supercomputer. The joint venture’s job postings in Chinese implore candidates to help strengthen China’s domestic chip ambitions.

Sun Ninghui, head of the computing-technology institute at the Chinese Academy of Sciences, which works closely with Sugon, likened its chip development strategy to what China did with high-speed trains—introduce a foreign technology to the market, absorb it, and then innovate to make China a leader.

“This gradually advances our ability to comprehend their core technologies,” Mr. Sun told a government-run newspaper. “That way, we no longer can be pulled around by our noses.”

By mid-2017, concerns about AMD’s China deal had reached the Trump White House. Retired Gen. Spalding, who left the National Security Council last year, said of AMD: “They’re using the letter of the law to violate the spirit of the law.”

In November 2017, Sen. John Cornyn (R., Texas) and then-Rep. Robert Pittenger (R., N.C.) introduced

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, including broader powers to review joint ventures overseas.

There was heavy opposition from many companies and trade organizations, which feared Cfius interfering in their overseas activities, and the provision didn’t make it into the final version of the legislation that passed in August 2018.

Defense Department officials decided to unilaterally submit AMD’s Sugon deal to Cfius for review, despite Treasury’s earlier interpretation that it fell outside the panel’s jurisdiction. Only rarely in Cfius’s 44-year history has the committee been asked to review deals without the cooperation of either party involved, according to lawyers who track the confidential cases.

As the Cfius filing sat in limbo, Lisa Porter, the Defense Department’s deputy undersecretary for research and engineering, criticized AMD’s China deal in front of industry executives. AMD officials hired Beacon Global Strategies, a Washington-based consulting firm that employs former top national-security officials, to try to make peace.

On Friday, however, the Commerce Department announced the new export restrictions banning Sugon and its affiliates on the AMD deal from accessing U.S. technology without a license. The move, which followed the imposition of similar export restrictions last month targeting Chinese telecommunications giant Huawei Technologies Co., effectively forces AMD to unwind the deal.

In its decision, the Commerce Department said the Chinese entities were determined “to be acting contrary to the national security or foreign policy interests of the U.S.” It added: “Sugon has publicly acknowledged a variety of military end uses and end users of its high-performance computers.”

In a statement on its WeChat account, Sugon said the decision would severely disrupt its cooperation with U.S. partners. It said it had complied with all U.S. laws and would seek to discuss the issue with U.S. officials. “We believe there is a large gap in the understanding of Sugon’s corporate circumstances on the part of relevant U.S. authorities,” it said.

The Commerce action will make it hard for China to make future generations of the x86 chip, and it’s unclear if AMD’s partners will be able to continue producing the current version without the U.S. company’s technical assistance, according to experts in semiconductor technology. But China gained significant technical know-how through the deal, which has already yielded chips currently powering supercomputers.

For AMD, pushing back against U.S. national security officials while its China partnership gained traction paid off. The chip maker used the cash infusion to get back on its feet and has since introduced an array of competitive new products.

The company’s stock price has risen to around $30 per share recently, from under $2 in early 2016. AMD’s shares were the S&P 500 index’s top performers last year, rising nearly 80%.

— Yang Jie in Beijing contributed to this article.

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Jura said:

and in the meantime
Donald Trump prepared to impose lower tariffs if China talks fail

• US president says additional duties could start at 10 per cent instead of 25 per cent
• Trump has already imposed 25 per cent tariffs on US$250 billion worth of Chinese goods, and has threatened to tax an additional US$325 billion in imports

Published: 1:23am, 27 Jun, 2019

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China on Thursday responded to U.S. recent threat to impose additional tariffs on Chinese products, urging the U.S. side to heed the voices of resistance to unilateralism, protectionism and bullying from the international community.

Foreign Ministry spokesperson Geng Shuang made the response at a daily news briefing in Beijing.

According to media reports, in an interview on Wednesday, U.S. President Donald Trump said the U.S. and China had exchanged views over economic and trade issues over the past few days. The two sides may come to an agreement at the upcoming Group of 20 summit to be held in Osaka in Japan, otherwise the U.S. will impose additional tariffs on China.

Geng said China always believes that trade frictions between the two countries should be settled via dialogue and consultation, and at the same time China will firmly defend its legitimate rights and interests.

The Chinese people will not be scared by U.S. threat of additional tariffs and also will not succumb to suppression, Geng said.

"I'd like to tell the U.S. side once again that waging trade wars and ramping up tariffs do harm to others while jeopardizing itself, and such moves will in no way solve the problems," Geng said, urging the U.S. to listen to voices of opposition to trade wars and additional tariffs from its within, including various groups and the general public, and the voices of resistance to unilateralism, protectionism and bullying from the international community.

He said China hoped the U.S. side can meet the Chinese side halfway, and accomodate each other's concerns and seek win-win results on the basis of mutual respect, equality and mutual benefit.

"This goes in line with the interests of the two countries and peoples, and is a widespread expectation of the international community," Geng said.

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US President Donald Trump on Thursday boasted of the tariff war's benefits to the US economy, and declared that if there is no progress on a trade deal after his meeting with Chinese President Xi Jinping, he will carry out his "Plan B" - imposing tariffs on the remaining $300 billion worth of Chinese products. But he said the tariffs may be "not at 25 percent, but maybe at 10 percent."

Exerting pressure on the other side before important meetings or negotiations is an old tactic that the US side often adopts. The Chinese side is overly familiar with their modus operandi, and will not fall for it.

The US side has released a stream of messages these past few days, which indicates its anxiety. It wants to pressure China, and meanwhile pump up US stock markets. The White House is proudly taking credit for the recent bullish market, but it is easy to understand that the market will plummet if the meeting between China and the US at the

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in Japan goes contrary to market expectations.

The US lowered the threat of imposing 25 percent tariffs to 10 percent, which is obviously affected by the opposition that more than 300 representatives of businesses and trade associations in the US displayed toward new tariffs on China during a hearing in Washington, DC. Will the new tariffs add more pressure on China's economy, or on the US economy and politics? The situation is getting more interesting. If the US believes waving its long-held $300 billion tariff card before an important meeting is effective, then such a strategy is way too naïve.

China's attitude toward the two state leaders' meeting is active and constructive. Meanwhile, China will defend its own core interests and will not make unconditional concessions. We hope China and the US can seek a compromise while taking into consideration both sides' core interests. The situation over the past year has proved that one side's overwhelming victory against the other side is unrealistic. Establishing a principle of equality and mutual trust is a must to reach an agreement.

Clearly aware that it can't get what it desires by only applying pressure, the US requested a phone conversation between the two state leaders, during which they agreed to meet at the G20. Unless the US just wants a temporary market boom, it should change its strategy of maximum pressure to one of candid dialogue and seek a real win-win result. The US trade war plot can no longer be sustained. Washington's hype that it is China that most wants a deal is just a way to reassure itself.

China wants a trade deal, but will always reject an unfair deal. It has nothing to do with how much pressure the US applies.

Many small countries in the world resisted firmly when they faced unreasonable demands from the US backed by threats of sanctions, let alone an economic and trade giant like China. After a trade war that has lasted more than a year, if the US still does not understand that tariffs will not intimidate China, it will be a tragedy for the US side.

The G20 Osaka Summit provides an opportunity for China and the US to break the impasse. The two sides have reasons to cherish this opportunity, instead of taking the chance to impose impossible conditions on the other side. They should not waste their time in repeating the past failed attempts. It is obvious that the international community, including the US public, hopes to hear good news from this summit.

Both China and the US have enough room to maneuver if the two leaders' meeting fails to reach a desirable outcome. But the US should not declare that US society is more capable of enduring the trade war than China. Whether there is an agreement or not, China will defend its core interests and will focus on doing its own things well. China is well prepared economically and politically.

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AssassinsMace said:

Everyone else is trying to manipulate China into bowing down to US demands because then they don't lose money having to makes changes. China going its own way is not a good idea to them but what other choice does China have? Only signing their soul away to the devil. That's why they were afraid of Made in China 2025 when Obama and the EU voiced concerns. China won't be buying from them. Trump is making Made In China 2025 all the more important and prophetic. I'm not surprised that everyone not the US or China are naysayers on China's future without the US. They just don't want China developing its own standards because then they'll have to pay double on license fees so their technology can work on both systems. That's what it's all about. Don't think it's because they're being intellectual and giving an honest assessment. They're already under the US standard so it's best for them to have China stay under the US standard so they can keep making money from China without it costing them more.

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vesicles said:

If you look at how the events are developing now, you will see that things are not working in the way you are imagining. The US is holding monopolies of many technologies. However, many American companies are voicing their displeasure for punishing the Chinese companies and the tariffs because of the Chinese manufacturing abilities, not their technologies. And this is happening across a wide spectrum of tech levels, from super computers to apparels. Even with such sizable monopolies, the US is now under tremendous pressure and influence from the Chinese.

As you can see, holding a technological monopoly is not making things easier for the American companies. And it is not making it easier for the US government to achieve their goals either.

I am in no way advocating that China should depend on foreign techs for everything. China should develop their own technologies as hard as they can and a healthy competition between American and Chinese companies will advance the technologies in every field. However, the mentality of becoming independent of foreign techs is very dangerous. It IS isolationism in every sense of the word.

Even when the Chinese do eventually achieve their complete technological independence, what will prevent them from experiencing the same difficulties and “unfair” influences that the American companies are experiencing now against China? This is not the way to go.

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gelgoog said:

The "convoluted" licensing corporate structure AMD made was not because they wanted to evade US government export limitation concerns. It was because of the cross-patent licensing agreement AMD has with Intel. AMD has a deal to cross-license x86 CPU patents with Intel. The deal was won on their last lawsuit against Intel for anti-competitive practices. But AMD cannot grant access to Intel's patents to a third party. So, for example, x86-64 is patented by AMD, but AVX/AVX2 instructions are patented by Intel, AMD couldn't grant a 3rd party access to processors which implement Intel's patents. By owning the majority of the patent license corporate entity, for all legal effects the patents haven't left AMD, so a chip production deal with all x86 patents could be made.

I think China should have got access to AMD's x86 patents on the deal though. Or made a separate deal with another partner to license their x86 patents. AMD in the past has been quite open to this, for example they did it with Transmeta and VIA on x86-64. Intel, on the contrary, is typically quite hostile to anyone else cloning x86.

AMD was not just saved from bankruptcy by the Chinese deal. The sale of console chips for the PS4 and Xbox One was the other reason why they did not go bankrupt. But it must have certainly helped at a time they needed funds to develop Zen and bring it to market.

The article is wrong in saying that AMD said they did not license their most advanced processor. For one the fact is, back when the deal was made, Zen was the most advanced processor AMD made.

What Lisa Su, AMD's CEO, said and I remember reading a direct quote somewhere else, was that the processor that the Chinese have licensed is no longer the most advanced processor they have. Which is a different statement, and accurate, unlike this news report. AMD designed Zen+ and Zen 2 since that. Zen 2 is supposed to be released this year I think. AMD also said they won't license any more advanced chip designs to China.

Still, AMD had to know the Obama administration had forbidden the sale of Intel Xeon server processors to China around that time. So the deal was kind of shady on that front. Everyone in the tech corporate press back then commented on it.

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