Raising supply chain concerns, the US Department of Defense has unveiled a new list of Chinese companies alleged to have ties to the country’s military.

Notable entities on this list include Yangtze Memory Technologies Company (YMTC), a major memory chip manufacturer, Megvii, a facial recognition firm, Hesai Technology, a provider of LiDAR solutions, and tech company NetPosa.

This list represents the most recent escalation in the ongoing China-US trade tensions, characterized by a series of measures undertaken by both nations.

Concerns of bans in the future

While inclusion on the list does not lead to immediate bans, it can significantly impact the reputations of these companies and serves as a clear warning to US entities and businesses regarding the potential risks associated with engaging in transactions or partnerships with them.

More importantly, this could be a prelude to sanctions or bans in the future. This means that enterprises that are reliant on these companies must begin to look elsewhere for their business.

“From earlier experiences, we can see that before companies were banned or placed on negative lists, there was time for enterprises to find alternate sources,” said Pareekh Jain, CEO of EIIRTrend & Pareekh Consulting. “Making a plan is essential because enterprises can’t change suppliers easily. You must identify the supplier and assess the quality, and the process can take one or two years. Enterprises need to prepare for alternate sourcing, especially if they enter a potentially banned territory. They should have alternate suppliers in different regions. This list is a potential watchlist for the future.”

Impact on a range of sectors

Another crucial point to highlight is the diversity of sectors represented on the list.

Take Hesai, for example, which specializes in providing LiDAR solutions for Advanced Driver Assistance Systems (ADAS) and autonomous mobility. Elon Musk recently emphasized that without sanctions or trade barriers, Chinese automobile companies could potentially outperform and dominate global competition.

“Chinese suppliers are very cost competitive, and many automotive companies want to reduce cost,” Jain pointed out. “But now, I think these companies will hesitate to use Chinese suppliers which are listed here. And they will need to find alternate suppliers, which would give an opportunity for suppliers in other regions.”

This would further reaffirm and add impetus to the current trend to diversify from China, often known as the “China Plus One” strategy.

US-China trade war continues

Publication of this list follows several other such steps in the recent past. In May last year, the Chinese government imposed a ban on the utilization of certain chips from YMTC’s competitor, Micron, citing security concerns.

As a response, US legislators called for restrictions on another Chinese memory chip manufacturer, Changxin Memory Technologies (CXMT).

This development followed the Biden administration’s decision in 2022 to include YMTC on a trade blacklist due to concerns of potential technology diversion to previously sanctioned Chinese tech giants like Huawei and Hikvision.

However, according to a report from Digitimes Asia, YMTC has been actively working on the development of “compliant” products throughout 2023 and intends to prioritize them in its 2024 capacity expansion strategy.

Meanwhile, China implemented restrictions on the export of crucial metals essential for semiconductor manufacturing, primarily utilized in the production of electric vehicles, displays, and defense equipment.