Unveiling the remote poaching model: Taiwan’s strategy to limit Chinese progress in AI chips

China is aggressive promoting research and production in the field of artificial intelligence (AI).with the aim of achieving greater autonomy in the China-US technology competition through local AI chip design. This ambition makes Chinese AI chip companies prime targets US technology sanctions. However, China faces a significant challenge: its largest wafer manufacturer, Semiconductor Manufacturing International Corporation (SMIC), can only produce chips from 7 nanometerswhich is a relatively outdated technology.

To achieve breakthroughs in AI chips and high-performance computing products, China cannot rely solely on its domestic industry and must rely on the advanced technology of Taiwan Semiconductor Manufacturing Company (TSMC). But how?

Chip design requires close collaboration with manufacturers. From silicon IP verification and trial production to full production, the process must ensure that the production technology meets the design specifications. As Chinese AI chip designers collaborate with TSMC to develop new AI chips, the switch to alternative chip makers will quickly become unfeasible. This dependence underlines the business mechanisms within the chip design partnerships between TSMC and China and illustrates how Taiwan and China’s semiconductor supply chains are potentially intertwined amid the China-US technology war.

The Remote Poaching Model: The Bitmain Case Study

Bitmain serves as an important case study in understanding the relationship between China and Taiwan in AI chip development. Originally focused on designing cryptocurrency mining machines, this leading Chinese IC design firm has switched to development of edge AI chips with the help of Taiwanese engineers.

This business approach, known as the remote poaching modelwith Taiwanese engineering teams designing chips for Chinese companies, managing local wafer production with TSMC and overseeing the entire packaging and testing process. Importantly, no Taiwanese engineers are moving to China, yet China’s AI chip industry continues to make progress.

As the Bitmain case shows, establishing cross-strait trading mechanisms is crucial for the remote poaching model to function effectively. Beijing Jingshi – a company that spun off from Bitmain in 2019 – played a central role in this collaboration. From Bitmain’s perspective, Beijing Jingshi is a subsidiary funded by the parent company and incorporating technology investments from Taiwanese engineers.

The Chinese side provides financing, while the Taiwanese side contributes technology. Through this joint venture, both partners are effectively tapping into the promising Chinese market, where the local government uses these AI tools energy monitoring systems in smart cities. Furthermore, this partnership has attracted significant financial investments from other Chinese entities, including Beijing E-hualu And Xiaomi Group.

However, such a business model is not legally acceptable in Taiwan.

Taiwan’s response: investigative actions and investment screening

To prevent Taiwan’s semiconductor industry from becoming a tool for China’s AI progress, the Taiwanese government has taken decisive measures since 2021. investigative raidsauthorities successfully blocked Bitmain from remotely poaching Taiwanese teams. Over the past three years, authorities have done just that dozens of similar cases have come to light.

These legal actions stem from Taiwan’s strict legal framework for China-related business transactions. Below these regulationsall Chinese entities must obtain prior government approval to operate in Taiwan. Most chip design companies targeted by raids failed to obtain this approval, but still attempted to recruit chip talent and conduct R&D within Taiwan’s semiconductor clusters. In another example, WiseCore Tech, one of Bitmain’s Taiwan-based subsidiaries, took on the parent company’s role in securing TSMC’s capacity and managing production processes.

Taiwan’s official investigations into these business ties are not only in line with efforts by like-minded countries to strengthen economic security, but also aim to regulate the flow of semiconductor technology. These regulations are essential to prevent technology from flowing into China and undermining the competitiveness of Taiwan’s industry. Like many other countries, Taiwan has established investment appraisal systems including inbound screening, which is common, and outbound screening, which is rare. Even just the United States outgoing measures introduced this year to regulate U.S. investments in China’s semiconductor, AI and quantum computing sectors.

However, Taiwan’s investment rating system fails to effectively counter the remote poaching model. Bitmain did not use formal investment channels to send money to Taiwan. Additionally, the company’s main operating funds for AI chip development remained in China, with most of the financing handled through Beijing Jingshi. Consequently, Taiwan’s mechanisms for assessing inward investments were not activated.

Furthermore, outbound screening regulations could not effectively detect their illegal business practices. The Taiwanese engineering team that assisted Bitmain with chip development first set up a company in Hong Kong. Under the name of this Hong Kong company, they acquired technical shares in Beijing Jingshi. According to Hong Kong Companies registerthe company’s capital was only the minimum required to establish it, far below the threshold required to trigger Taiwan’s outbound screening mechanisms.

Taiwan’s research activities serve as a complementary mechanism to the investment appraisal system. Through these investigations, the Taiwanese government is compensating for the limitations of the investment screening process in effectively blocking the remote poaching model. This case clearly demonstrates that modern economic security frameworks must continually adapt to the evolving nature of global supply chains to remain effective.

Slowing down China’s progress in AI

Taiwan’s experience with the remote poaching model also provides the international community with an analytical framework to examine China’s similar business activities in other countries and assess potential threats to economic security. There is a common argument that current US-led export control measures have inadvertently accelerated the localization of Chinese chip technology. Due to limited channels for importing products, domestic market demand in China remains strong, forcing Chinese companies to invest resources in local technological research and development, thereby accelerating technological progress.

In Bitmain’s case, however, Taiwan exports more than just chip products. Taiwanese engineering teams have jointly improved the technical capabilities of Chinese chip designers. Ceasing these business activities should be seen as an effective measure to slow down the development of Chinese AI technology.

Bitmain has recently regained significant attention within the Taiwanese semiconductor sector. By the second quarter of 2024, Bitmain would have become that a major source of demand for TSMC’s 3nm chips. In the third quarter of 2020, TSMC halted shipments to Huawei, causing a sharp decline in sales from China. However, recent figures are returned to pre-sanction levelsThis indicates that Chinese companies outside of Huawei continue to have strong demand for TSMC’s technology.

In 2018, Bitmain’s founder made bold claims: promise to challenge the dominance of Intel, Nvidia and AMD in the AI ​​chip market. Currently, Bitmain’s orders for high-performance computing products from TSMC are not subject to U.S. export controls, and TSMC only complies with U.S. extraterritorial regulations. However, are current international economic security measures sufficient, from the perspective of slowing the progress of authoritarian states in the global AI race? Even if the chips sold are not the most advanced, can these business activities still advance China’s AI chip technology?

Given the high complexity of the semiconductor supply chain, simplistic assumptions may fail to clearly identify the effects of technological sanctions on China’s emerging technological development. The remote poaching model provides a nuanced analytical perspective, allowing us to assess the effectiveness of economic security policies.