Taiwan Semiconductor Manufacturing Co. The core circuit produced by was found in Huawei’s Ascend 910B chips.

Huawei’s AI chip is one of China’s best domestic alternatives to Nvidia’s high-end offerings, which remain inaccessible to buyers in China. Some of the technology comes from TSMC, the world’s largest contract chipmaker, whose market cap of nearly $1 trillion exceeds that of Tesla and Walmart.

This episode underscores the difficult task of stifling China’s technology supply chain despite intense U.S. export controls and sanctions. Backed by billions of dollars in government support in recent years, Huawei has become one of China’s national technology champions and is at the forefront of the country’s artificial intelligence goals.

At the core of the Biden administration’s strategy is to thwart China’s AI efforts, which carry national security implications due to their potential military applications. The Commerce Department’s Bureau of Industry and Security said it remains committed to “ensuring compliance” with China-related export controls on advanced chips and is aware of recent reports of possible violations.

The TSMC circuit in question should be inaccessible to Huawei, which has been facing US sanctions since September 2020 due to national security concerns.

Based on a preliminary internal investigation, TSMC believes its technology was somehow routed through Sophgo, a Chinese chip company, but others may also be involved, according to people familiar with the matter. A less likely scenario being discussed internally involves TSMC circuits being selected (or “dying,” in chip industry parlance) from Huawei stockpile collected before U.S. sanctions were imposed more than four years ago, sources said.

It was not previously reported what Sophgo may have purchased from TSMC. A TSMC spokesperson said it would take immediate action, including investigations, and would be in contact with U.S. authorities if any concerns were raised.

TechInsights is a chip industry research firm founded in 1989. The firm’s website states that its semiconductor reverse engineering, dismantling and market analysis has an audience of more than 650 companies and 100,000 users.

Two TechInsights reports published last month established a connection between TSMC’s circuits and Huawei’s AI chip.

Orders for Sophgo were flagged internally at TSMC last month, according to people familiar with the matter. The Taiwanese chipmaker also recently canceled Sophgo’s orders deemed suspicious and reported the situation to US regulators, the sources said.

After The Wall Street Journal requested comment last month, Sophgo denied any business ties to Huawei in a statement posted on the company’s social media account. The Chinese company added that it shared a detailed investigation report with TSMC to prove that it was not involved in the incident. Reached on Tuesday, the company referred to its previous statement.

Industry officials say TSMC circuitry originally purchased by Sophgo may have been diverted to gray markets; some chip buyers do this when they have overstock.

Huawei said it has not produced any chips through TSMC since it was approved by the US. Ascend 910B is among Huawei’s top AI-related chips, designed for high-performance computing and intensive AI applications.

A separate TechInsights review last year of a different Huawei chip led to a Commerce Department review. Echoing the report’s findings, Commerce Secretary Gina Raimondo said US export controls had managed to limit the performance of the Huawei chip, making it “not nearly as good” as the latest alternatives.

Write to Yang Jie at [email protected] and Joyu Wang at [email protected].