China's Smuggling of Korean HBM Chips Surges Amid U.S. Export Controls

According to reports, despite U.S. export controls on semiconductor sales to China, high-bandwidth memory (HBM) produced by Samsung Electronics and SK Hynix is being smuggled into China in large quantities. The illegal market for HBM is expanding as the supply shortage, identified as a major weakness in China's artificial intelligence (AI) semiconductor industry, worsens.

On November 2, U.S. IT publication The Information reported that Chinese smugglers have recently been packaging Korean HBM with low-cost server processors to circumvent export regulations. While exporting HBM alone triggers U.S. restrictions, combining it with server processors allows smugglers to evade these rules.

The publication noted that smugglers are exploiting a loophole in U.S. export regulations, which assess the performance of the package based on the server processor rather than the memory.

Once the products arrive in China, they undergo a disassembly process. Local technicians apply heat to the package to melt the solder, separating the HBM from the remaining server processor, which is then discarded. However, this process poses significant risks, as exposure to high temperatures can distort or crack the internal structure of the memory, making the operation challenging and prone to failure.

The motivation for smugglers to take such risks is the skyrocketing price of HBM. An intermediary involved in memory smuggling in China told The Information that the price of HBM3E, which was several hundred dollars a year ago, has recently surged to around $4,000. Considering that each AI semiconductor typically requires 6 to 8 HBM units, securing memory alone could cost between $24,000 and $32,000, excluding expenses for the AI processor, server, and power.

The sharp increase in HBM prices in China is attributed to domestic semiconductor companies' inability to keep pace with the demand from the AI industry. HBM is a high-performance memory that vertically stacks multiple DRAM chips to enhance data processing speeds. It is essential for training and running large-scale AI models, yet Chinese companies' production capabilities remain limited. In contrast, Samsung Electronics and SK Hynix dominate over 80% of the global HBM market.

There are indications that Huawei, China's largest telecommunications equipment company, heavily relies on Korean HBM. The Information cited sources familiar with Huawei's supply chain, stating that the company recently informed some clients that its next-generation AI semiconductor, the Ascend 960DT, would incorporate a significant amount of HBM from Samsung and SK Hynix.

Huawei reportedly claims that the Ascend 960DT will deliver double the performance of existing products. Additionally, as it becomes increasingly difficult to purchase HBM directly from Korean companies, some clients have been instructed to source the necessary memory for AI semiconductors independently. This suggests that while Chinese AI semiconductor firms are accelerating their processor development, they still heavily depend on Korean companies for securing critical memory.

The issue is that such smuggling operations could pose challenges for domestic semiconductor firms. Even if Samsung Electronics and SK Hynix do not supply products directly to Chinese companies, Korean HBM that enters China through third parties could attract scrutiny from the U.S. government if found in Chinese AI semiconductors.

In fact, Taiwanese foundry TSMC faced a U.S. investigation after its semiconductors were discovered in Huawei products in 2024. Subsequently, the U.S. tightened restrictions on TSMC's exports of AI semiconductors to China. Korean companies are also expressing concerns about increased management burdens regarding their final customers and product distribution channels.

In light of this, SK Hynix has stated that it strictly complies with relevant laws, including U.S. and Korean export control regulations. The company emphasized that it has not supplied products to Huawei since the implementation of U.S. export controls in 2020.

The illegal trade of HBM in China is expected to continue for the foreseeable future. Although Chinese AI companies are expanding their in-house semiconductor development, achieving domestic production of advanced memory will take considerable time. Particularly, for companies like DeepMind and Moonshot, which are engaged in large-scale model development competition, securing a stable supply of high-performance processors and HBM is essential.