When the U.S. put six Chinese companies on a “blacklist” last month because a suspected spy balloon flew over the country, a small tech company in Northern California had reason to pay extra attention.
AXT Inc. has a lot of connections with China that go beyond the factories it has there. According to a filing that AXT made with the Securities and Exchange Commission in August, the company owns an 85% stake in a Chinese subsidiary that makes materials for semiconductors. One of its biggest customers has been a huge state-owned defense company that has ties to Beijing’s surveillance balloon program.
China Electronics Technology Group Corp., or CETC, is a division of the defense company. It was one of the Chinese companies that the Biden administration put on a blacklist for “supporting” the aerospace programs of the People’s Liberation Army. That wasn’t the first time the U.S. government did something against CETC. Since 2018, at least 20 of its subsidiaries and divisions have been added to a list known as the “entity list.”
The entity list names foreign companies that are thought to be a threat to U.S. national security. U.S. companies that want to export goods to these companies must follow strict rules.
It’s not clear if any of the blacklisted parts of CETC bought materials directly from AXT’s subsidiary.
In its SEC filing, AXT doesn’t say which parts of CETC its subsidiary worked with, and the company didn’t answer any of our questions.
There’s no evidence that AXT is breaking any U.S. laws, but the fact that it has ties to a Chinese defense conglomerate that weren’t known before shows how hard it is to keep U.S. technology and know-how from going to China’s military.
A senior fellow at a Washington think tank called the Center for Strategic and International Studies, Emily Benson, said that the two economies are tied together in a way that other economies are not. “Therefore, the more connected you are, the harder it is to set up controls and really force separation in a bilateral supply chain.”
Even the most powerful and well-funded operation would have trouble keeping track of the flow of goods that come into China and move through a large military contractor like CETC.
In the U.S., the Bureau of Industry and Security in the Commerce Department is responsible for keeping track of the movement of electronics that could be used by the Chinese military. This is a difficult job, and the bureau often doesn’t have the resources to sort through reams of export data and public ownership records, Benson said.
“A very small staff at the Bureau of Industry and Security is in charge of basically looking for wrongdoing in the supply chain,” she said.
Emily de La Bruyère, a senior fellow at the Foundation for Defense of Democracies, a Washington research group, said that China Electronics Technology Group is one of China’s “core” state-owned defense companies. It has a large global network.
She said, “It’s a huge thing.” “One of the ways it works is through this huge network of subsidiaries, which include large research institutes, joint ventures, investment players, and subsidiaries that are owned by the company. And they have a lot of partnerships with other countries in the international system.”
Last year, Fortune magazine listed CETC as the 233rd best company in the world.
U.S. securities filings show that Ren Diansheng, who is the technical director of AXT’s Beijing Tongmei subsidiary, worked for CETC for 15 years before joining AXT in 2005. Ren lives in China, so it wasn’t possible to talk to him.
The Commerce Department didn’t give any more information about what role CETC was supposed to play in China’s surveillance activities using balloons. A department representative told NBC News that the analysis of the downed balloon’s debris “is still going on, and we don’t have a final analysis yet.”
The Chinese government says the balloon was a civilian one that went off course.
American Xtal Technology Inc., which is what AXT used to be called, began in 1986. In its early years, the Defense Department gave it $2 million to help it develop technology and products. AXT moved its manufacturing to China about 20 years ago and set up facilities in several different places. Securities filings show that as of 2021, the company had 28 employees at its headquarters in California and almost 1,400 in China.
Wafers are small, highly pure discs that are used in semiconductors. They are made by AXT. The materials are used to make things like solar cells, lasers, and sensors that are used in electronics.
The Chinese balloon that flew over the U.S. in early February, carrying more than 2,000 pounds of electronics, was 200 feet tall, according to the Biden administration. U.S. officials say that the balloon could pick up radio signals and listen in on people.
After the balloon incident, the Commerce Department put six Chinese organizations on a “black list” last month. The 48th Research Institute at CETC was one of them. The institute’s website says that it makes and sells microelectronic equipment like solar-powered wafers, cells, and panels to customers in China and around the world.
CETC didn’t respond to requests for comment.
The company is part of what China calls its “military-civil fusion strategy.” This strategy aims to remove barriers between commercial and defense research and production in order to boost the country’s military power, said Grant Parks, a China analyst at C4ADS, a Washington-based nonprofit global security organization.
CETC is in charge of a company that U.S. officials say is linked to a complicated spying operation against the country’s Uyghur minority, which is mostly Muslim. Human rights groups say that Chinese authorities have repressed Uyghurs as part of a campaign, and the U.S. government says that what China is doing is genocide.
The ruling Chinese Communist Party owns the tabloid newspaper Global Times. Last year, it wrote an article about a “powerful” space surveillance radar that was made by one of CETC’s research arms.
President Donald Trump and Vice President Joe Biden have made it illegal for U.S. citizens to invest in CETC. In 2010, a Massachusetts company was found guilty of sending illegal military electronics to CETC. The Justice Department said at the time that CETC was in charge of “buying, developing, and making electronics for the Chinese military.”
In 2020, the Commerce Department blacklisted four CETC entities for helping the Chinese People’s Liberation Army build and “militarize” artificial islands in the disputed waters of the South China Sea.
Some experts say that because Chinese conglomerates are made up of a large number of smaller units, they are often one step ahead of Washington’s sanctions and blacklisting efforts.
“One of the biggest problems with existing export controls and other regulatory systems is that you leave all of these loopholes if you don’t say that the entire corporate network of the company is covered,” de La Bruyère said.
China’s use of U.S. technology in its defense industry is now at the top of the list of worries in Washington. The issue will be the focus of hearings by a new House committee on China.
Last month, the Senate Intelligence Committee’s top Democrats and Republicans warned that giving the People’s Republic of China U.S. technology made the country “vulnerable in dangerous ways.”
Sens. Mark Warner, D-Va., and Marco Rubio, R-Fla., wrote in a letter to Treasury Secretary Janet Yellen that “U.S. technology, talent, and capital continue to contribute, through both legal and illegal means, including theft, to the PRC’s development of critical military-use industries, technologies, and related supply chains.”
China has denied that it has stolen intellectual property or spied on other companies’ businesses.
China also wants to be less dependent on foreign markets and technology made in the West. To do this, it is pursuing a policy it calls “dual circulation” to increase its economic and technological independence.
In October, the Biden administration put in place restrictions that had never been done before on sending certain semiconductor chips and tools for making chips to China. The goal was to stop the Chinese military from getting access to important technology.
The move was criticized by China’s foreign ministry as an unfair use of trade policy that was meant to give the U.S. “technological hegemony.”
To strengthen the new U.S. export rules, Washington has tried to work with Japan and the Netherlands, which are home to major chip-making companies, to stop China from getting advanced equipment for making chips.
Benson of the Center for Strategic and International Studies said that if the three governments could come to an agreement on export restrictions and make sure they were followed, it would be a big step forward and provide a new model for future efforts.