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Workers at chipmaker startup PXW Semiconductor Manufactory in Shenzhen, China’s southern technology hub, began panicking after the US placed their company on a trade blacklist last week.

“Most team leaders and executives are in emergency meetings, but the rest of us are not allowed to discuss such a ‘sensitive’ issue,” the employee said, adding that the door to their boss’s office remained closed on Friday, a day after the U.S. was added. PXW appeared on the “entity list” along with 35 other Chinese companies.

US suppliers are prohibited from exporting to companies on the list without approval, which in most cases is expected to be denied. Analysts said the latest blacklist was a “domestic defense” to close loopholes in devastating measures imposed in October that allow Washington to block Chinese access to high-end chips and the talent and tools to make them.

“It’s a game of whack-a-mole,” said Douglas Fuller, an expert on the chip industry at Copenhagen Business School. “Every time Washington comes up with sanctions, new projects appear, which they then try to block.”

The U.S. began using export controls to curb China’s tech boom, blacklisting Huawei in May 2019. Since then, Washington has added many other Chinese tech businesses, including surveillance companies, chip makers, drone developers, smartphone makers and institutes, that it suspects. supplying the People’s Liberation Army.

Some of the companies targeted last week, including PXW, are only just starting to develop the semiconductor business and are therefore more vulnerable than established players like Huawei.

“The US government has mastered the Chinese semiconductor supply chain and knows who the priorities are and who has future potential,” said Brady Wang, a Taiwan-based analyst at research firm Counterpoint.

PXW has strong backing, including funding from the Shenzhen government and the leadership of a former Huawei executive. The company has ordered equipment from various US companies that is expected to arrive next year, but now may never receive it, according to two company employees.

Another unexpected addition to the list is Hefei Core Storage Electronic, a company founded by former employees of Taiwanese chip design company VIA Technologies to develop a homegrown alternative to Intel-based PC processors. “It’s a bad surprise,” said an engineer at Hefei Core Storage. “Nobody expected us to be on their radar.”

A Western trade official said the U.S. could have discovered the Hefei company was working on processors suitable for supercomputers or supporting China’s development of advanced memory chips, areas targeted under the October surveillance.

“The U.S. is developing a more detailed understanding of China’s industry, including players you would consider unknown,” the official said.

However, the list also contains more famous companies.

Yangtze Memory Technologies, China’s largest memory chip maker, has already been hit hard by the October crackdown. The company had halted its expansion and asked U.S. equipment manufacturers to return advance payments for previously ordered tools, said a senior YMTC engineer.

“At that time we could still think about retreating there [making less advanced] chips, but now our fate is sealed,” he said, referring to the near-impossibility of getting permission to obtain licenses for equipment to expand production after being on the entity list.

YMTC had already terminated negotiations with Apple to supply memory chips for iPhones in China. Research firm TrendForce predicts that it may be forced out of the advanced 3D Nand flash product market by 2024 as it has lost critical support from toolmakers to compete with rivals in this particular memory technology.

Washington also included a prominent developer of chip-making equipment, Shanghai Micro Electronics Equipment, which represents China’s only hope to develop home-grown lithography machines, a key advanced chip-making tool currently dominated by Dutch company ASML.

The company’s lithography machines rely on imported components and have never been mass-produced. “There is still a long way to go,” said a Shanghai official who led the SMEE development program. But the official pointed out that the company has created teams of experienced personnel to replace ASML field workers who provided services but were later removed due to US export controls.

“SMEE does not have staff who are US citizens like some other Chinese chip equipment manufacturers,” Fuller said. “Consequently, the control over the US persons included in the October events is less effective.”

Another important addition is the Shanghai Integrated Circuits Research and Development Center, a company believed to be tied to Huawei’s efforts to increase domestic chip production. Huawei denies its involvement.

“The ICRD has had this for a long time,” said a Western trade official. “We expected them to be blacklisted for two years as the US would try to crack down on any company close to Huawei’s chip development projects.”

None of the companies for this article responded to a request for comment.

The listing also targets China’s development of high-performance chips. It includes chip design house Cambricon Technologies and its nine subsidiaries. It also subjects them and their incubator at the Chinese Academy of Sciences to a “foreign direct product rule” that prevents them from acquiring supplies or services that contain certain amounts of US technology.

Cambricon received funding from Alibaba and the Shanghai government before listing on China’s tech-focused Star market in 2020. It gets intellectual property from UK-based Arm and design tools from US suppliers Cadence and Synopsys. It also relies on Taiwan’s TSMC to manufacture its chips.

“If the conflict between China and the USA escalates. . . it could have a significant negative impact on the company’s future product development and supply chain,” Cambricon said in its latest fundraising filing.

That fate may await other Chinese startups, analysts say. “There’s a lot more to chip design,” Fuller said.

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