Impact of Section 5949 Chinese Semiconductor Prohibitions on Supply Chains

Section 5949 of the National Defense Authorization Act (NDAA) for Fiscal Year 2023 (FY23) will have a significant impact on the semiconductor supply chain in both the public and private sectors. Effective December 23, 2027, the US government is prohibited from acquiring parts, products, or services from certain semiconductor companies based in the People’s Republic of China (PRC). Federal contractors are likewise prohibited from procuring and providing components or products from these companies.

Private industry suppliers are expected to implement policies to comply with this prohibition, including proactively illuminating their own supply chains. Federal procurement processes will also change accordingly. As an experienced practitioner and provider of supply chain risk management (SCRM) services for public- and private-sector organizations, Guidehouse is uniquely positioned to help clients navigate this new and significant challenge.

Section 5949 Specifics

Three semiconductor companies and their subsidiaries, affiliates, and successors are named in the Section 5949 prohibition:

• Semiconductor Manufacturing International Corporation (SMIC)
• ChangXin Memory Technologies (CXMT)
• Yangtze Memory Technologies Corp (YMTC)

These firms are targeted due to their operation under Chinese state control, as well as the national Military-Civil Fusion policy, which blurs the line between China’s semiconductor industry and the military/defense sector. Section 5949 specifically allows additional companies to be added to the list at a later date. Most semiconductor design and manufacturing in the PRC likely fits the terms outlined, and therefore more companies could fall under this prohibition in later years.

Guidehouse projects that the onus of implementation will primarily fall on private companies. Federal contractors and suppliers will be required to self-report the presence of prohibited products or parts in their goods and will likely bear the costs of mitigation and remediation. Penalties for non-compliance could include contract termination or non-renewal, with reputational harm and intangible impacts also possible.

The Federal Acquisition Security Council is required to provide detailed guidance on this prohibition by December 23, 2025—exactly two years before it goes into effect on December 23, 2027.

Impact on the Supply Chain

Section 5949 will impact federal procurement of goods and services in priority categories including information and communications technologies (ICT), transportation, healthcare, and more. Given that semiconductor supply chain entanglement extends well beyond ICT services and products, such as laptops, mobile phones, data centers, and cloud computing, companies in many industries beyond ICT must also begin to adapt immediately.

Public sector decision makers should also start their response now. Procurement life cycles, encompassing everything from acquisition planning to contract awards, can take years to develop or to change. Restrictions on the use of Chinese technology may constrain supply chains and reduce the number of viable vendors. To mitigate potential supply chain disruptions and increase supply chain resilience, procurement officers may need to address supply chain issues during market research and, in advance, develop alternate sourcing strategies in the event they should be needed. Note also that the waiver for Section 5949 has a relatively high bar. Overall, federal agencies should probably anticipate paying more for compliant goods.

Section 5949’s prohibition is clearly aligned with federal initiatives to promote the domestic semiconductor industry and enhance supply chain resilience. It, and other semiconductor-related regulations, will very likely impact federal and commercial business procurement in a wide variety of sectors. Private companies will be largely responsible for mitigation and remediation costs, while government organizations will face disruptions and cost increases if supply chains are constrained and the number of compliant vendors is reduced.

Those in the military and intelligence community have advised that although Section 5949 and similar regulations highlight concerns about the presence of malicious technology in US government supply chains, they are not comprehensive guards against Chinese technology in sensitive US hardware and software. It is our view that sensitive national security clients as well as other clients need to go beyond satisfying regulatory and legislative requirements to illuminate supply chains to multiple tiers, conduct due diligence, and perform continuous monitoring to identify, assess, and mitigate risks and ensure supply chain security.

Guidehouse recommends responding to Section 5949 with comprehensive and proactive supply chain risk assessments and industrial base analyses, even for those organizations not dealing directly with the companies named in the 2023 NDAA.

How Guidehouse Can Help with Section 5949 Response

Guidehouse has the supply chain risk management expertise, capability, technology, and data necessary to provide both government and industry organizations with deeper insights into their semiconductor and technology supply chains. We offer a range of SCRM services, including strategic and operational transformation, program design and implementation, supply chain illumination and industrial base analysis, and due diligence and risk assessments and ratings.

Our experts come from careers in both industry and government, and have backgrounds in fields like supply chain security, information protection, law, finance, cybersecurity, intelligence, law enforcement, data science and analysis, and investigations. We have a proven track record of successfully delivering these insights to multiple government agencies and industrial and technology companies. Guidehouse’s experience can help your organization better manage the risks and understand the opportunities in your supply chains.

Guidehouse’s multidisciplinary experts, with their proven track record of real-world supply chain risk management, can help both government and industry organizations respond now to the implementation of Section 5949 and probable additional regulations to come.

This article was co-written by Max Barmack, Eric Skidmore, and Rodney Snyder.