U.S. Updates Entity List, DSET Reveals Substantial Controllers Behind Some Chinese Enterprises
This report investigates how Huawei, despite U.S. sanctions, leverages a shadow network to access foreign resources, technologies, and services to expand its semiconductor manufacturing capabilities.
On the 2nd of this month, the U.S. government announced new export control measures, adding 140 Chinese entities to its Entity List to curtail China’s capacity to manufacture advanced chips. Companies such as Swaysure, Qingdao SiEn, and Pengxinxu, which collaborate with Huawei in chip production, were among those listed. The report places a spotlight on Shenzhen Major Industry Investment Group (SZMII), a state-owned investment conglomerate and the controlling entity behind Swaysure and Pengxinxu, both of which were recently sanctioned by the U.S.
Shenzhen’s Strategic Semiconductor Investment
SZMII, a state-owned investment conglomerate under the Shenzhen municipal government, controls numerous semiconductor manufacturers. As outlined in Figure 1 of the report, SZMII plays a critical role in allocating resources, establishing semiconductor companies such as Swaysure and Pengxinxu, and maintaining close ties with Huawei through strategic personnel arrangements. The report identifies the following key findings:
- To bolster the local semiconductor manufacturing industry, SZMII has forged close ties with Huawei. Within this context, SZMII has adopted three primary investment strategies to build Huawei’s “shadow supply chain” :
- Encouraging established companies to set up manufacturing facilities in Shenzhen.
- Integrating private companies into its network through mergers and acquisitions.
- Founding new entities to directly support Huawei’s supply chain needs.
- As detailed in Figure 1, SZMII has established entities such as Swaysure, Pengxinxu, and PXW. These newly created companies, which have minimal publicly available information, serve as intermediaries to engage with Taiwan’s semiconductor supply chain. Through these entities, SZMII has secured technological assistance and expertise.
- Compared to prominent Chinese technology giants, these lesser-known startups are better positioned to evade the scrutiny of international governments. Their low profile allows them to acquire technology and services from Taiwanese companies more effectively, ultimately integrating Taiwan’s semiconductor industry expertise into Shenzhen’s—and by extension, China’s—broader national semiconductor strategy.
China’s Strategy: Incentivizing Taiwanese Firms to Localize
A 2023 Bloomberg report revealing that four Taiwanese companies provided engineering services to PXW and Pengxinxu. This revelation brought Huawei’s shadow network back into public focus. DSET Non-resident Fellow Chiang Min-yen noted that while media reports play a vital role in fostering public policy discussions related to technology safeguards, further analysis of the underlying business mechanisms and the influence of China’s industrial policies is essential for deepening these conversations.
Tsai-Yi Wang, a DSET adjunct analyst and lead author of the report, explained how China leverages domestic market incentives and local compliance procedures to encourage Taiwanese companies to establish more autonomous subsidiaries within China. This growing autonomy may place these subsidiaries beyond the reach of international regulatory measures. Wang emphasized that this situation serves as a warning for other companies investing in China.
The report examined several cases, including key Chinese semiconductor firms such as Huawei’s shadow network, SMIC, Fujian Jinhua, and ChangXin Memory, which have all received cleanroom engineering services from Taiwanese firms. These commercial ties can be traced back to the early 2000s when Taiwanese wafer manufacturers began investing in China. Despite Taiwan’s government imposing investment review restrictions to safeguard its semiconductor industry’s competitiveness, the complexity of semiconductor production networks has left many suppliers beyond the scope of these reviews.
Wang elaborated that globalization had previously integrated China’s semiconductor industry into global value chains. Under this structure, the successful listing of Taiwanese subsidiaries on Chinese stock markets was once seen as a strategic move to expand global business operations. On one hand, China’s capital markets allowed Taiwanese firms to reduce reliance on funding from their Taiwan-based parent companies, leveraging Chinese capital for local market expansion. On the other hand, the public listing status often enhanced trust with Chinese clients.
Learning from Experience: To Strengthen Taiwan’s Economic Security System, DSET Publishes Latest Supply Chain Research Report
However, with the current U.S.-China technology rivalry, the above structure has been upended. What was once an advantage now exposes Taiwanese firms to greater constraints, undermining Taiwan’s economic security policies. The DSET report provides a comprehensive analysis of this historical development.
Wang emphasized that the supply chain research report should be seen as a step toward strengthening Taiwan’s economic security framework. For businesses, understanding the political implications of specific commercial mechanisms can help mitigate future geopolitical risks. For Taiwanese society, addressing contemporary issues rooted in past industrial developments can steer public discussions toward critical policy priorities. For the international community, the report offers a reliable foundation for devising policies that prevent corporations from being absorbed into China’s state-driven semiconductor strategy.
