A BIS 50% Rule Case Study: Three High-Tech Subsidiaries of a Restricted Chinese Institute

The Shanghai Institute of Optics and Fine Mechanics (SIOM) is a leading research institute under the Chinese Academy of Sciences (CAS) that is recognized for its work in high-powered laser systems, quantum optics, nonlinear optics and ultrafast laser technologies.

But SIOM’s research has potential uses not only in civilian contexts but also in military systems, like space-based sensors and targeting technologies. In January, its role in China’s civil-military fusion strategy and military-modernization efforts landed the institute on the U.S. Bureau of Industry and Security’s (BIS) Entity List, which subjects it to strict export-licensing requirements and a loss of access to American technology.

SIOM has a number of subsidiaries that have been involved in Chinese military procurement. None are on the Entity List themselves. But together they offer an instructive case study as the Trump administration reportedly considers a rule that would subject subsidiaries owned 50% or more by parties on the BIS Entity List to the same export restrictions as their listed parents.

How would such a rule approach the math around ownership and control? What would it mean for screening? Prepare with these examples.

Shanghai Daheng Optical Precision Machinery Co., Ltd.

Business scope: A range of optical components (lenses, mirrors, prisms), laser optics, imaging systems, and opto-mechanical assemblies used in scientific research, industrial automation, and defense applications.

Ownership:

Wholly owned by SIOM, Shanghai Daheng Optical Precision Machinery serves as a textbook case of a subsidiary that a proposed 50% rule could apply to. That would subject it to the same BIS export-licensing requirements that SIOM faces, even though Shanghai Daheng Optical Precision Machinery has not been named to the Entity List itself.

Military-end-use (MEU) risk nexus: Like its parent’s products, many of Shanghai Daheng Optical Precision Machinery’s products are dual-use in nature, suitable for both civilian high-tech contexts and military systems. These include components used in laser systems, aerospace optics, surveillance equipment and targeting technologies.

Along with its ownership, such military applications provide risks worth weighing, even before a possible BIS 50% rule arrives.

Shanghai Hengyi Optics and Fine Mechanics Co., Ltd.

Business scope: High-precision optics, with a technical strength in optical polishing, coating and alignment, which are essential for high-performance optical systems.

Ownership:

Here we see a slightly more complex ownership dynamic. Shanghai Hengyi Optics and Fine Mechanics is not directly owned by Entity Listed SIOM, but it is 90%-owned by Shanghai Daheng, which, as we know, SIOM wholly owns.

MEU risk nexus: While the company markets itself in civilian sectors—such as medical imaging, machine vision and laser instrumentation—its product lines carry inherent military uses as well. The same optical components can be integrated into military systems including targeting optics, surveillance equipment and laser-based rangefinders.

Shanghai Hengyi’s military relationship appears to be more than theoretical. The company holds a Chinese Weapons and Equipment Research and Production Certificate, an official authorization issued by the State Administration of Science, Technology and Industry for National Defense.

• That legally permits companies to engage in the R&D, production, and maintenance of military weapons and defense projects involving missiles, radar, aerospace systems, naval platforms, optics, electronics, and other strategically sensitive technologies.

Shanghai Shenguang Laser Technology Manufacturing Equipment R&D Co., Ltd.

Business scope: High-powered laser systems, laser processing equipment, and manufacturing technologies related to laser integration and control. Shanghai Shenguang’s products and research are closely linked to precision engineering, photonics and directed-energy applications.

Ownership:

Restricted SIOM owns a 35% indirect share of Shanghai Shenguang through the aforementioned Shanghai Daheng Optical Precision Machinery. A second entity on the U.S. list, Shanghai IC R&D Center Co., Ltd., owns another 15% share.

In the aggregate, that makes Shanghai Shenguang 50%-owned by two different Entity Listed companies.

• Of note: Shanghai IC R&D Center faced particular U.S. scrutiny in its December listing. BIS listed it as a footnote 5 designation under the Foreign Direct Product Rule, which aims to restrict access to foreign-produced items that could support the production of advanced-node integrated circuits.

MEU risk nexus: Shanghai Shenguang’s technologies align with broader efforts to develop next-generation warfare capabilities, including laser-based missile-defense and space-based optical systems.

In brief

These case studies illustrate a range of ownership structures that could require screening under a potential BIS 50% rule, including entities majority-owned through layered or shared holdings.

In the meantime, industry and trade-compliance teams will need to begin assessing their existing screening logic, enhancing due-diligence processes and securing deeper data on BIS-listed entities—so they are prepared if, and when, the rule becomes a reality.

Read more from the Brief:

• What a BIS 50% Rule Would Mean for Compliance, Enforcement and Chinese Tech Firms
• UFLPA-Listed Companies Are Adding New Subsidiaries, Away from Xinjiang and its U.S. Scrutiny
• Chinese Labs Test Most U.S. Electronics. A New FCC Rule Will Block Those with ‘Prohibited’ Ties.