TSMC chips reportedly ended up at Huawei. It raises concerns about ‘shadow networks’ bypassing US sanctions.

• TSMC halted shipments to a client after its chips were found in Huawei products, per reports.
• TSMC and other chipmakers are barred from doing business with Huawei without US government approval.
• Min-yen Chiang, a researcher, told BI it raises the questions about a “shadow network” of chip supply.

Taiwan Semiconductor Manufacturing Company has cut off shipments to a client after the chips it sent were found in products produced by Huawei Technologies — which is under US export control — an unnamed Taipei government official told AFP.

TSMC notified the US and Taiwanese governments due to the possible violations of US sanctions to restrict tech transfers to the Chinese firm, per Bloomberg. TSMC is Taiwan’s largest company and the world’s largest dedicated independent semiconductor foundry.

TSMC and other chipmakers are barred from doing business with Huawei without US government approval. The sanctions are part of efforts to restrict Huawei’s technological capabilities, especially in areas like 5G and AI.

The reports raise questions about supply chain transparency and could lead to increased export scrutiny, according to researchers and analysts who spoke with BI.

On Wednesday, John Moolenaar, the chairman of the Select Committee on the Chinese Communist Party, slammed the development in a statement.

“Reports that cutting-edge TSMC-manufactured chips have contributed to Huawei’s AI development represent a catastrophic failure of US export control policy,” he said.

“AI accelerators, like the one that these chips fueled, are at the forefront of our technology race with the CCP, and I fear the damage done here will have significant consequences for our national security,” Moolenaar added. “Congress needs immediate answers from both BIS and TSMC about the scope and volume of this disaster. The US government must take immediate steps to ensure this does not happen again.”

TSMC, Huawei, and the Commerce Department did not immediately respond to Business Insider’s requests for comments.

TSMC told Bloomberg that it stopped all shipments to Huawei after September 15, 2020. It declined to comment on the reports that its chips had ended up in Huawei products.

“TSMC is a law-abiding company, and we are committed to complying with all applicable rules and regulations, including applicable export controls,” TSMC said in its emailed statement to Bloomberg. “We proactively communicated with the US Commerce Department regarding the matter in the report. We are not aware of TSMC being the subject of any investigation at this time.”

A ‘shadow network’ of chips

The report adds to US concerns that Huawei is potentially obtaining advanced chips despite being blacklisted since 2020. A US semiconductor association warned last year that Huawei was building a shadow manufacturing network.

Min-yen Chiang, a researcher who focuses on the political economy of semiconductors, told Business Insider the development raises the question of opacity surrounding Huawei’s “shadow network” of chips, including how big the web is and the nature of the network.

He said public information suggests TSMC has been closely following export controls, but Huawei’s network needs to be better understood to improve due diligence.

“If it remains unclear, what happened with TSMC could happen to other chip manufacturers as they wouldn’t know if the chips that they sell would be resold to Huawei,” Chiang said.

Supply chain issues

The situation could also have other implications, including distrust about TSMC’s supply chain and more intense regulatory scrutiny, analysts said.

Kate Leaman, chief market analyst at AvaTrade, said the wider concern is how Huawei obtained the advanced chips.

“This raises suspicions about potential loopholes or third-party intermediaries acting on their behalf,” she said.

“If TSMC is found to have breached said export controls, it may face penalties that could restrict its ability to access US technology,” she continued, adding this would not only hurt TSMC’s operations but also have wider implications for tech giants like Apple and Nvidia that rely heavily on TSMC for chip production.

Leaman said the issue could also prompt ever stricter export controls and more intense supply chain scrutiny for companies involved in sensitive technology​.

Export controls

On Wednesday, JW Kuo, Taiwan’s economic affairs minister, told reporters in Taipei that the island respects US export control measures and will strongly communicate this stance to the industry.

A US Commerce Department spokesperson told Bloomberg the agency’s Bureau of Industry and Security is “aware of reporting alleging potential violations of US export controls.”

Xiaomeng Lu, the director of geo-technology practice at the Eurasia Group consultancy, said that the US investigation into TSMC, as reported by The Information on October 17, appears to examine whether the company is following export control rules.

“This question is slightly different than whether Huawei got restricted chips from TSMC through illegal channels,” she told GZERO Media, a subsidiary of the Eurasia Group.

“If Huawei is doing that, which is a more geopolitically significant development than potential TSMC misconduct — and TSMC proves they are following all US rules and regulations, Huawei should be the one receiving severe penalties. And I am almost certain they will,” Lu added.