Caught Red Handed: Applied Materials Allegedly Illegally Exporting Tech to China

For years China Tech Threat has warned that U.S. export controls have been insufficient to stop the transfer of American technology to the Chinese military. In our August 2023 report, Cash Over County, we explained how American semiconductor equipment manufacturers Applied Materials, KLA, and Lam Research grew their combined revenues from China by 103% between 2018 and 2022—strengthening the Chinese military and intelligence apparatuses in the process.

Apparently, the greed infecting at least one of these companies is worse than we thought.

Reuters reports that the Justice Department is investigating Applied Materials for allegedly selling hundreds of millions of dollars’ worth of equipment to China in violation of U.S. export controls. The alleged infractions took place in 2021 and 2022, after the U.S. Commerce Department put SMIC on an export blacklist. Applied Materials apparently circumvented those restrictions by first shipping equipment to its South Korean subsidiary, and then on to China.

This is bad on multiple levels.

First, if these allegations are true, someone inside Applied Materials likely believed that the U.S. export control regime as applied to China was porous enough to be penetrated without detection. Even though Applied Materials was caught, that person was still right: Read Steve Coonen’s Willful Blindness report on the uselessness of U.S. export controls, which, among other flaws, retain no meaningful mechanism for determining how American technology is used once it reaches China.

Second, this investigation prompts the question: How many other U.S. companies are pulling off similar schemes? In truth, it’s unlikely there is an epidemic of companies conducting illegal trade undetected—most companies have too much at stake to break the law so flagrantly (Applied Materials stock was down 7.3% the day the Reuters story broke, and who knows what legal and reputational consequences will follow). Still, it only takes a few transfers of high-level technology to help China boost its warfighting capabilities. We can only hope that the DOJ’s criminal probe will deter future lawbreakers.

Third, the fact that the government is pursuing Applied Materials is terribly ironic, and perhaps even futile. Every day, some of the world’s most sensitive technologies continue to flow to SMIC and other Chinese semiconductor makers legally. For example, during one stretch of time from 2021 and 2021, the Commerce Department approved or returned without action 99.5.% of all applications to transfer technologies to SMIC. Assuming that Applied Materials wasn’t exporting equipment used for making the most advanced chips, the company didn’t have to break the law if it wanted revenue from SMIC. It likely only had to exercise patience in waiting  for a Commerce Department rubber stamp! Now it’s too late for that. Applied Materials has a massive legal issue on its hands. And the “Cash Over Country” philosophy underpinning Applied Materials’ business model is truer than ever.