How Chinese Startup SEIDA’s Ingenious Strategy Challenges United States Efforts To Contain China’s Chip Industry

Attempting to curb China’s chip industry, the United States faces challenges from a startup- SEIDA’s efforts to circumvent export controls; the tech rivalry between the two nations centers on semiconductors, particularly Integrated Circuits (ICs).

In August 2022, President Joe Biden enacted the CHIPS and Science Act to enhance US advanced chip manufacturing; after that, the White House implemented export controls to limit China’s acquisition and development of cutting-edge computer processors.

China, in response to these restrictions, criticized the move as a violation of market economy principles and fair competition. In retaliation, Beijing prohibited the use of chips manufactured by the US-based company Micron in critical infrastructure projects.

Additionally, China restricted the export of gallium and germanium, essential metals for chip production.

Despite these measures, Chinese enterprises remain eager to obtain high-end chips and are employing innovative strategies to navigate around export controls.

The Challenger
Notably, a seasoned Silicon Valley software executive assumed leadership of a startup in China last year; the startup, according to company records, pledged to offer microchip design software, a tool predominantly provided by a few major Western companies.

This sought-after software, referred to by its initials OPC, plays a vital role in the design of numerous microchips and holds significance in the development of advanced chips.

Thus, the battle for economic and military dominance between the United States and China intensifies, with Washington actively working to limit China’s access to crucial microchip design tools.

SEIDA
The startup SEIDA’s strategy, led by CEO Liguo “Recoo” Zhang, sheds light on the formidable challenges posed by the containment efforts to restrict China’s chip industry.

Zhang, prior to assuming the role of chief executive at SEIDA, had spent a considerable amount of time in the United States, securing permanent residency and even acquiring a residence in Silicon Valley, as per information from individuals familiar with his career and public records.

His previous employment at Siemens EDA, a U.S. unit of the German industrial giant Siemens AG, positioned him in a company dominating the Chinese market for the technology SEIDA expressed intentions to sell. Notably, at least three other Chinese-born colleagues from Siemens EDA followed Zhang to join SEIDA.

In a 2022 business-plan presentation crafted for potential investors, SEIDA stressed the significance of OPC, labeling it as “indispensable technology.”

The startup outlined plans to offer this tool by early 2024, asserting that a Chinese version would disrupt the foreign monopoly, fostering self-reliance in chip technology for China. SEIDA’s ambitious objective, as depicted in one slide, is to “Become OPC leader in the world.”

The Chinese Support
This compelling pitch garnered support from influential Chinese investors, including an investment arm of Semiconductor Manufacturing International Corp (SMIC).

Recent corporate filings revealed that SMIC, a Shanghai-based state-backed company, stands as China’s premier microchip manufacturer.

Meanwhile, U.S. regulations have restricted American companies from supplying technology to SMIC without a special license, citing concerns about its alleged collaboration with China’s military, deemed a threat to U.S. national security.

In the interim, Chang explained that the company’s objectives have evolved, emphasizing that its primary backers are “private institutions and individuals.”
However, he refrained from disclosing the amount of capital raised or detailing the current product focus, stating that SEIDA’s business plan is “under continuous evaluation.”

Siemens EDA confirmed Zhang’s departure, along with three other colleagues, acknowledging SEIDA as a “potential competitor” but offering no further comments.

Although it cannot be ascertained whether SEIDA has progressed in selling Optical Proximity Correction (OPC), a software crucial in microchip design and part of the broader Electronic Design Automation (EDA) technologies facilitating advancements in artificial intelligence, quantum computing, and hypersonic flight.

Why The Departure
Chang indicated that U.S. restrictions influenced Zhang and colleagues to leave Siemens EDA for SEIDA, citing limitations on business opportunities and career advancement at Siemens EDA, stating that SEIDA adheres to both U.S. and Chinese regulations, stressing the company’s commitment to compliance.

It’s crucial to note that neither SEIDA nor its executives have faced allegations of wrongdoing, and there is no evidence suggesting the use of proprietary knowledge or technology from Siemens EDA or others. Chang asserted that SEIDA employs “a stringent vetting process” to prevent any infringement on the intellectual property of others.

The Chinese Game
According to industry experts and individuals familiar with Beijing’s strategies to navigate U.S. restrictions on technology transfer, SEIDA’s initiation aligns with a common pattern seen in Chinese companies leveraging foreign expertise.

Even if SEIDA executives refrained from taking proprietary information from their previous employer, the intricate nature of the technologies involved suggests that only years of experience with established providers would enable them to offer comparable products.

Jan-Peter Kleinhans, Director of Technology and Geopolitics at Stiftung Neue Verantwortung, a Berlin-based think tank focusing on China’s market for Electronic Design Automation (EDA) tools, emphasized the formidable challenge of developing Optical Proximity Correction (OPC) from scratch within the given timeframe.

Kleinhans noted that such a task would be particularly challenging without access to existing intellectual property.

The emergence of SEIDA, not previously reported, stresses the complexities faced by the West in hindering Chinese advancements in advanced microchip technology.
Despite Washington’s endeavors to impede China’s access to chip technology, Beijing is actively promoting domestic development, enticing skilled expatriates to return, and addressing its lag in the sector.

A spokesperson for China’s foreign ministry criticized the United States for “abusing export control measures” and applying “illegal unilateral sanctions and long-arm jurisdiction to Chinese companies.”

The spokesperson asserted that China has implemented laws to safeguard intellectual property, complying with internationally accepted rules, and China attributes its technological progress to the ingenuity and hard work of its people, denying any allegations of theft or robbery.

United States On The Backfoot
U.S. officials have consistently emphasized that Chinese efforts to acquire Western technology pose a significant long-term threat to the U.S. economy and security.
Concerns have been particularly voiced regarding China’s utilization of advanced chips, with their potent processors, in its rapidly expanding military.

The Chinese foreign ministry spokesperson dismissed such concerns as reflective of a “Cold War and hegemonic mentality.” Despite potential delays posed by export rules, industry experts suggest that these restrictions are unlikely to impede China’s progress in chip technology development.

Michael Bruck, former General Manager in China for chipmaker Intel Corp, likened the U.S. efforts to a “speed bump,” pushing China towards greater independence rather than halting its momentum.

How China Is Upping Its Game
China’s government has positioned the advancement of sophisticated chips as a central component of its strategic objectives.
In response to new restrictions imposed by Washington last year, Beijing pledged a substantial investment of $143 billion to stimulate the growth of China’s domestic chip sector.

Additionally, through the “Thousand Talents” program, which has been in operation for over a decade, the Chinese government entices experts to return from science and technology roles abroad by offering employment, housing, and other incentives.

However, this program has faced criticism from Washington, which views it as a potential mechanism for China to illicitly acquire intellectual property from overseas.

The “Thousand Talents” program has attracted scrutiny, with the U.S. Federal Bureau of Investigation (FBI) making a trade secrets-related arrest in May. Liming Li, a California-based software engineer, was charged with stealing millions of files from two undisclosed U.S. employers.

According to an FBI affidavit, one of the companies found a folder on Li’s laptop containing documents related to the “Thousand Talents” program. The stolen files allegedly included materials pertinent to “national security, nuclear nonproliferation, and anti-terrorism.” Li has pleaded not guilty, and his attorney, Daniel Olmos, declined to provide further comments.

The Race For Supremacy
Throughout this year, there has been ongoing competition between the West and China across various sectors, ranging from killer robots to undersea cables and the encryption of digital communications.

The race for supremacy in chipmaking is particularly pivotal, as the outcome will significantly influence which entity emerges as the leader in these technologies and others that rely on faster processors yet to be developed.

The Evolving Dynamics Between The U.S. And China
Since the 1950s, the United States has been a trailblazer in chip technology, contributing significantly to the development of the world’s largest economy, robust high-tech and financial sectors, and an unmatched military.

However, China’s rapid economic growth and its determination to establish itself as a global power pose a challenge to this long-standing dominance.

During the Cold War, Washington effectively blocked exports of certain raw materials to Eastern Bloc countries to impede their weapon development.

However, in the current era of globalization, the interconnected nature of most industries, including the approximately $600 billion semiconductor business, makes such isolation more challenging.

Semiconductors, from raw materials to design to assembly, constitute a global industry, rendering isolationist measures less effective.

James Andrew Lewis, Director of the Strategic Technologies Program at the Center for Strategic & International Studies (CSIS), notes that cutting off China, as was done with the Soviets, is not feasible due to global interdependence.

Both the United States and China aspire to achieve self-reliance in advanced microchip manufacturing.

While the U.S. leads in chip design technologies, the majority of printing and assembly occurs in Asia. South Korea is a key source for memory chips, while Taiwan plays a crucial role in logic chips, responsible for processing data and executing instructions.

Last year, the United States initiated the “CHIPS for America” program, allocating nearly $53 billion through the Commerce Department to incentivize companies to boost domestic chip production.

However, recipients of these incentives face restrictions on sharing sensitive technologies with non-allied countries, including China.

The Gaps
One significant challenge for China in advancing its chip capabilities lies in securing access to Electronic Design Automation (EDA) tools, such as the Optical Proximity Correction (OPC) software championed by SEIDA.

EDA tools are essential for designing intricate circuits with billions of ever-smaller transistors, with the technology often marketed as scientific breakthroughs.

Despite stringent U.S. export controls, China is making strides in its pursuit of advanced chip technologies, exemplifying the evolving dynamics in the global chip landscape.

In 2019, the U.S. Commerce Department placed Huawei Technologies Co, the Chinese telecommunications giant, on a list preventing it from purchasing U.S. technologies without a special license, citing national security concerns.

Similarly, Semiconductor Manufacturing International Corp (SMIC) faced a similar blacklisting a year later. The U.S. has implemented such export controls to significantly impede China’s technology acquisition, as highlighted by Thea D. Rozman Kendler, Assistant Commerce Secretary for Export Administration, during a recent Congressional hearing.

Despite these controls, Huawei introduced a new 5G smartphone in August with a sophisticated seven-nanometer chip manufactured by SMIC.

The unveiling occurred while U.S. Commerce Secretary Gina Raimondo was visiting China, raising questions. The Commerce Department later disclosed an investigation into whether the two companies utilized restricted U.S. technologies in developing the chip. Huawei, however, declined to comment on the matter.

Proving the origin of certain technologies is a complex task.

Semiconductor advancements often build upon existing intellectual property, and the mobility of personnel within the industry, particularly across borders, poses challenges in investigating export violations or intellectual property theft.

James Andrew Lewis of the Center for Strategic & International Studies noted that it is challenging to control what is in people’s minds with export controls.

Alon Raphael, CEO of a California-based company selling a tool for semiconductor defect detection, shared a firsthand experience of the difficulty in controlling intellectual property.

Despite being the exclusive supplier of the technology until 2020, a key employee, Chongji Huang, resigned and later emerged in China with a startup offering a similar product.

Raphael, surprised by this development, eventually filed a lawsuit against the startup late last year. The startup, Weichong Semiconductor Group, denies taking anything from FemtoMetrix and insists they did not violate any trade secrets, according to Robert Shwarts, an attorney representing Huang and the startup.

The Dynamics
SEIDA, a startup led by veterans from Siemens EDA, represents one among many Chinese tech startups established in response to Beijing’s push for a robust domestic semiconductor industry.

Tracking the proliferation of such startups can be challenging due to recent changes in Chinese regulations restricting access to company registries. Whether the Chinese government played a role in SEIDA’s launch or CEO Zhang and his colleagues received state incentives to leave Siemens EDA for SEIDA remains unclear.

SEIDA’s corporate filings, examined with the assistance of companies like Datenna in the Netherlands and Global Data Risk in New York, shed light on the startup’s history since October 2021.

The filings reveal that majority ownership lies with partnerships now controlled by Zhang and former Siemens EDA colleagues, with investments made in November 2021, shortly after SEIDA’s inception and before Zhang’s departure from Siemens EDA.

Zhang’s journey toward SEIDA started at Mentor Graphics Corp, Siemens EDA’s predecessor, acquired by Siemens in 2017. With over a decade of experience at Mentor and Siemens EDA, including a role as a Siemens EDA product director, Zhang, holding a master’s degree in microelectronics from a Shanghai university, became SEIDA’s CEO in July 2022.

At least three other Chinese-born colleagues who joined Zhang were Siemens EDA veterans, including Zhitang “Tim” Yu and Yun Fei “Jack” Deng, both with doctorates from U.S. universities.
Yu, also a U.S. citizen, and Deng, a U.S. legal permanent resident, have been associated with Siemens EDA for an extended period.

Under new export restrictions, U.S. citizens and permanent residents can face penalties for assisting Chinese companies in developing advanced chips without a license.
SEIDA’s Chief Operating Officer, Chang, emphasized the company’s commitment to monitoring and aligning with applicable legal standards.

The Potent Mix
SEIDA, seeking investors, projected a potential valuation of up to 700 million yuan (approximately $99 million) by the end of 2022 and aimed to go public by 2026.

In June 2023, SEIDA received undisclosed funding from China Fortune-Tech Capital Co (CFTC), an investment vehicle owned by chipmaker SMIC. This month, five investors secured additional investments, including four Chinese venture capital firms.

Chang did not disclose whether SEIDA’s ongoing business plan review implies a shift from its early focus on OPC.

According to the presentation, the company’s name stands for “Semiconductor Intelligent Design Automation,” and its slogan, “enable chip success,” remains consistent across branding and the SEIDA website.