The U.S. Department of Commerce is expanding its investigation into Applied Materials, the largest semiconductor equipment manufacturer in the United States. The company is suspected of violating U.S. chip export regulations by shipping to Chinese chip manufacturers.
According to media reports, Applied Materials disclosed in its quarterly report submitted to the U.S. Securities and Exchange Commission (SEC) on Thursday that it received a subpoena from the Commerce Department’s Bureau of Industry and Security in May, demanding more information on potential violations of the Biden administration’s chip ban. Last November, the company also received a subpoena from the same department.
Earlier this year, Applied Materials also received subpoenas from the SEC and the Massachusetts Attorney General, requesting information on shipments to Chinese customers. Since August 2022, the company has received similar subpoenas from multiple government departments.
One of the investigations is focused on whether Applied Materials, through South Korea, transferred semiconductor manufacturing equipment worth hundreds of millions of dollars to Chinese semiconductor giant SMIC to circumvent U.S. semiconductor export license requirements.
In its quarterly report, Applied Materials explained that “the company is fully cooperating with the government on these issues. Due to the uncertainty of these issues, we cannot predict the outcome or reasonably estimate any potential losses or penalties associated with them.”
The U.S. government has imposed restrictions on the types of semiconductor manufacturing equipment that can be shipped to Chinese customers to prevent the Chinese Communist Party from obtaining cutting-edge technology that could pose a threat to U.S. national security.
Like many of its peers, Applied Materials has seen a decline in sales since the U.S. announced export restrictions, but China still accounts for about a quarter of the company’s sales.
Applied Materials reported second-quarter revenue of $6.646 billion, flat compared to the same period last year, higher than analysts’ consensus expectation of $6.537 billion. The company announced adjusted earnings per share of $2.09, surpassing analysts’ consensus expectation of $1.99.
In November of last year, Reuters reported, citing sources, that Applied Materials was under investigation for allegedly exporting semiconductor equipment to Chinese chipmaker SMIC, violating U.S. export control laws. The company repeatedly shipped equipment from its Gloucester, Massachusetts factory to its subsidiary in South Korea, and then to SMIC. The equipment involved in the incident was valued at hundreds of millions of dollars.
SMIC has been on the export blacklist since the Trump administration. In December 2020, the Trump administration designated SMIC as a Chinese military company and put it on the U.S. Department of Commerce’s Entity List, subjecting it to export controls.
SMIC produces mature process chips and purchases a large amount of specialized chip manufacturing equipment from the United States. Despite being blacklisted, the U.S. Department of Commerce has issued licenses for cooperation with SMIC to companies in the U.S. chip industry.
In September of last year, another blacklisted company, Huawei, released the new Mate 60 Pro smartphone, which used a 7nm 5G chip provided by SMIC, which is the target of U.S. export controls. Previously, SMIC’s most advanced chip was 14nm. This news shook decision-makers in the U.S.
Subsequently, Michael McCaul, chairman of the House Foreign Affairs Committee, along with 9 other members of Congress, wrote to the U.S. Department of Commerce, calling for increased sanctions against Huawei and SMIC, implementing a “comprehensive blockade sanction.” They also urged the revocation of all existing export licenses for Huawei and SMIC, as well as criminal charges against the executives of these two Chinese companies.
On March 21 of this year, during a hearing in the U.S. Congress, lawmakers questioned whether SMIC illegally used U.S. equipment to produce related chips. In response, Alan Estevez, Deputy Secretary of Commerce for Industrial and Security Affairs, stated that SMIC may have violated U.S. export controls and an investigation will be conducted into the matter.