China is actively pursuing advancements in artificial intelligence (AI) research and production to enhance its autonomy in the China-U.S. tech competition by developing local AI chip design. This goal makes Chinese AI chip companies vulnerable to U.S. technology sanctions. However, a significant challenge for China is that its main wafer manufacturer, Semiconductor Manufacturing International Corporation (SMIC), can only manufacture chips of 7 nanometers, which is considered outdated technology.
In order to make breakthroughs in AI chips and high-performance computing products, China needs to rely not only on its domestic industry but also on advanced technology from Taiwan Semiconductor Manufacturing Company (TSMC). This collaboration requires close cooperation between chip designers and manufacturers to ensure that the production technology meets design specifications, making a quick switch to alternative chipmakers impractical. This partnership highlights the business dynamics between TSMC and Chinese AI chip designers, showing the interconnectedness of Taiwan and China’s semiconductor supply chains amid the ongoing China-U.S. tech conflict.
The Remote-Poaching Model: The Bitmain Case Study
Bitmain offers insights into the relationship between China and Taiwan in AI chip development. Initially focused on designing cryptocurrency mining machines, this major Chinese IC design company shifted its focus to developing edge AI chips with the help of Taiwanese engineers.
The business model they adopted, known as the remote-poaching model, involves Taiwanese engineering teams designing chips for Chinese firms, managing local wafer production with TSMC, and overseeing the packaging and testing processes. Notably, no Taiwanese engineers physically relocate to China, yet China’s AI chip industry continues to progress.
Establishing cross-strait business mechanisms is essential for the effectiveness of the remote-poaching model, as demonstrated in the collaboration between Bitmain and Beijing Jingshi—a company spun off from Bitmain in 2019. This cooperation allows both partners to utilize the Chinese market, where the government uses AI tools for surveillance systems in smart cities. Furthermore, this partnership has attracted significant financial investments from Chinese entities like Beijing E-hualu and Xiaomi Group.
However, Taiwan does not legally accept such a business model.
Taiwan’s Response: Investigative Actions and Investment Screening
To prevent Taiwan’s semiconductor industry from becoming a tool for China’s AI advancements, the Taiwanese government has taken decisive actions since 2021, including investigative raids that successfully prevented Bitmain from poaching Taiwanese teams remotely. Taiwan’s stringent legal framework for China-related business dealings requires all Chinese entities to obtain prior government approval to operate in Taiwan, a process that many chip design companies failed to complete.
Taiwan’s official investigations into these business connections align with efforts by like-minded countries to bolster economic security by regulating the flow of semiconductor technology. However, Taiwan’s investment review system has limitations in countering the remote-poaching model effectively. Bitmain’s operations did not trigger Taiwan’s inbound investment review mechanisms, and outbound screening regulations could not detect their illegal practices.
Taiwan’s investigative actions complement its investment review system, highlighting the need for evolving economic security frameworks to address the complexities of modern global supply chains.
Slowing China’s AI Progress
Taiwan’s experience with the remote-poaching model provides a framework for assessing similar business activities by China in other countries, aiming to safeguard economic security. Although current export control measures led by the U.S. have accelerated the localization of China’s chip technology, halting such business activities can effectively impede China’s AI technology development.
Bitmain’s increasing demand for TSMC’s 3 nm chips indicates ongoing advancements in China’s AI chip technology. Questions arise about the effectiveness of existing international economic security measures in countering authoritarian states’ progress in the global AI race. The complexity of the semiconductor supply chain necessitates a nuanced approach to assessing the impact of technological sanctions on China’s technological development.