Project 506

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PROJECT 506

CXMT and China’s Semiconductor Industrial Policy

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Table of CONTENTS

ABOUT

H ORIZON A DVISORY

Horizon Advisory

Horizon Advisory brings a new approach and unparalleled sources and methods to understanding business implications and financial market impacts of geopolitics.

Horizon Advisory was formed with the mission of building products to analyze competitive dynamics, supply chains, and long term trends relevant to emerging security and economic challenges. Business leaders face uncertainty associated with changes activated or impacted by geopolitical risks. Today’s economic battlefield features new type powers operating in ways and for effects that are misunderstood by traditional risk analysis and supply chain monitoring.

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Executive Summary

Changxin Memory Technologies Inc. (CXMT), also translated as Changxin Storage Technologies Inc., is a critical node within the Chinese Communist Party’s (CCP’s) semiconductor industrial project. CXMT serves both a key technological role in China’s quest for semiconductor security and an important organizational role in guaranteeing coordination throughout the broader Chinese microelectronics ecosystem. CXMT’s founding and flourishing has been hailed by Chinese press as a critical “bottleneck counterattack;” a means of leveraging advanced foreign technology in order to shore up Chinese technological weaknesses and flip the playing field of international industrial capacity.

US efforts to restrict Beijing’s advances in critical and emerging technology, including in the semiconductor value chain, risk failing to impose costs on Beijing if this bottleneck counterattack is not targeted and defended against.

The role that CXMT plays in China’s semiconductor strategy is reflected in ties to the Chinese government, military, and surveillance systems as well as to other non government actors known to be affiliated with China’s military and surveillance apparatus. CXMT was established by the Hefei government to develop China’s domestic DRAM manufacturing capabilities in accordance with the “Made in China 2025” national plan’s call to build indigenous capability all along the semiconductor value chain. In December 2019, Changxin Memory became the only DRAM supplier in China.1 In other words, CXMT is to DRAM what YMTC is to flash memory chips. CXMT’s position poses a threat along technology acquisition, export restriction evasion, and techno economic competition dimensions on par or more severe than that of YMTC. Key risk indicators that emerge from a survey of CXMT include:

• CXMT, originally called the 506 Project, exists as a project within Beijing’s “Made in China 2025” national strategy and is part of the National Integrated Circuit Major Project, one of the Ministry of Science and Technology’s major science and technology efforts.

• CXMT was originally established as a State owned enterprise backed by the Big Fund and the Hefei Municipal Government. Its capital backers continue to be primarily State owned and in several cases military tied.

• CXMT co invests with Chinese government and military tied entities, including the Big Fund and Shanghai National Defense Private Equity Fund Management Co., Ltd.

• In addition to its government investment, CXMT receives extensive subsidies.

• CXMT’s products appear to serve military and surveillance end uses in China: Its chips are advertised as military grade; procurement documents for a government video surveillance system in Inner Mongolia mention CXMT.

• CXMT supplies Huawei, was originally established under the leadership of the SMIC CEO, and partners with China Telecom on a high performance computing project. All 1 See: https://hf.ihouse.ifeng.com/news/2019_12_10 52475039_0.shtml

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three of those companies have been identified by the US Department of Defense as Chinese Communist Military Companies and are on the Department of Commerce’s Entity List

• CXMT is closely integrated with Zhaoyi Innovation, also known as GigaDevice: Zhaoyi Innovation is government backed, receives extensive government subsidies; appears to supply the Chinese Ministry of Public Security; cooperates on research and development projects with Chinese military entities; supplies Huawei, Hikvision, DJI, China Mobile, and iFLYTEK; and has a strategic cooperation agreement with SMIC.

• Throughout, CXMT operates on the basis of, and thanks to, foreign technology. The company’s technological model is based on patents acquired from the now defunct Qimonda, via Polaris. Chinese press reports note that CXMT had to be creative to ensure that it could acquire this technology without triggering US regulatory mechanisms: “In order to circumvent the export restrictions of the US entity list, CXMT revised some technical details” of the acquired material.2 CXMT continues to partner with and leverage the advances of leading international semiconductor companies including ASML and KLA Tencor.

Select Risk Factors: The Crowd CXMT Runs With Risk Factors Investors R&D Partners

Government entity or State owned enterprise

China State owned Enterprise Structural Adjustment Fund, China Ordnance Industry Group, China Communications Construction Company, China Mobile, National Integrated Circuit Industry Investment Fund, Hefei Municipal Government

Chinese Academy of Sciences Institute of Microelectronics, China Telecom, SMIC, MIIT's Fifth Institute of Electronics (via Gigadevice), China Electronics Technology Corporation (via Gigadevice)

Department of Commerce Entity List

China Ordnance Industry Group, China Communications Construction Company (select subsidiaries)

SMIC, China Electronics Technology Corporation

FCC Covered List China Mobile China Telecom Military or Military Civil Fusion-tied

China Ordnance Industry Group, China Communications Construction Company, China Mobile, National Integrated Circuit Industry Investment Fund

Chinese Academy of Sciences Institute of Microelectronics, China Telecom, SMIC, MIIT's Fifth Institute of Electronics, China Electronics Technology Corporation, Gigadevice 2 See: https://baijiahao.baidu.com/s?id=1667112540522987034&wfr=spider&for=pc

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Corporate Network

CXMT’s corporate network reveals close ties to the Chinese government, including military tied players. These are evident in CXMT’s ownership, as well as its co investments. The variety and depth of these ties suggest that CXMT is a close partner of the Chinese state and that the company’s strategy directly contributes to China’s semiconductor security, efforts to develop asymmetric semiconductor capacity, and military modernization agenda.

CXMT was originally established in 2016 as a State-owned enterprise under the Hefei Municipal Government the result of a joint project undertaken by that government and Zhaoyi Innovation, a major Chinese semiconductor player backed by the Big Fund. Since, CXMT’s parent company, Ruili Integrated Circuit, has raised additional capital, diversifying its backers. They remain primarily State owned and in several cases military tied. CXMT’s top shareholders include:

• The China State owned Enterprise Structural Adjustment Fund Co., Ltd, a State owned fund whose backers include companies that the US Department of Defense has identified as Chinese Communist military companies like China Communications Construction Company, China Ordnance Industry Group, China Mobile, and CRRC;

• The National Integrated Circuit Industry Investment Fund, or Big Fund, China’s government guided fund charged with supporting domestic development of integrated circuit capabilities, including for military applications;

• The Hefei municipal government; and

• A who’s who of Chinese State owned players including China Orient Asset Management; China Post Life Insurance Co., Ltd; PICC Science and Innovation Equity Investment Fund (Shanghai) Center (Limited Partnership); Agricultural Bank of China Financial Assets Investment Co., Ltd.; PICC Capital Insurance Asset Management Co., Ltd.; and Beijing Junlian Shengyuan Equity Investment Partnership (Limited Partnership).

Ruili Integrated Circuit (Ruili) and CXMT co invest with a series of additional Chinese government- and military-tied players.

Ruili has six wholly owned subsidiaries, including CXMT, all of them within a mutually reinforcing technological and industrial ecosystem. One of those, Changxin Xinju Equity Investment (Anhui) Co., Ltd co invests (90 percent) with the Shanghai National Defense Private Equity Fund Management Co., Ltd (10 percent) in a joint private equity fund, Anhui Qihang Xinrui Private Equity Management Co., Ltd. Its investments, if any exist, are not disclosed.

In addition, CXMT also co invests with government and military tied Beijing Yizhuang International Investment Development Co., Ltd. (Yizhuang Investment) and the National Integrated Circuit Industry Investment Fund Phase (Big Fund) in Changxin Collector (Beijing) Storage Technology Co., Ltd.

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Ruili Integrated Circuit Wholly-Owned Subsidiaries

Chinese Name English Name

Changxin Storage Technology (Hefei) Co., Ltd

Changxin Xinju Equity Investment (Anhui) Co., Ltd

Changxin Storage Technology (Xi'an) Co., Ltd

Changxin Xinqiao Storage Technology Co., Ltd

Beijing Jiuxin Technology Co., Ltd

Changxin Storage Technology Co., Ltd

Changxin Collector (Beijing) Storage Technology Co., Ltd

The Big Fund is a Chinese government guidance fund charged with supporting development of domestic capacity in the integrated circuit industry. Its backers include government entities like the Ministry of Finance, as well as State owned Chinese Communist military companies like China Telecom and China Mobile. It is overseen by the Ministry of Industry and Information Technology, a core player in operationalizing Beijing’s military civil fusion strategy.

Yizhuang Investment is a State owned investment and financing company charged with developing strategic industrial capacity in Beijing. Its other investment targets include SMIC subsidiaries SMIC International Holdings, SMIC North Integrated Circuit Manufacturing (Beijing) Co., Ltd. and SMIC Jingcheng Integrated Circuit Manufacturing (Beijing) Co., Ltd. as well as China Electronics Investment Holdings Limited and the Big Fund itself. SMIC is on the Department of Commerce’s Entity List; China Electronics Investment Holdings Limited is an investment arm of China Electronics Corporation, which the US Department of Defense has identified as a Chinese Communist military company.

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A Government Project for Domestic Capacity

In 2014, the State Council issued the National Integrated Circuit Industry Development Promotion Outline, raising the development of the integrated circuit industry to a national strategy…In 2016, CXMT was established by Hefei, focusing on DRAM. A month later, YMTC was established.3

CXMT’s government backing and partnerships are not a surprise. The company exists squarely within, and as a function of, the Chinese government scientific and technological industrial project and, more specifically, Beijing’s efforts to develop capacity across the semiconductor supply chain: CXMT is the product of the Chinese state’s program to develop domestic DRAM capacity in order to create an indigenous semiconductor supply chain, an effort that has been elevated to national level strategy for the Chinese Communist Party. CXMT’s position as such entails close partnership with Chinese government entities leading research, development, and engineering projects, as well as extensive State subsidies.

CXMT’s Role in the PRC’s Industrial Strategy

CXMT is part of China’s larger National Integrated Circuit Major Project.4 Run by the Ministry of Science and Technology, the National Integrated Circuit Major Project is one of China’s National Science and Technology major projects the highest profile projects in China’s science and technology apparatus, and the pillars around which its industrial planning organizes.

Those projects, and CXMT, also exist under the umbrella of the Made in China 2025 industrial strategy. Per one Chinese press source, “As part of the Made in China 2025 project, it [Changxin Memory] is expected to support about half of the global DRAM demand.”5 Or, more explicit, "Changxin Storage Technology (Changxin Memory Technologies, abbreviated as CXMT)…was established in 2016 with the support of the Hefei Municipal Government in Anhui Province. It is one of the three national strategic memory chip companies in China. It, Fujian Jinhua, and YMTC are collectively referred to as the three major semiconductor industry national teams of the Made in China 2025 plan.”6

3 See: https://cloud.tencent.com/developer/news/632488.

4 See: https://yq.aliyun.com/articles/599617?type=2

5 See: https://www.cnbeta.com/articles/tech/917201.htm, https://www.shangyexinzhi.com/article/349156.html.

6 See: https://xueqiu.com/8700204077/131746190

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The Hefei Municipal Party Committee and government have declared that they “attach great importance to the [CXMT] project.” Chinese press further reports that the “relevant municipal departments pay attention to the project, the municipal economic and technological development zone fully supports the project, and the production and investment group provides sufficient guarantee for human, financial, and material resources.”7

CXMT’s Origin Story

In 2014, the State Council issued the National Integrated Circuit Industry Development Promotion Outline, raising the development of the IC industry to a national strategy. Two years later, in 2016, the Hefei Municipal Government and Zhaoyi Innovation with support from the Big Fund launched a project to develop domestic DRAM memory chip capability, leveraging Zhaoyi technology. 8 They called it, cryptically, the “506 project.” 9 The 506 project backed from the outset by some 54 billion RMB in provincial government funding would become CXMT. It was intended to fill in the DRAM layer of China’s domestic semiconductor capability gap.

In 2018, the 506 project became public, and publicly labeled as CXMT: In April of that year, the Hefei Municipal Government held a celebration ceremony for the “National Integrated Circuit Major Project entering Anhui,” unveiling CXMT’s 220 billion RMB 12 inch memory wafer manufacturing base project. The event was attended by the leadership teams of SMIC and the Institute of Microelectronics of the Chinese Academy of Sciences, among others. 10

In 2019, the 506 project bore fruit: CXMT announced that it had reached mass production of domestic DDR4 memory chips, in what Chinese media called the “bottleneck counterattack” 11 and what constituted a first for China. Chinese media reports write that CXMT’s success “indicates that my country [China] has achieved a technological breakthrough in mass production in the field of memory chips and has an independent production capacity of this key strategic component.”12 Today, CXMT is China’s largest and most technology advanced DRAM layer. 13 Chinese media also describes it as “core” to Hefei’s semiconductor planning, and a leader that has attracted dozens of integrated circuit industry chain supporting projects in Hefei.

Chinese discourse and company statements at the time that mass production began underline the strategic purpose behind Changxin Memory Technologies. As an article in China News on "General Secretary Xi Jinping's Concerns" and "Anhui Beauty Innovation" puts it, "memory chips are an irreplaceable key strategic component of electronic products. They are also a break point in my country's chip industry chain. In 2019, Changxin Storage Technology Co., Ltd, with an

7

See: http://news.eeworld.com.cn/mp/s/a38788.jspx

8

See: https://baijiahao.baidu.com/s?id=1725057891142844130&wfr=spider&for=pc.

9 See: https://baijiahao.baidu.com/s?id=1735344991583541219&wfr=spider&for=pc

10 See: https://baijiahao.baidu.com/s?id=1735344991583541219&wfr=spider&for=pc.

11 See: https://baijiahao.baidu.com/s?id=1735344991583541219&wfr=spider&for=pc

12 See: https://xuangubao.cn/article/538245.

13 See: https://baijiahao.baidu.com/s?id=1735344991583541219&wfr=spider&for=pc

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investment of over 100 billion RMB, went into production smoothly. My country has broken the international monopoly and has advanced independent production capacity of dynamic random memory chips."14 More succinctly, per a Baijiahao account, “without CXMT, we will be strangled by foreign countries.”15

CXMT’s Government Subsidies

As a part of China’s national scientific and technological project, CXMT receives significant government subsidies, in addition to its government ownership. Chinese financial commentators consistently assess that CXMT is not a profitable business in its own right, and is instead “maintained by subsidies.”16 In 2017, Anhui Province released its list of major provincial industrial projects; that list featured CXMT, projecting that its 12 inch wafer base would receive 53.4 billion RMB in provincial funding. 17 In 2018 CXMT received 19.3 billion RMB and in 2019 5 billion RMB.18 Hefei city’s 2019 announcement of financial support of the integrated circuit industry reports having granted research and development subsidies to Changxin Memory Technology Co., Ltd and Ruili Integrated Circuit Co., Ltd.

This is not to mention support granted Changxin Memory Technology through its position in the Hefei Economic and Technological Zone. That zone’s preferential policies and subsidies for 2020 included:

• A special fund for scientific and technological innovation,

• Technology loans,

• Loan discounts for technology based small and medium sized enterprises

• Patent pledge loan subsidies,

• Research and development grants,

• Subsidies for winning science and technology awards,

• Tax benefits,

• Equipment purchase subsidies,

• Awards for drafting national, industry, and local standards,

• Awards for obtaining intellectual property,

• Awards for applying for foreign invention patents,

• Dedicated loans for developing semiconductor technology.19

14 See: https://baijiahao.baidu.com/s?id=1676550032950661485&wfr=spider&for=pc.

15 See: https://baijiahao.baidu.com/s?id=1681224944894100770&wfr=spider&for=pc

16 See: https://baijiahao.baidu.com/s?id=1681224944894100770&wfr=spider&for=pc.

17 See: https://zhuanlan.zhihu.com/p/143793121

18 See: https://www.sohu.com/a/318926735_117925.

19 See: http://www.kejishenbao.com/display.asp?id=10889

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Building on a Foundation of Foreign Technology

Chinese press and business media celebrate CXMT as a victory of domestic technological ingenuity. In reality, the company is based on and continues to rely on international technologies, acquired from abroad.

CXMT was founded based on technology from the now defunct Qimonda, acquired after that company went bankrupt. Qimonda was originally formed in 2006 as a spin off from Infineon’s semiconductor division. It went on to become the world’s second largest DRAM company until the 2008 financial crisis hit, crippling its business and forcing Qimonda to file for bankruptcy. In June 2015, Infineon sold Qimonda’s patents to Polaris for 30 million USD. In 2019, Polaris sold those to CXMT, providing it with more than 10 million DRAM related technical documents and 16,000 patents. These would make the 506 project feasible.20

The deal was not entirely clear cut, though. As one Chinese press account notes, CXMT had to be creative to ensure that it could acquire this technology without triggering US regulatory mechanisms: “In order to circumvent the export restrictions of the US entity list, CXMT revised some technical details” of the acquired material.21

In 2020, CXMT returned to this acquisition playbook, signing a patent license with US semiconductor company Rambus Inc. That agreement allowed Changxin Memory to obtain a large number of DRAM technology patent licenses.22

CXMT also reports carrying out extensive cooperation with other cutting edge international semiconductor tech players, including ASML, KLA Tencor, Lam Research, Tel, and Applied Material.23 For example, CXMT and ASML are reported jointly to have undertaken papers and research projects; in 2018, CXMT CEO Zhu Yiming traveled to Europe to meet with the top management of ASML and to visit Belgium’s IMEC.24 Chinese media notes that CXMT leverages “the products of major US equipment manufacturers (e.g., Applied Materials, Lam Research, and KLA Tencor) and electronic design automation tool suppliers (e.g., Cadence and Synopsys), as well as raw materials from Dow Chemical.”25

20

See: https://www.cxmt.com/about us/latest news/.

21

See: https://baijiahao.baidu.com/s?id=1667112540522987034&wfr=spider&for=pc

22

See: https://www.cxmt.com/about us/latest news/ 23 See: https://nb.zol.com.cn/716/7169693_all.html; https://www.eefocus.com/industrial electronics/438591 24 See: https://www.sohu.com/a/314327210_609238; https://www.sohu.com/a/270688892_115479.

25 See: https://www.elecfans.com/consume/1130410.html

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CXMT’s Ties to Chinese Government and Military Entities

CXMT appears to supply and partner with the Chinese government military and surveillance entities. For example:

• Its DRAM chips are advertised on Chinese procurement websites as “military grade.”

• It features in the procurement information for the Otog Banner Public Security Bureau video surveillance platform in Otog Banner, Inner Mongolia.

• It appears to partner with the Hefei Public Security bureau: In May 2021, that bureau went to CXMT’s headquarters to discuss collaboration and outline a set of demands.26

• CXMT’s wholly owned subsidiary Beijing Jiuxin Technology conducts advanced DRAM technology research with Chinese government entities, including with Beijing Superstring Memory Research Institute, which is integrated with the Chinese Academy of Sciences Institute of Microelectronics.27

CXMT chips are advertised as “military

26 See: https://baijiahao.baidu.com/s?id=1700568324334187528&wfr=spider&for=pc. 27 See: https://xueqiu.com/2653321046/158260573?ivk_sa=1024320u

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CXMT also partners with other companies tied to the Chinese military and surveillance system, including SMIC, Huawei, and China Telecom:

• CXMT’s original establishment was spearheaded by former SMIC CEO, Wang Ninguo, who went on to lead the company.28 Zhaoyi Innovation its original backer and one of its major customers, discussed later in this report has additional ties to SMIC. SMIC has been identified by the US Department of Defense as a Chinese Communist military company and is on the Department of Commerce’s Entity List.

• Chinese media describes CXMT as a supplier for Huawei, and as having passed the certifications of Chinese chip manufacturers including Huawei subsidiary HiSilicon. 29 Huawei has been identified by the US Department of Defense as a Chinese Communist military company and is on the Department of Commerce’s Entity List.

• CXMT and China Telecom have, since at least July 2021, worked together on a high performance cloud computing project, dubbed the CXMT Exclusive Cloud project, the first high performance cloud project in the Chinese domestic integrated circuit industry. 30 China Telecom has been identified by the US Department of Defense as a Chinese Communist military company and is on the Department of Commerce’s Entity List.

• In addition, in 2020, CXMT signed a cooperation agreement with Suzhou Ruihong Electronic Chemicals. 31 The latter sells to SMIC and has undertaken Chinese government research and development projects for the 863 program, a core Chinese national military tied science and technology program.

• CXMT’s partner company and major customer Zhaoyi Innovation reportedly supplies Huawei, DJI, iFlytek, China Mobile, and Hikvision, among others.32

The China Sound Valley

CXMT, as well as its long standing partner Zhaoyi Innovation, are described in Chinese media accounts as leading enterprises in the Hefei Economic and Technological Development Zone’s “China Sound Valley.” That development base was established as a key provincial and ministerial cooperation project by the Ministry of Industry and Information Technology (MIIT) and the Anhui Provincial Government to focus on artificial intelligence. The China Sound Valley is operated by the Fifth Electronic Research Institute of MIIT. MIIT is one of the primary government entities charged with implementing Beijing’s Military Civil Fusion (MCF) (军民融合) strategy.33 In 2017, the Anhui Provincial Government issued policies detailing its support for the China Sound Valley

28 See: http://news.eeworld.com.cn/mp/s/a38788.jspx. 29 See: https://zhidao.baidu.com/question/208079221734386045.html; https://baijiahao.baidu.com/s?id=1674090824749602080&wfr=spider&for=pc. 30 See: https://baijiahao.baidu.com/s?id=1737333566602403355&wfr=spider&for=pc 31 See: https://xueqiu.com/9983210953/151554711 32 See: https://baijiahao.baidu.com/s?id=1724976249383529747&wfr=spider&for=pc 33 中国声谷：“十四五”将打造世界级产业地标 [China Sound Valley: "14th Five Year Plan" Will Create a World Class Industrial Landmark], CCTV, December 29, 2020.

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that outlined intentions to dedicate some 800 million RMB annually for special funds, talent training, technology and product promotion, and other forms of support.34

Many of the other companies integrated into the Sound Valley project have direct, documented ties to the Chinese military and government. Sound Valley participants include Hikvision, IFlytek, Anhui Aerospace Information Technology Co., Ltd, and Navinfo. 35 In June 2020, the US Department of Defense (DoD) identified Hikvision as tied to China’s military.36 IFlytek’s two top shareholders are China Mobile (12.7%), which DoD has also identified as tied to the Chinese military, and the State-owned China Science and Technology University Asset Management Co (4.12%). 37 Anhui Aerospace Information Technology is majority owned by Aerospace Information Co., Ltd, which itself is a joint venture on the part of 12 of China’s best known aerospace companies and institutions, including China Aerospace Science and Industry Corporation (CASIC).38 DoD has labeled CASIC, too, as a Chinese military company.39 NavInfo, China’s leading provider of digital map content and Internet of Vehicles services, is State-owned. Its largest shareholder, China Siwei Surveying and Mapping Technology Co., is backed by China Aerospace Science and Technology Group (CAST) as well as China Academy of Launch Vehicle Technology (CALT), both of which are on the DoD list of military tied companies.40

Zhaoyi Innovation

CXMT’s affiliation with Zhaoyi Innovation one of its original backers, primary customers, and primary partners exposes the company to additional risk indicators. Zhaoyi Innovation, also known as GigaDevice, is the world’s number one fabless NOR flash supplier. Building on ARM technology, its three main lines of business are storage, MCU, and sensors. Zhaoyi reportedly sells to Huawei, DJI, Hikvision, China Mobile, and iFlytek, among others; buys from SMIC; appears

[Announcement About Anhui Province's 2020 Support for China Sound Valley Construction Special Fund (First Batch)], September 11, 2020; 中 国声谷：让人工智能走入千家万户 [Sound Valley of China: Let Artificial Intelligence Enter Thousands of Households], China News Net, October 26, 2020. For additional English language analysis of Hikvision, see “Hikvision and the Chinese Military,” IPVM, May 25, 2021, https://ipvm.com/reports/hikvision prc military. 36 “Qualifying Entities Prepared in Response to Section 1237 of the National Defense Authorization Act for fiscal Year 1999,” Department of Defense, June 12, 2020. https://media.defense.gov/2020/Aug/28/2002486659/ 1/ 1/1/LINK_2_1237_TRANCHE_1_QUALIFIYING_ENTITIES.PDF

37 For shareholder information, see the company profile at Market Screener: https://www.marketscreener.com/quote/stock/IFLYTEK CO LTD 6500190/company/

38 Details on shareholders can be accessed from Chinese regulatory sources or from third party aggregators of Chinese corporate information: https://aiqicha.baidu.com/company_detail_66942425098802?rq=ef&pd=ee&from=ps.

39 “Qualifying Entities Prepared in Response to Section 1237 of the National Defense Authorization Act for fiscal Year 1999,” Department of Defense, June 12, 2020. https://media.defense.gov/2020/Aug/28/2002486659/ 1/ 1/1/LINK_2_1237_TRANCHE_1_QUALIFIYING_ENTITIES.PDF

40 See: https://media.defense.gov/2020/Aug/28/2002486659/ 1/ 1/1/LINK_2_1237_TRANCHE_1_QUALIFIYING_ENTITIES.PDF

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to supply technology to the Chinese surveillance system; and collaborates on research and development with Chinese military affiliates.

Zhaoyi Innovation provided the original basis for CXMT technology, partnering with the Hefei Municipal government to launch the company in 2016. Today, Zhaoyi Innovation continues to hold a stake in Ruili Integration and one that it has increased over recent years. 41 Zhaoyi Innovation and CXMT also have supply and joint development partnerships: In 2021, Zhaoyi Innovation purchased some 1,280 million RMB of DRAM products from CXMT; that same year, it invested about 4.25 million RMB in their joint product development platform. 42 The two companies have signed framework purchase agreements, foundry service agreements, and product joint development platform cooperation agreements.43 At the leadership level, Zhaoyi Innovation board member and largest shareholder Zhu Yiming is the chairman of Ruili Integrated Circuit.44

Zhaoyi Innovation’s Customer Network45

Zhaoyi Innovation’s Government Ownership and Support

Zhaoyi Innovation is invested in by a number of government players, including the Big Fund and the Industrial and Commercial Bank of China, and China Construction Bank. It also receives significant government subsidies. Zhaoyi’s 2021 annual report listed 70 million RMB worth of government subsidies, including for:

• The Hefei Economic and Technological Development Zone Chip Design Project

• Development and industrialization of low power NORFLASH for IoT applications

• 24nm SPI NAND Flash memory chip research and development project

41

See: http://www.zhimeng.com.cn/news/2021/0529/3413679.html

42 See: http://www.zhimeng.com.cn/news/2021/0529/3413679.html.

43 See: https://baijiahao.baidu.com/s?id=1709883138837618053&wfr=spider&for=pc

44 See: Zhaoyi Innovation 2021 annual report.

45 See: https://baijiahao.baidu.com/s?id=1724976249383529747&wfr=spider&for=pc

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• Beijing Intellectual Property Grant Fund of the Patent Office of the State Intellectual Property Office

• Beijing Municipal Bureau of Economics and Information Technology Special Funds for Advanced Development

• Provincial Science and Technology Innovation Policy R&D Expenditure Double Top 100

• Hefei Economic and Technological Development Zone Economic and Trade Bureau Subsidy for Triple One Creation Project

• Hefei Science and Technology Bureau Provincial Subsidy for the Purchase of R&D Instruments and Equipment

• Hefei Economic and Technological Development Zone municipal level foreign trade promotion policy "expanded amount" financial subsidy

• Suzhou Enterprise R&D Growth Subsidy Fund.46

Zhaoyi Innovation’s Military and Surveillance Ties

As that extensive government funding suggests, Zhaoyi Innovation appears to support China’s surveillance and military program. For example, the Ministry of Public Security reportedly leverages Zhaoyi Innovation’s sensor technology, including its TFT large area fingerprint recognition. 47 Zhaoyi Innovation also sponsors the Zhaoyi Innovation Cup Electronic Design Competition, originally launched by Tsinghua University in 1996 and intended to improve Chinese capacity in “core key technologies.” The other sponsors for that competition include government players like the China Institute of Electronics, CAST, the Rugao Municipal Committee of the Chinese Communist Party, and Rugao Municipal People’s Government as well as Chinese military-tied companies like Huawei and Phytium.48

Zhaoyi Innovation’s ties to Huawei extend beyond that competition. Huawei is one of Zhaoyi Innovation’s core customers. The two are also “ecological partners in the Internet of Things field” as evident in partnerships in areas ranging from car networking and smart manufacturing to smart city relevant domains. Zhaoyi Innovation has cooperated with Huawei LiteOS since 2016, integrating its GD32F407 series MCU wireless development board with Huawei’s LiteOS operating system.49

Zhaoyi Innovation reportedly supplies a range of additional Chinese military-tied companies, including DJI, Hikvision, China Mobile, and iFlytek. 50 DJI, a Chinese commercial drone champion, and Hikvision, a video surveillance company, have been identified by the Department of Defense as a Chinese Communist military company and is on the Department of Commerce’s Entity List. China Mobile has been identified by the Department of Defense as a Chinese Communist military company and placed on the Covered List by the FCC. IFlytek’s two top

46 Ibid.

47

See: https://baijiahao.baidu.com/s?id=1674090824749602080&wfr=spider&for=pc.

48 See: http://www.jskx.org.cn/web/mobile/mobile_art/822037

49 See: http://ee.mweda.com/rd/147694.html.

50 See: https://baijiahao.baidu.com/s?id=1724976249383529747&wfr=spider&for=pc

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shareholders are China Mobile (12.7) and the State owned China Science and Technology University Asset Management Co (4.12%).51

Zhaoyi Innovation also has ties to SMIC. The two companies have a strategic cooperation agreement, signed in 2017. 52 SMIC is also Zhaoyi Innovation’s main foundry and Zhaoyi Innovation has historically invested in SMIC.53 The ties are so close that the Chinese financial system describes Zhaoyi Innovation as a “concept stock” of SMIC.

Finally, Zhaoyi Innovation also partners on auto chips with military-tied players like Chang’an Auto, the Ministry of Industry and Information Technology’s (MIIT’s) Fifth Institute of Electronics, China Electronics Technology Corporation’s (CETC’s) 55th Research Institute, the Chinese Academy of Sciences Institute of Microelectronics, and the Chinese Academy of Sciences Institute of Computing Technology. 54 MIIT is a leading Chinese government entity in operationalizing the military-civil fusion strategy. CETC has been identified as a Chinese Communist military company and is on the US Department of Commerce’s Entity List. Chang’an is subordinate to China South Industries Group Corporation., Ltd, which the US Department of Defense as identified as a Chinese Communist military company and the Department of the Treasury has placed on the Non SDN CMIC list.

51

For shareholder information, see the company profile at Market Screener: https://www.marketscreener.com/quote/stock/IFLYTEK CO LTD 6500190/company/.

52 See: https://laoyaoba.com/n/649005

53 See: http://vip.stock.finance.sina.com.cn/corp/view/vCB_AllBulletinDetail.php?id=4689127.

54 See: https://baijiahao.baidu.com/s?id=1738964501450156135&wfr=spider&for=pc

www.horizonadvisory.org

ConclusionThe US and China are locked in an industrial competition that hinges on advanced technology. In that competition, Beijing pursues asymmetric advantage by obtaining cutting edge technologies from abroad and converting those into military, surveillance, and industrial capacity, all of which ultimately fuel the Chinese Communist Party’s power projection and global influence. This dynamic is increasingly recognized in the United States. So is the reality that the semiconductor value chain plays a critical role in the competition.

Now, an effective response requires understanding the players operationalizing Beijing’s industrial offensive, their relationships among themselves, and their relationships to the international system.

CXMT is one such player, and an integral one: The government launched company was established to develop China’s domestic DRAM manufacturing capabilities in accordance with the Made in China 2025 national plan. In other words, CXMT is to DRAM what YMTC is to flash memory chips. This position comes with a host of ties to the Chinese government, military, and surveillance systems: CXMT is part of one of the Ministry of science and Technology’s major science and technology projects and backed by government and military tied players; its products appear to support military and surveillance end uses in China; it also supplies and engages in research partners with Chinese government and military tied players ranging from Huawei to China Telecom, DJI to Hikvision. And CXMT does all of this on a foundation of advanced foreign technology.

CXMT is an instructive example of Chinese industrial policy and the ways in which US competitive orientation needs to update for China’s shrewd asymmetric integration and coercion through supply chain control. CXMT was established in order to serve as a “bottleneck counterattack.” If US efforts to spur domestic microelectronics development are not paired with necessary attention to players like CXMT, they will be destined to fail, and in stupendous fashion: China is steps ahead with its bottleneck counterattacks and will continue to pilfer the fruits of US investment and cutting edge technology unless bottlenecks aren’t converted into and activated as chokepoints.