17 Jun 2024 -
 Defence

US Government’s Chinese Semiconductor Ban Shakes Up Defence Industry

The US defence industry is facing a major shake-up as the government moves to ban certain Chinese-made semiconductors from its supply chain. This sweeping restriction, set to take effect in December 2027, could disrupt existing contracts and significantly impact future procurement, potentially increasing costs and causing delays.

The ban, detailed in Section 5949 of the National Defense Authorization Act for fiscal year 2023, as reported in National Defense Magazine targets semiconductors and related products from major Chinese manufacturers like Semiconductor Manufacturing International Corp (SMIC), ChangXin Memory Technologies, and Yangtze Memory Technologies Corp, along with their subsidiaries.

The proposed implementation, as outlined by the Federal Acquisition Regulatory Council (FAR Council), is far-reaching, says National Defence. It prohibits not only the direct purchase of electronics containing these semiconductors but also contracts where the end product “uses” other electronics containing the banned components. This two-pronged approach mirrors a similar ban on telecommunications equipment from Chinese manufacturers implemented in 2019.

The FAR Council’s proposed rule requires defence contractors to conduct “reasonable inquiry” to identify and avoid using banned semiconductors. While they can rely on supplier certifications, they are not mandated to conduct independent audits, raising questions about the robustness of the compliance verification process.

The rule also imposes stringent disclosure requirements on contractors, compelling them to inform their customers and the government of any use of banned components. Failure to comply can result in significant financial penalties, as the cost of corrective actions is deemed unallowable. This has sparked concerns within the industry, as an estimated 75% of defence contractors could be affected, and up to 20% of semiconductors in their products may be non-compliant.

To further tighten control, the government is considering requiring contractors to disclose the entire provenance of their semiconductor supply chain. This would necessitate identifying all vendors and facilities involved in the design, manufacturing, and testing of the components.

While the ban aims to bolster national security by reducing reliance on potentially vulnerable foreign sources, its impact on the defence industry is likely to be substantial. The complexity of identifying and replacing banned components could lead to disruptions in supply chains, increased costs, and project delays. The FAR Council is seeking industry feedback on the proposed rule, hoping to address concerns and clarify implementation details.

Despite the potential challenges, the ban signals a clear shift in US policy towards greater scrutiny and control over its defence supply chain. It underscores the increasing geopolitical tensions and the growing importance of securing critical technologies in an increasingly interconnected world.

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