Applied Materials Faces U.S. Criminal Investigation for Suspected Export Violations to China

The United States’ premier semiconductor equipment manufacturer, Applied Materials, is currently the subject of a U.S. Justice Department investigation. They are under scrutiny for alleged violations of export restrictions related to shipments to China’s Semiconductor Manufacturing International Corporation (SMIC), the nation’s leading chipmaker. This inquiry revolves around accusations of evading export licenses, leading to a sharp decline of 7.3% in Applied Materials’ shares.

Unveiling the Criminal Probe

The U.S. Justice Department is closely examining Applied Materials for purportedly dispatching semiconductor equipment to SMIC through South Korea without the requisite export licenses. The value of the equipment involved in this investigation reaches hundreds of millions of dollars. This revelation, reported by Reuters for the first time, exposes the potential legal challenges the semiconductor giant will face.

National Security Imperatives

Due to national security concerns, the United States has imposed stringent restrictions on exporting advanced chips and chipmaking equipment to China. Earlier this year, the Justice and Commerce departments established a task force aimed at investigating and prosecuting criminal violations of export controls. The overarching objective is to prevent the transfer of technology that could bolster China’s military and intelligence capabilities.

Applied Materials’ Response

Addressing the investigation, Applied Materials, headquartered in Santa Clara, California, disclosed that it had initially received a subpoena from the U.S. Attorney’s Office in Massachusetts in October 2022. The company underscored its commitment to compliance with global laws, including export controls and trade regulations, and affirmed its active cooperation with the government.

Shipment Routes and Timelines

Insiders familiar with the matter revealed that Applied Materials produced semiconductor equipment in Massachusetts and subsequently shipped it from its Gloucester facility to a subsidiary in South Korea. From there, the equipment made its way to SMIC in China. These shipments were even made after SMIC was added to the U.S. Commerce Department’s “Entity List” in December 2020. This imposed restrictions on exports to the company. The alleged violations occurred during the years 2021 and 2022.

SMIC’s Entity List Placement

SMIC’s placement on the Entity List was attributed to suspicions of its ties to the Chinese military. In response, SMIC refuted any such connections, asserting that its activities solely revolve around the manufacturing of chips and providing services for civilian and commercial purposes. The Chinese company has not issued a statement regarding the reported shipments from Applied Materials.

Global Responses and Ambiguities

According to Liu Pengyu, the Chinese spokesperson, the Chinese Embassy in Washington claims to be uninformed about the Applied Materials probe. However, he expressed that “imposed restrictions” contradict market economy principles and fair competition. Simultaneously, China’s foreign ministry spokesperson, Mao Ning, urged the U.S. to stop disrupting the global semiconductor industry’s production and supply chain.

Regulatory Background and Ongoing Hurdles

The Commerce Department, tasked with overseeing export controls, blacklisted SMIC in 2020. Licenses for equipment capable of producing chips at advanced technology nodes would likely be denied to prevent support for China’s military initiatives. Licenses for other items were subjected to a case-by-case review. In March 2021, Reuters reported delays in approving permits for American companies, including Applied Materials, to sell to SMIC.

In a filing with the U.S. Securities and Exchange Commission in August 2023, Applied Materials acknowledged the investigation’s uncertainties. The company could not predict the outcome or estimate potential losses or penalties related to the matter. The ongoing probe raises pertinent questions about the future trajectory of U.S.-China trade relations and the intricate balance between national security concerns and international business transactions within the semiconductor industry.