Consistent with multilateral export controls, the U.S. government classifies  semiconductor manufacturing equipment and materials as dual-use items  because they have both commercial and military uses. China’s Semiconductor Manufacturing Capability Has Steadily Advanced

Since 2002, China’s ability to produce commercial semiconductors has  steadily advanced but remains approximately one generation behind the  United States. As of July 2008, China’s most advanced semiconductor  manufacturing company can produce integrated circuits with a feature size  of 65 nanometers, compared with U.S. companies that are producing  semiconductors with 45-nanometer feature sizes. However, China has begun developing an indigenous capacity to build  some types of advanced semiconductor manufacturing equipment, which  may enable it to reduce its dependence on some foreign-sourced  equipment. Since 2002, commercial state-of-the-art production has  continued to advance. The United States also lacks a domestic source  of state-of-the-art lithography equipment. The VEU Program Allows Export of Some Semiconductor Equipment and Materials to China without a License

The VEU program, announced by Commerce in June 2007, marks a shift to  a more end-user-based system of export controls for semiconductor  equipment and materials by allowing the export of some items to China  without a license. Moreover, Commerce has not reached a  VEU-specific agreement with the Chinese government for conducting on- site reviews of validated end-users, a key mechanism for ensuring program  compliance. Instead, as a stopgap measure, Commerce is attempting to  conduct VEU on-site reviews under a 2004 agreement. Challenges with VEU Implementation May Limit Commerce’s Ability to Conduct On-site Reviews

Commerce may not be able to ensure that semiconductor equipment and  materials exported to China are used as intended because it has not  negotiated a VEU-specific agreement with the Chinese government for  conducting on-site reviews under the VEU program and lacks specific  procedures for carrying out these reviews. However, to conduct  on-site reviews under the 2004 agreement, Commerce relies on the  voluntary compliance of validated end-users to obtain End-User  Statements from the Chinese Ministry of Commerce, as this requirement  was not included in the regulations establishing the VEU program. Objectives, Scope, and Methodology

This report discusses the (1) evolution of China’s semiconductor  manufacturing capabilities since 2002, (2) changes to U.S. export control  policies over the sale of semiconductor manufacturing equipment and  materials to China since 2002, and (3) the advantages and limitations of  these changes to U.S. export controls. In addition, we visited three  companies—Applied Materials China, Hua Hong NEC, and Semiconductor  Manufacturing International Corporation—that are involved in  manufacturing semiconductors in China and have received semiconductor  manufacturing equipment and materials from U.S. exporters under export  licenses and the Validated End-User authorization.
Why GAO Did This Study

Semiconductors are key components in weapons systems and consumer electronics. Since semiconductors have both civilian and military applications, U.S. export control policy treats the equipment and materials used to manufacture semiconductors as "dual-use" items, and controls the export of these items through licensing requirements to sensitive destinations such as China. You requested that we update our 2002 report on China's semiconductor manufacturing capabilities to address the (1) evolution of China's capabilities since 2002, (2) changes to U.S. export control policies over the sale of semiconductor manufacturing equipment and materials to China since 2002, and (3) the advantages and limitations of these changes.

What GAO Found

The gap between U.S. and Chinese commercial semiconductor manufacturing capabilities, as measured by the feature size of the semiconductors produced, rapidly narrowed between 1994 and 2002. Since 2002, China's semiconductor manufacturing capabilities have continued to advance but remain one generation behind state-of-the-art semiconductors produced in the United States. China's most advanced semiconductor manufacturing companies continue to rely on equipment and materials from the United States, Europe, and Japan to improve their manufacturing capabilities. However, China has developed an indigenous capacity to build some types of advanced semiconductor manufacturing equipment, which may soon provide companies in China with a domestic source of equipment capable of producing semiconductors that are close to state of the art. Since 2002, U.S. export control policies over semiconductor equipment and materials to China have become more "end-user" focused, with the introduction of the Validated End-User (VEU) program, a parallel licensing framework that allows select pre-screened Chinese end-users to receive controlled items, including some semiconductor equipment and materials, without a license. The Department of Commerce anticipated that the VEU program would facilitate trade to China and enhance U.S. security; however, challenges with program implementation may limit Commerce's ability to ensure items are being used as intended. Specifically, Commerce has not reached a VEU-specific agreement with the Chinese government for conducting on-site reviews of validated end-users, a mechanism cited by Commerce as critical for ensuring program compliance. Instead, as a stopgap measure, Commerce is attempting to conduct VEU on-site reviews under a 2004 agreement. In addition, Commerce lacks procedures for conducting on-site reviews, though the validated end-user program was introduced in June 2007.