In This Issue Vol. 30 Issue 27

SAVING INTEL: THE FUTURE OF LIP-BU TAN, CHINESE ESPIONAGE, AND INTEL'S CHIPS How SNS Called Intel The Role of Cadence As Asset Transfer Node Did Cadence Transfer IP from Other Firms? Is Tan Trying to Cripple Intel's US Chip Production? Gutting Technical Capabilities at Intel Foundry Killing Onshoring and Nearshoring in Favor of Southeast Asia? And So Much More! Next Up: Celestial AI OUR PARTNERS WHERE'S MARK? UPCOMING EVENTS

SAVING INTEL: The Future of Lip-bu Tan, Chinese espionage, AND INTEL'S CHIPs

By Berit Anderson

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Why Read: As Trump calls for the ouster of Intel CEO and longtime Chinese military backer and strategist Lip-Bu Tan, SNS moves forward, bringing our members a deep-dive analysis of how his former company, Cadence Design Systems, was used to transmit chip IP to Chinese military institutions; how his "brilliant turnaround strategy" for Intel plays right into China's hands; and what other critical US technologies he may be putting at risk.

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Fifteen years ago, if you'd asked me about chips, I would have said they were technically important, but extremely dry to cover. Today, chips have become the center of an all-out geopolitical brawl - with Chinese statecraft embedding spies and thieves at the highest levels of major US and international chip architecture. Their mission: to steal advanced IP and ship it back to China. 

At the heart of that story is Lip Bu-Tan, Intel's CEO since last March. Tan's significant record of illegally transferring funds and US chip technology through his investment fund, Walden International, and his former chip company, Cadence (2009-2023), to Chinese state-backed entities is finally coming under Donald Trump's ire. Thanks to a recent DOJ release about Cadence and pressure from Arkansas Senator Tom Cotton, Trump is now demanding that the Intel board fire Tan. 

 

How SNS Called Intel

On March 23, I first wrote about the highly questionable circumstances around Lip-Bu Tan's hiring, his demonstrated history of supporting Chinese state and military entities in his role at Walden, and his personal role in agitating the Intel board to fire former CEO Pat Gelsinger. 

Strangely, despite a public DOJ report about Walden's activities, SNS was the only US media entity we know of that was drawing any kind of real attention to the issue at the time Tan was appointed to lead one of the top chip companies in the US. We also hosted an SNS Spark salon on the topic that month to help our members understand the gravity of the situation. 

(SNS members can revisit that reporting here: "SNS: Is Intel's New CEO a National Security Risk?" We're making this issue available at no charge to the public; feel free to share the link widely with your networks.)

On March 27, just four days after that release, Intel announced that three of its board members would not be standing for reelection: Omar Ishrak, former CEO of medical device maker Medtronic; Tsu-Jae King Liu, a dean at the College of Engineering at the University of California, Berkeley; and Risa Lavizzo-Mourey, a former professor of population health and health equity at the University of Pennsylvania.

At the time, this departure was framed as a move to shift the makeup of the board away from those with general engineering and health experience and toward more chip-specific expertise. It's possible that this was true. It's also possible that it was a clever cover for the sudden departure of three longtime board members. In either case, I remain baffled by the Intel board's decision to appoint Tan CEO after the release of the DOJ report about Walden International and its role in funding China's state-backed chip architecture to the tune of $2.2 billion. 

 

The Role of Cadence As Asset Transfer Node

While SNS members were in the know about the risk to Intel, the rest of the media world continued to laud Tan's drastic "cost-cutting measures" and "fiscal austerity" as he fired thousands of Intel employees around the world and began to cripple R&D units. 

That is, until this week. 

On July 28, the DOJ reported that Tan's former chip company, Cadence, had agreed to plead guilty and pay over $140 million in criminal and civil cases for illegally - and deliberately - exporting semiconductor designs and tools to the People's Republic of China's National University of Defense Technology (NUDT). 

From the DOJ report: 

In court documents, Cadence admitted that Cadence China employees installed EDA hardware on NUDT's Changsha, China, campus and that NUDT personnel downloaded EDA software and IP technology from Cadence's download portals while Cadence and Cadence China, through its employees, had knowledge that NUDT had been added to the Entity List. On Feb. 18, 2015, the same day that NUDT was added to the Entity List, Cadence's export control officer emailed Cadence and Cadence China employees that NUDT had been added to the Entity List "meaning that export licenses will be required if sales are made." Further, in March 2016, a Cadence China employee authored a presentation for a quarterly sales review meeting with her colleagues stating (as translated from Chinese) that as of Feb. 18, 2015, the U.S. Department of Commerce had "embargoed" four national supercomputer centers in the PRC, including NUDT, due to U.S. microprocessor chips being used in the "TianHe" supercomputing systems believed to be used for nuclear explosion simulation. Cadence also admitted that its employees who conducted work at CSCC's location on NUDT's campus knew about connections between CSCC and the PRC military.[...] 

Further, in October 2020, while Cadence and Cadence China had knowledge that items previously sold and exported to CSCC had in fact been exported to NUDT in violation of U.S. export control laws, Cadence consented to CSCC's assignment to Phytium, a semiconductor company closely associated with CSCC and NUDT in the PRC, of CSCC's contracts for Cadence EDA tools.[...]

In March 2021, Cadence placed Phytium on export hold as a result of its internal compliance review and discontinued transactions with Phytium without completing all of the originally anticipated transfers, including any hardware transfers. 

When was Lip-Bu Tan CEO of Cadence again? Oh, that's right: 2009 to 2021. 

In December 2021, nine months after the internal compliance review was completed, Cadence posted on Instagram: "Today, Lip-Bu Tan transitioned out of his role as Cadence CEO and is now our Executive Chairman [a role he held until 2023]. We thank him for his outstanding stewardship over the past 13 years as he transformed the company and set the foundation for sustained long-term growth!" 

Yes, what stewardship! Such a foundation! 

I have so many questions: Was he forced out quietly as CEO by his board because of that March 2021 internal compliance review? Was it a strategic move for optics to protect Cadence's growth won through deliberate corporate espionage? Did Tan himself decide to step down to make room for his run at the Intel board and leadership? 

What I wouldn't give to have been a fly on the wall in those conversations. 

I asked Evan Anderson, SNS senior news analyst and CEO of INVNT/IP, to provide an assessment of this most recent news about Cadence and to compare it with what SNS members already know about Walden. His response: 

Part of what we track at INVNT/IP are any activities of the Chinese government as it seeks to complete its central planning for domination of all key global tech sectors. Walden has a long history of participating in these kinds of programs and had a co-sponsored fund in 2017 with state-owned China Everbright specifically designed to, in Everbright's own words "create obvious synergy effects through importing high-ending technology." That represents the kind of legal technology transfer that should be of concern in all dual-use industries, and which CFIUS [the Committee on Foreign Investment in the United States] should be preventing. The idea that Lip-Bu Tan is working to help the Chinese state acquire technology, including for its military, should give anyone great pause. 

But what Cadence was doing under his leadership appears to have been illegal work done in the interest of the Chinese state. Over at my desk, we call that espionage.

 

Did Cadence Transfer IP from Other Firms? 

Most important, and what I hope the DOJ continues to investigate, is what specific EDA software Cadence transferred to the Chinese military at that time. 

Was it acting as a broad node of transfer for American chip IP beyond its own? 

I see no reason to assume that the IP being transferred through Cadence was in fact limited to Cadence IP. The link could just as easily have acted as a relatively unscrutinized node for the transfer of American chip IP broadly - scooping up EDA secrets from Intel, Qualcomm, Nvidia, and other companies through a network of embedded Chinese agents working inside major American chip companies.

This is exactly the kind of arrangement that the PRC is known for helping to shepherd. 

If that was the case, Cadence - known for its exponential growth under Tan's leadership - could also have benefited from acting as a chip IP clearinghouse for the Chinese military. It's much easier to grow quickly when you don't have to spend billions on R&D. 

For Cadence, such an arrangement would have been a fantastic deal: We give you all the secrets of your competitors - all you have to do is give them back to us. 

To be clear: I have no proof whatsoever that this was the case. However, in the context of Tan personally and deliberately driving the advancement of Chinese military and state-backed chips, across both of his companies, and his entities knowingly and repeatedly violating US law in doing so, it would be negligent not to investigate. 

In any case, Tan's next move, in 2022, was to join the board of Intel, where he proceeded to personally go deep on manufacturing, in a very unusual move for a board member, before fomenting the ouster of Pat Gelsinger. 

So, what has he been up to since his appointment? 

 

Is Tan Trying to Cripple Intel's US Chip Production?

In his first two quarters as CEO, Tan has swept into Intel at full force, with plans to eliminate 20% of its workforce. Workforce reduction in itself isn't necessarily a bad thing in a company long bloated by middle management. However, where and how he has so far chosen to do so is significant. 

Keep in mind that under Pat Gelsinger's leadership, the entire strategy of Intel was to develop extensive US chip foundry capabilities, with a focus on onshoring and nearshoring US chip production to protect it in the case of a Chinese invasion or takeover of Taiwan and TSMC.  

That is a process that necessarily requires upfront investment of R&D, which, under the CHIPS Act, the federal government was set to heavily augment. 

So, where is Tan cutting costs? 

 

Gutting Technical Capabilities at Intel Foundry

To start with, Tan is gutting Intel Foundry, eliminating 15%-20% of technician, engineering, and research positions - precisely the positions needed to succeed in building out Intel's 18A and 14A manufacturing processes. 

It's perhaps not surprising, then, that those processes aren't advancing according to schedule. 

As PC Gamer reported on August 5:

Last week, we reported on a claimed 18-month deadline for Intel to win customers for its next-next-gen 14A chip node, else the company would have to give up on cutting-edge chip manufacturing. This week, it's Intel's actual next-gen node that's in the news for the wrong reasons, as 18A is apparently in trouble.

Reuters says sources inside Intel put the company's all-important 18A node (well, it used to be all-important before Intel shifted that dubious honour to 14A) at 10% in terms of manufacturing yields. That lowly figure is reportedly up from an even worse yield of just 5% late last year.

Tan has also shifted Intel away from its urgent focus on the 18A manufacturing process upon which Gelsinger bet so heavily - a process that was supposed to have gotten Intel to the point where it could start replacing TSMC dependency among US customers like Apple and Nvidia. 

As reported by Reuters on July 2:

To put aside external sales of 18A and its variant 18A-P, manufacturing processes that have cost Intel billions of dollars to develop, the company would have to take a write-off, one of the people familiar with the matter said. Industry analysts contacted by Reuters said such a charge could amount to a loss of hundreds of millions, if not billions, of dollars.[...] 

Tan has tasked the company with teeing up options for discussion with Intel's board when it meets as early as this month, including whether to stop marketing 18A to new clients, one of the two sources said. The board might not reach a decision on 18A until a subsequent autumn meeting in light of the matter's complexity and the enormous money at stake, the person said.

What's more, while Tan, on the one hand, decries the buildout of foundry capacity without sufficient customer buy-in, his public statements and SEC disclosures about both 18A and 14A manufacturing processes have actively discouraged the acquisition of any potential customers as they deliberately sow doubt about the company's commitment to those processes. 

More from PC Gamer:

That's according to a 10-Q (quarterly report) filing to the SEC. Intel explains: "If we are unable to secure a significant external customer and meet important customer milestones for Intel 14A, we face the prospect that it will not be economical to develop and manufacture Intel 14A and successor leading-edge nodes on a go-forward basis.

"In such event, we may pause or discontinue our pursuit of Intel 14A and successor nodes and various of our manufacturing expansion projects."

[...] What's more, [Bernstein & Co. analyst Stacy] Rasgon reckons that the mere acknowledgement that Intel may have to exit the cutting-edge chip manufacturing business may scare off potential clients, even before they're

signed up. "We believe the disclosure itself may make it more difficult to attract major customers if they are not convinced of Intel's commitment," Rasgon says.

 

Killing Onshoring and Nearshoring in Favor of Southeast Asia?

In his July shareholder update, Tan wrote: "We will take a fundamentally different approach to building our foundry business. Over the past several years, the company invested too much, too soon - without adequate demand. In the process, our factory footprint became needlessly fragmented and underutilized. We must correct our course."

In fact, the "needless" fragmentation and underutilization he criticizes here was deliberate. Otherwise known as onshoring and reshoring. And yes, it is hard to generate demand for foundries that aren't yet open and running. 

Tan's new strategy is to cut Western and US investments almost completely and to move those investments BACK INTO SOUTHEAST ASIA. 

"We have decided not to move forward with previously planned projects in Germany and Poland," he writes. "We also plan to consolidate our assembly and test operations in Costa Rica to our larger sites in Vietnam and Malaysia."

Ah, yes - Vietnam and Malaysia: two countries where Chinese influence and oversight is much stronger than in Germany, Poland, or Costa Rica. Somewhere out there, Xi Jinping had a good laugh at this release.

"We remain deeply committed to investing in the U.S., where we will apply the same level of financial discipline," he states in one breath.

In the next: "To that end, we are further slowing construction in Ohio to ensure our spending is aligned with demand - while maintaining flexibility to accelerate based on new customer wins."

Wait a minute ... Those two sentences don't add up.

You can't make this stuff up. 

 

And So Much More! 

Tan has eliminated Intel's automotive division entirely - an area that, as we have written about before, is a key focus of Chinese technological dominance. 

"In addition, I have instituted a policy where every major chip design is reviewed and approved by me before tape-out," he wrote in his July update.  

 

Next Up: Celestial AI

As if the Intel CEO didn't have enough on his plate, Tan also became a board member at photonics pioneer Celestial AI in January of this year, after being lauded as the only individual investor in the company's previous round.

Celestial AI is the creator of the Photonic Fabric optical interconnect technology platform. What role does it play in the current international AI arms race, and why might Tan be so keen to be involved?

I asked SNS CEO Mark Anderson, a much stronger technical assessor of photonics than I, to weigh in on the strategic significance of this key technology. 

His response:

For at least a decade, and long before the current GenAI explosion in AI Data Center technology (i.e., Nvidia AI Chips), the world of high-performance computing had recognized what became the most critical bottleneck in HPC design - the latency in moving electrons (and therefore data) from memory to (and often back from) the processor. Among the techniques for solving this problem were many new attempts to reduce the distances involved. This includes, but is not limited to, so-called "embedded" memory, in which the storage function is built into or next to the processor.  

With the advent of AI chips, including Nvidia's, a related idea of high-bandwidth memory has taken hold, essentially in an effort to reduce this latency problem by increasing the bandwidth of the connections between memory and processor. Since AI, today, is the peak technical source of competition in the economic war between China and the US, anything that gives either side a boost over the other would be considered a national-security-related technology.

For the above reasons and others, it would therefore appear that a company such as Celestial AI, specializing in reducing latency by using photonics (light waves) to collapse this latency, would be a potential key player. After all, latency is not really a distance problem; it is a time problem, with the shorter time between storage and processing being the "winner."  To this end, there appears already to be some discussion of putting this tech and company onto the US "entity" list, which would make it illegal to sell to China firms with any potential dual-use military applications, like this one.

In summary, this company and its tech would appear to be a perfect security and espionage target in the economic and military competition for AI dominance.  

Tan himself had this to say in a release published by Celestial about his appointment:

"The transformative potential of Celestial AI's Photonic Fabric for AI computing, networking and memory solutions stands to be as significant as the impact OpenAI's GPT has had on AI models," said Lip-Bu Tan. "The Photonic Fabric technology platform introduces a revolutionary suite of architectural tools for optical interconnectivity that extend from AI accelerator and GPU packages to hyperscale AI clusters. I look forward to collaborating with the team to [sic] as they continue to positively disrupt the industry."

If I were Celestial CEO Dave Lazovsky, I'd be thinking pretty hard about how to remove Tan from my board right now. Collaborating with him no longer seems to be in his company's best interest. 

As for those on Intel's board, they should all be deeply embarrassed at having been manipulated into installing such an obvious threat to the company's best interests. But there's still light at the end of the tunnel.

All they need to do is hire someone who can oversee the exact opposite of Tan's proposed strategy. And I know just the guy for the job.

They certainly don't deserve him - but might Gelsinger come out of retirement again to reclaim his legacy?

Your comments are always welcome.

 

Sincerely,

Berit Anderson

berit@stratnews.com

 

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