How U.S. Firms Battled a Government Crackdown to Keep Tech Sales to China

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How U.S. Firms Battled a Government Crackdown to Keep Tech Sales to China

An intense struggle has unfolded in Washington between companies and officials over where to draw the line on selling technology to China.

A silicon wafer at Applied Materials in May 2023.Credit...Jim Wilson/The New York Times

By Ana Swanson

Ana Swanson covers international trade and the U.S. technology restrictions against China. She reported from Washington and Sunnyvale, Calif.

Dec. 12, 2024

At a meeting in Washington this spring, tech company representatives and government officials once again found themselves at odds over where to draw the line when it came to selling coveted technology to China.

The Biden administration was considering cutting off the sales of equipment used to manufacture semiconductors to three Chinese companies that the government had linked to Huawei, a technology giant that is sanctioned by the United States and is central to China’s efforts to develop advanced chips.

Applied Materials, KLA Corporation and Lam Research, which make semiconductor equipment, argued that the three Chinese companies were a major source of revenue. The U.S. firms said that they had already earned $6 billion by selling equipment to those Chinese companies, and that they planned to sell billions more, two government officials said.

U.S. officials, who view the flow of U.S. technology to Huawei as a national security threat, were stunned by the argument. In regulations issued this month, they ultimately rejected the American companies’ plea.

Over the past year, an intense struggle has played out in Washington between companies that sell machinery to make semiconductors and Biden officials who are bent on slowing China’s technological progress. Officials argue that China’s ability to make chips that create artificial intelligence, guide autonomous drones and launch cyberattacks is a national security threat, and they have clamped down on U.S. technology exports, including in new rules last week.

But many in the semiconductor industry have fought to limit the rules and preserve a critical source of revenue, more than a dozen current and former U.S. officials said. Most requested anonymity to discuss sensitive internal government interactions or exchanges with the industry.

The U.S. chip equipment companies argue that they do not oppose stronger rules as long as they also apply to international competitors. Their chief complaint is that the U.S. industry is the only one facing restrictions, allowing companies in Japan and the Netherlands to step in to supply China with technology. That damages U.S. companies while also failing to restrain Beijing, they argue.

Over the course of this year, the chip equipment companies deployed lobbyists to Capitol Hill and the White House, set up advocacy organizations and funded supportive research by think tanks to make their argument. They put in dozens of calls to officials and leaned on vulnerable Democrats in Congress, warning of job losses in their districts and asking them to reach out to the Biden administration.

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An employee at a semiconductor production plant in Shandong Province in China in April 2024. Some argue that China’s ability to manufacture chips is a national security threat to the United States, but it is also a source of massive revenue for companies selling the manufacturing equipment.Credit...VCG/VCG, via Getty Images

Data from OpenSecrets, a nonprofit, shows that lobbying spending by Applied Materials, KLA and Lam Research has roughly doubled since 2020, as the United States has tightened its technology controls.

Applied Materials and KLA declined to comment. Lam Research said in a statement that it “diligently adheres to U.S. export controls” and that it engaged regularly “in constructive dialogue with policymakers on trade-related matters for the benefit of the semiconductor industry, national security and the U.S. innovation economy.”

Some U.S. officials have privately said that the lobbying undercut their recent rules. It helped feed an argument against the United States taking action by itself and it delayed restrictions on certain Chinese factories, they said, resulting in billions of dollars of additional sales.

Some officials have had longer-running concerns about industry influence. Eight current and former officials expressed concerns about the close relationship between the Commerce Department’s Bureau of Industry and Security, which oversees export controls, and the semiconductor equipment industry, which employs several former officials as executives or legal advisers.

In recent years, according to four of those officials, some B.I.S. employees inappropriately informed U.S. companies about forthcoming sanctions. That information had sometimes been passed on to Chinese customers, who then stockpiled U.S. products, three of the people said.

Other U.S. officials denied that the industry had any influence on the administration’s decisions. Some acknowledge they should move faster, but say they struggle with a lack of resources.

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Alan Estevez, the under secretary for B.I.S., said in an interview that lobbying had no impact on his deliberations. He said his department had worked closely with other agencies and U.S. allies to set tough restrictions that sought to target advanced chip production, not China’s industry overall.

“National security is my north star,” he said. “There is nothing that industry would ever do that would make me compromise that bottom line.”

The debate over how best to control technology demonstrates the difficulty for the United States in dealing with China, a military rival but also a crucial trading partner. Many officials believe the chip industry needs to be regulated, but also nurtured: Without its cutting-edge companies, after all, the United States would have no leverage over China at all.

That relationship between American companies and China could become an even greater source of tension under President-elect Donald J. Trump, who has promised to take aggressive action against the country.

China has been investing heavily in technology, and it is currently constructing nearly two dozen new chip factories, U.S. officials say. Beijing has also responded more hostilely to recent U.S. restrictions — including by banning rare earth exports to the United States and by starting an investigation into the chip maker Nvidia — potentially presaging a widening conflict over technology and supply chains.

Many Biden officials agree with the companies that say the United States should work with allies. After months of negotiations, the administration reached an agreement in September with Japan and the Netherlands to each halt the exports of roughly two dozen types of advanced chip manufacturing equipment to China.

Speaking at the Reagan Defense Forum in Simi Valley, Calif., on Dec. 7, Gina Raimondo, the commerce secretary, said the United States had to work with allies to ensure its efforts were not undercut. “When I set the rules, I have to make damn sure China can’t just buy the stuff from Japan or Korea or the Europeans,” she said.

The government also needed a “continuous dialogue” with the industry to figure out how to restrict technology that was incredibly complex, she said. “My thing is, you can’t put a price tag on national security. So if I dig into your profits, such is life.”

Hidden Huawei Factories

The export controls issued last week ban certain chips and manufacturing equipment from being shipped to China, some on a global basis. They also add 140 Chinese companies to the “entity list,” which prevents exporters from sending them certain technology without a special license. The three Chinese companies that bought billions of dollars of U.S. equipment — Swaysure Technology; Shenzhen Pengxinxu Technology, or PST; and Si’En Qingdao — were among those added to the list.

But some analysts said that the rules contained carve-outs that could undercut their power, and that they might come too late. According to a commercial market research report obtained by The New York Times, Swaysure, PST and Si’En Qingdao have finished building a dozen chip factories in China and may have already filled them with machinery.

While the rules will stop the most advanced chip-making equipment from being shipped anywhere in China, they do not impose additional restrictions on several major Chinese chipmakers or on some factories that, U.S. officials recently learned, are connected with Huawei.

One such plant, a multibillion-dollar state-owned chip factory in southern China, recently finished construction. According to corporate records from Wirescreen, a data platform, the factory does not share shareholders with Huawei or other companies on the entity list — and thus would not raise red flags for due diligence. But it sits on land owned by Huawei and is directly adjacent to another Huawei factory, public records show.

Two officials said that the U.S. government was aware of the information and that it was concerning that Huawei factories might still be receiving U.S. equipment. Huawei did not respond to request for comment.

Gregory C. Allen, a technology expert at the Center for Strategic and International Studies, said Chinese firms were finding ways around U.S. controls much more quickly than the U.S. was stopping them.

“The U.S. now has a track record of closing loopholes once per year, and China’s loophole identification operation runs 24/7/365,” Mr. Allen said.

Loophole Identification

In fact, those loopholes are what many officials believe allowed Huawei to survive, despite being targeted by U.S. restrictions since 2019.

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Gina Raimondo, the U.S. commerce secretary, speaks to reporters on the conclusion of her trip through China at Boeing’s Shanghai factory in August 2023.Credit...Andy Wong/EPA-EFE, via Shutterstock

In August of 2023, as Ms. Raimondo was traveling through China, Huawei surprised U.S. officials by releasing a phone that contained a Chinese-made advanced chip. Ms. Raimondo said the chip had “almost certainly” been made with banned U.S. technology and promised to investigate.

Media reports had documented a network of enterprises that appeared to be supporting Huawei — including Swaysure, PST and Si’En Qingdao — and some U.S. officials began pushing to add them to the entity list.

In late 2023, Bureau of Industry and Security officials started seizing U.S. shipments to those three Chinese firms. U.S. companies objected, arguing that the stoppages would hurt them.

Other B.I.S. officials sympathetic to that argument weighed in to have the block lifted, and shipments to the three companies resumed, ultimately continuing for another year, according to two officials and another person familiar with the incident.

Officials also believed U.S. equipment makers were sidestepping regulations by shipping to China from subsidiaries in Asia, and began investigating Applied Materials.

The Biden administration had been pushing Japan and the Netherlands to agree to restrictions, but those governments had reservations about hurting their companies, and about Chinese retaliation. In June, the United States threatened to deploy the foreign direct product rule, which would effectively steamroll the other governments and impose global restrictions on their exports.

By September, the governments reached an agreement, which fell short of what some American officials had wanted, but constituted a significant expansion of global rules.

Mr. Estevez said that the United States was not afraid to act by itself, but that doing so would encourage global companies over time to remove American technology from their supply chains. Now the United States has a framework with allies that it can update to address new threats from China, he said.

“That frankly protects national security to a greater degree,” he added.

Miracle Makers

The machines that make semiconductors are as big as a van or a bus, and they are mind-bogglingly complex, manipulating materials at the scale of just a few atoms to create the intricate features on computer chips.

At Applied Materials’ Silicon Valley offices in November, Tristan Holtam, the group vice president, said making chips involved “two miracles.” One is fitting 19 billion switches and 70 miles of wiring on a chip as big as a fingernail, he said, and the other “is that you can make that chip for $30.”

Mr. Holtam stood before a massive construction site, where Applied Materials is investing more than $4.5 billion to build a research center that will develop new chips for uses like A.I. and quantum computing.

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Vice President Kamala Harris and Gary Dickerson, the C.E.O. of Applied Materials, right, at Applied Materials in Sunnyvale, Calif., in May 2023. Applied Materials is investing more than $4.5 billion in a research and development center.Credit...Jim Wilson/The New York Times

As the technology war widens, concerns have grown that U.S. companies could lessen investments like these as they lose ground to competitors that are selling more to China.

A paper by the New York Fed this year found that profitability and employment had decreased for U.S. firms. In a letter to the Biden administration in August, lawmakers in California complained that U.S. companies were “rapidly losing” market share and “at risk of a ‘death spiral.’”

Other say these arguments are overblown, arguing that U.S. companies have maintained steady gross margins and that export controls have had minimal impact, according to earnings calls. In a call in May, Brice Hill, the chief financial officer of Applied Materials, described the last three quarters in China as “very strong.”

“We don’t see a cliff for that market,” he said.

A Final Push

In September, as the Biden administration prepared to announce new restrictions, the chief executives of KLA Corp, Lam Research and Applied Materials visited the White House and Capitol Hill to argue that unilateral controls would cause them long-run harm.

They stirred up several offices in Congress, which requested briefings from B.I.S. on the controls, according to two congressional staff members. Amid pressure from companies and Congress, Ms. Raimondo asked staff in early October to reassess whether the restrictions would have too much unilateral impact.

A senior administration official said the effort aimed to determine if restricted technology would be available from other sources, to make sure they effectively protected national security.

Some Commerce officials pushed to create a broad license exception for some Chinese factories, including those owned by Huawei, if products were available from non-U.S. sources, according to two people familiar with the events.

That effort was mostly overruled, they said, though the final rules contained new licensing exceptions for some Chinese companies. Other chipmakers that are substantial revenue sources for U.S. industry, which had previously been considered for entity listings, were not targeted.

Claire Fu contributed reporting from Seoul.

Ana Swanson covers trade and international economics for The Times and is based in Washington. She has been a journalist for more than a decade. More about Ana Swanson