U.S. firm’s subsidiary sold electronics to Chinese defense firm linked to spy balloon program

When the U.S. blacklisted six Chinese entities last month in response to a suspected spy balloon’s traversing the country, a little-known tech firm in Northern California had reason to pay particularly close attention.

AXT Inc. has extensive ties to China that go beyond its manufacturing facilities there. The company owns an 85% stake in a Chinese subsidiary that produces materials for semiconductors and has counted as one of its biggest customers a giant state-owned defense firm linked to Beijing’s surveillance balloon program, according to AXT’s filing to the Securities and Exchange Commission in August.

A division of the defense firm, China Electronics Technology Group Corp., or CETC, was among the Chinese companies the Biden administration blacklisted for providing “support” to the People’s Liberation Army’s aerospace programs. That was only the latest U.S. government move against CETC — at least 20 of its subsidiaries and divisions have been added to the so-called entity list since 2018.

The entity list identifies foreign firms deemed to pose risks to U.S. national security and imposes severe restrictions on U.S. companies seeking licenses to export goods to them.

It’s not clear whether AXT’s subsidiary sold materials directly to any of the blacklisted parts of CETC.

AXT’s SEC filing doesn’t specify which divisions of CETC its subsidiary dealt with, and the company didn’t respond to multiple requests for comment.

There’s no indication that AXT is violating any U.S. laws, but its previously unreported ties to the Chinese defense conglomerate highlight the broader challenge of preventing U.S. technology and know-how from ending up in the hands of China’s military. 

“The two economies are very intertwined in a way that others are not right now,” said Emily Benson, a senior fellow at the Center for Strategic and International Studies, a Washington think tank. “And so the more intertwined you are necessarily means the more complex it is to promulgate controls and really to force the separation in a bilateral supply chain.”

Even the most robust and well-funded operation would struggle to track the flow of goods that enter China and move through a sprawling military contractor like CETC. 

In the U.S., the laborious task of tracking the movement of electronics that could be used by the Chinese military falls to the Commerce Department’s Bureau of Industry and Security, which often lacks the resources to sift through reams of export data and public ownership records, Benson said.

“It’s up to a very skeletal staff at the Bureau of Industry and Security to basically track down wrongdoing in the supply chain to look for violations,” she said.

China Electronics Technology Group is one of China’s “core” state-owned defense companies, with a vast global network, said Emily de La Bruyère, a senior fellow at the Foundation for Defense of Democracies, a Washington research organization. 

“It’s a huge entity,” she said. “One of the ways it operates is through this enormous network of subsidiaries, whether those are large research institutes or joint ventures or investment players or wholly owned subsidiaries. And those have huge numbers of partnerships in the international system.”

Last year, CETC was ranked 233rd in Fortune magazine’s top 500 global companies.

The technical director of AXT’s Beijing Tongmei subsidiary, Ren Diansheng, worked for CETC for 15 years before he joined AXT in 2005, according to U.S. securities filings. Ren, who lives in China, couldn’t be reached for comment.

The Commerce Department didn’t offer more details about the role of CETC in China’s alleged balloon surveillance activities. A department spokesperson told NBC News that an analysis of recovered debris from the downed balloon “is ongoing, and we do not have definitive analysis at this time.”

The Chinese government has claimed it was a civilian weather balloon that veered off course. 

AXT, formerly known as American Xtal Technology Inc., started in 1986. In its early years, it got $2 million in seed money from the Defense Department to develop technology and products. About 20 years ago, AXT moved its manufacturing to China, setting up facilities in multiple locations. As of 2021, the company employed 28 people at its headquarters in California and nearly 1,400 in China, according to securities filings. 

AXT manufactures wafers, small discs with a high level of purity that are vital for semiconductors. The materials are used in electronics like satellite solar cells, lasers and sensors.

The Biden administration said the Chinese balloon that floated over the U.S. in early February was 200 feet tall, with a payload of electronics that weighed more than 2,000 pounds. U.S. officials say the balloon was able to pick up radio signals to conduct eavesdropping.  

After the balloon episode, the Commerce Department last month blacklisted six Chinese organizations, including CETC’s 48th Research Institute. According to its website, the institute manufactures and supplies microelectronic equipment, such as solar-powered wafers, cells and panels, to clients in China and abroad.

CETC didn’t respond to requests for comment.

The firm is part of what China calls its “military-civil fusion strategy,” designed to eliminate barriers between commercial and defense research and production to bolster the country’s military power, said Grant Parks, a China analyst at C4ADS, a Washington-based nonprofit global security organization. 

CETC oversees a firm that U.S. officials say is linked to an elaborate surveillance operation against the country’s mostly Muslim Uyghur minority. Human rights groups say Chinese authorities have carried out a campaign of repression against Uyghurs, and the U.S. government says China’s actions constitute genocide.

The Global Times, a tabloid newspaper owned by the ruling Chinese Communist Party, published a story last year about a “powerful” space surveillance radar that was developed by one of CETC’s research arms.

Executive orders from former President Donald Trump and President Joe Biden ban U.S. citizens from investing in CETC. In 2010, a Massachusetts firm was convicted of illegally shipping military electronic components to CETC. At the time, the Justice Department said CETC was responsible for “the procurement, development and manufacture of electronics for the Chinese military.”

In 2020, the Commerce Department blacklisted four CETC entities for helping China’s People’s Liberation Army build and “militarize” artificial islands in the disputed waters of the South China Sea.

Some experts say Chinese conglomerates are often a step ahead of sanctions and blacklisting efforts in Washington, as they use a sprawling network of smaller units. 

“One of the biggest weaknesses of existing export controls and other regulatory regimes is that you leave all of these loopholes if you don’t say that the entire corporate network of the company is covered,” de La Bruyère said.

The potential threat posed by China’s defense industry’s exploiting U.S. technology is now top of the agenda in Washington. A new House select committee on China has vowed to focus on the issue at coming hearings.

Last month the Democratic chairman and the ranking Republican on the Senate Intelligence Committee warned that the flow of U.S. technological know-how to the People’s Republic of China created “dangerous vulnerabilities.”

“U.S. technology, talent, and capital continue to contribute — through both lawful and unlawful means, including theft — to the PRC’s development of critical military-use industries, technologies, and related supply chains,” Sens. Mark Warner, D-Va., and Marco Rubio, R-Fla., wrote in a letter to Treasury Secretary Janet Yellen.

China has rejected accusations it has stolen intellectual property or carried out industrial espionage. 

China also is keen to reduce its dependence on foreign markets and Western-made technology, pursuing what it calls a “dual circulation” policy to bolster economic and technological self-reliance. 

In October, the Biden administration introduced unprecedented export restrictions on shipments of certain semiconductor chips and chipmaking tools to China, seeking to block the Chinese military’s access to the crucial technology.

China’s foreign ministry slammed the move as an abuse of trade policy that was designed to give the U.S. “technological hegemony.”

To reinforce the new U.S. export controls, Washington has sought to join forces with Japan and the Netherlands, which host major chip production companies, to restrict advanced chip-manufacturing equipment to China.

If the three governments can clinch an agreement on export restrictions and enforce them, it would be an important step and offer a new model for future efforts, said Benson of the Center for Strategic and International Studies.