Tech war: China-listed unit of server maker Inspur on US trade blacklist changes domicile to a location 2km from parent

·5 min read

Shenzhen-listed Inspur Electronic Information Industry Co, the main listed vehicle of Chinese server maker Inspur Group that was added to a US trade blacklist last week, held a board meeting this week to change its domicile to an address about two kilometres away from its parent group.

In a corporate filing, the company did not give any reason for the change, but the decision was made just days after the US Department of Commerce added Inspur Group, which owns a 36 per cent equity stake in the unit, to Washington's Entity List for allegedly obtaining US technologies in support of China's military modernisation. US exporters must obtain a government licence to sell any American products or services to companies on the list.

Although the listed vehicle, which is a separate entity from its parent group in legal terms, is not on the Entity List, its share price has been hammered. Its Shenzhen-traded shares have lost over 20 per cent since Washington blacklisted parent Inspur Group, and turnover of the stock hit an all-time high on Monday, indicating that investors are panic-selling over fears about its business prospects if it loses access to the advanced chips it needs to power its servers.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

The change of corporate domicile, from the address of its sanctioned parent to a nearby office building within the same postcode zone in the city of Jinan, capital of eastern Shandong province, partly reflects the limited options available to Chinese tech firms when it comes to mitigating the risks of US sanctions given their reliance on American components or technologies, analysts said.

Gary Ng, senior economist for Asia-Pacific at French investment bank Natixis, said the growing list of Chinese tech champions under US sanctions - more than 600 China entities are now on the Entity List - has also discouraged investor appetite for the country's tech hardware sector.

"Unless the [listed] firms achieve a breakthrough ... and build a sole China supply chain for their products ... there is a limit to stockpiling and their ability to produce will be constrained by the sanctions at some point in time," Ng said. "Therefore, investors have become conservative and will focus on firms with mature technology if they really want to bet on China's reopening."

Details are sketchy on whether Inspur Group's affiliated entities that are not on the sanctions list can purchase American semiconductors. US suppliers such as Nvidia and Advanced Micro Devices (AMD), which provide the high-end chips used in Inspur's servers, are trying to figure out if they need to halt sales to units of Inspur Group, Reuters reported. AMD said at an investor conference this week it was seeking clarification on the rules.

Inspur Electronic did not immediately reply to a request for comment on Tuesday.

If Inspur Group and its subsidiaries are deprived of chips from Nvidia, AMD and Intel, it would deal a major blow to its business. In its 2019 annual report - the last time it disclosed such information - Intel was the Chinese company's top supplier, accounting for 37.5 per cent of its total purchases in 2019, while Nvidia was ranked No 2, accounting for nearly 8 per cent of its purchasing budget that year.

Few high-profile Chinese tech companies have escaped unscathed from US sanctions. Huawei Technologies Co, one of China's most powerful technology giants, saw its lucrative smartphone operations wither after it was denied access to advanced chips, while Yangtze Memory Technologies Corp, China's top memory chip maker that was hoping to challenge Samsung Electronics and SK Hynix, had to lay off staff and slow down expansion plans after it was added to the US blacklist.

US attempts to deny China's access to advanced chips is a key reason why Beijing has doubled down on its tech self-sufficiency drive. This week, Chinese President Xi Jinping for the first time directly criticised the US for leading an "all-round containment, encirclement and suppression" of China.

However, progress in self-sufficiency has been limited. Ivan Lam, senior analyst at market consultancy Counterpoint Research, said there was a technology gap between imported tech products and home-grown ones. "We have to recognise the gap," Lam said. "[However], while Chinese companies might not have perfect substitutes [for global technologies] yet, there are still some alternatives, thanks to local companies' pre-emptive moves".

Intel headquarters in Santa Clara, California, July 26, 2022. Photo: Bloomberg alt=Intel headquarters in Santa Clara, California, July 26, 2022. Photo: Bloomberg>

Inspur Group servers are used extensively in the country's data centres and artificial intelligence (AI) labs. The company said it provides over half of all servers for AI applications in the domestic market.

Analysts said adding Inspur to the Entity List would likely have an adverse impact on the Chinese AI industry.

"Computing power [provided by servers] is critical to the AI industry ... if the US uses sanctions to block China's computing power, that's tantamount to stifling the Chinese AI industry", said Adela Guo Junli, a research director at IDC Asia-Pacific. "Inspur is being targeted as the world's largest AI server provider and second largest server provider."

Inspur Group appeared on Washington's radar back in July 2020, when the US Department of Defence named it and Huawei in a list of Chinese companies with links to the military. Intel had to briefly suspend its supply of server chips to Inspur to ensure compliance with the US laws, but shipments later resumed.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.