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When the US blacklisted six Chinese organizations last month in response to suspicions that a spy plane was crossing the country, a little-known tech firm in Northern California had reason to pay special attention.
AXT Inc. has extensive ties to China that go beyond its manufacturing capacity. The company owns an 85% stake in a Chinese semiconductor manufacturing subsidiary and lists a giant state-owned defense firm linked to Beijing’s balloon surveillance program as one of its largest customers, according to AXT’s filing with the Securities and Exchange Commission in August.
A division of defense firm China Electronics Technology Group Corp., or CETC, was among Chinese companies blacklisted by the Biden administration for “supporting” the People’s Liberation Army’s aerospace programs. This was just the latest step by the US government against CETC – since 2018, at least 20 of its subsidiaries and divisions have been included in the so-called list of legal entities.
The list of legal entities identifies foreign firms considered to pose a threat to US national security and imposes severe restrictions on US companies seeking licenses to export goods to them.
It is not clear if the AXT subsidiary directly sold materials to any of the blacklisted parts of CETC.
The AXT SEC filing did not specify which divisions of CETC its subsidiary is dealing 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 problem of preventing US technology and know-how from falling into the hands of the Chinese military.
“These two economies are very closely intertwined, unlike the others,” said Emily Benson, senior fellow at the Center for Strategic and International Studies at the Washington think tank. “And so the more intertwined you are, the harder it is to make control public and really achieve separation in the two-way supply chain.”
Even the most reliable and well-funded operation will not be able to track the flow of goods that enter China and pass through a sprawling military contractor like CETC.
In the US, the painstaking 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 the plethora of export data and government property records. Benson notes. said.
“The very skeletal staff of the Bureau of Industry and Security has to basically track supply chain disruptions to look for disruptions,” she said.
China Electronics Technology Group is one of China’s “major” state-owned defense companies with an extensive global network, said Emilie de La Bruyère, senior fellow at the Defense of Democracies Foundation, a research organization in Washington.
“It’s a huge entity,” she said. “One of the ways this works is through a huge network of subsidiaries, whether they are large research institutes, joint ventures, investment companies or wholly owned subsidiaries. And they have a huge number of partners in the international system.”
Last year, CETC was ranked 233rd on Fortune magazine’s list of the world’s 500 largest companies.
Ren Diansheng, CTO of AXT’s Beijing subsidiary Tongmei, worked at CETC for 15 years before he joined AXT in 2005, according to US Securities filings. Ren, who lives in China, could not be contacted for comment.
The Commerce Department did not provide more details about the role of CETC in China’s alleged balloon watching activities. A department spokesman told NBC News that analysis of the found balloon debris is “ongoing and we don’t have a definitive analysis at this time.”
The Chinese government said it was a civilian weather balloon that went off course.
AXT, formerly known as American Xtal Technology TK, was founded in 1986. In its early years, it received $2 million in seed capital from the Department of Defense to develop technologies and products. About 20 years ago, AXT moved production to China, opening factories in several locations. As of 2021, the company’s California headquarters employed 28 people, and about 1,400 people in China, according to securities filings.
AXT manufactures wafers, small discs with a high level of purity that are vital to semiconductors. The materials are used in electronics such as satellite solar arrays, lasers and sensors.
The Biden administration said the Chinese hot air balloon that flew over the US in early February was 200 feet high, with useful electronics weighing more than 2,000 pounds. US officials say the balloon may have received radio signals for listening.
After the balloon incident, the Ministry of Commerce blacklisted six Chinese organizations last month, including the 48th Research Institute of CETC. According to its website, the institute manufactures and supplies microelectronic equipment such as solar wafers, cells, and panels to customers in China and abroad.
CETC did not respond to requests for comment.
The firm is part of what China calls its “civilian-military fusion strategy” designed to remove barriers between commercial and defense research and manufacturing to bolster the country’s military strength, said Grant Parks, a China analyst at Washington-based nonprofit C4ADS. organization of global security.
CETC oversees a firm that US officials say is linked to a sophisticated surveillance operation against the country’s predominantly Muslim Uyghur minority. Human rights organizations say Chinese authorities are conducting a crackdown on Uyghurs, and the US government says China’s actions constitute genocide.
The Global Times, a tabloid newspaper owned by China’s ruling Communist Party, published an article last year about a “powerful” space surveillance radar developed by one of CETC’s research divisions.
Executive orders from former President Donald Trump and President Joe Biden bar US citizens from investing in CETC. In 2010, a Massachusetts firm was found guilty of illegally supplying military electronic components to CETC. At the time, the Department of Justice stated that CETC was responsible for “purchasing, developing and manufacturing electronics for the Chinese military.”
In 2020, the Department of Commerce blacklisted four CETC organizations for helping China’s People’s Liberation Army build and “militarize” artificial islands in the disputed waters of the South China Sea.
Some experts say Chinese conglomerates are often one step ahead of Washington’s sanctions and blacklisting efforts as they use an extensive network of smaller units.
“One of the biggest drawbacks of existing export control regimes and other regulatory regimes is that you leave all these loopholes if you do not say that the entire corporate network of the company is protected,” said de La Bruyère.
The potential threat posed by China’s defense industry, which uses American technology, is now at the center of Washington’s attention. The new House Select Committee on China has vowed to focus on the issue in upcoming hearings.
Last month, the Democratic chairman and top Republican on the Senate Intelligence Committee warned that the flow of American technological know-how to the People’s Republic of China was creating “dangerous vulnerabilities.”
“U.S. technology, talent, and capital continue to contribute — through both legal and illegal means, including theft — to China’s development of critical industries, technologies, and associated military supply chains,” said Sen. Mark Warner, D-Va . . , and Marco Rubio of Florida wrote in a letter to Secretary of the Treasury Janet Yellen.
China has denied allegations of intellectual property theft or industrial espionage.
China is also seeking to reduce its dependence on foreign markets and Western-made technologies by pursuing a so-called “dual circulation” policy to strengthen economic and technological self-sufficiency.
In October, the Biden administration imposed unprecedented restrictions on the export of certain semiconductor chips and tools to ship them to China to block the Chinese military’s access to critical technology.
China’s Foreign Ministry called the move an abuse of trade policy aimed at giving the US “technological hegemony.”
To tighten new US export controls, Washington has sought to join forces with Japan and the Netherlands, which are home to major chip manufacturing companies, to limit China’s access to advanced chip manufacturing equipment.
If the three governments can reach an agreement on 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.
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