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On February 11, 2026, BIS announced a settlement agreement with Applied Materials Inc., headquartered in Santa Clara, California (“Applied Materials”) and Applied Materials Korea, Ltd. (“AMK”), covering 56 violations of the Export Administration Regulations (“EAR”) resulting from AMK’s unauthorized reexport and attempted reexport of semiconductor manufacturing equipment to China-incorporated Semiconductor Manufacturing International Corporation and its subsidiaries (collectively, “SMIC”). The approximately $252 million penalty was the maximum allowed by statute (twice the value of the transaction) and the second-highest penalty ever imposed by the Department of Commerce Bureau of Industry and Security (“BIS”) in a stand-alone enforcement action.

As described below, Applied Materials attempted to avoid EAR license requirements for its semiconductor manufacturing equipment by moving final production and testing to AMK in South Korea, under the theory that the work done by AMK would transform the equipment into a foreign-produced item that was not subject to the EAR under the de minimis or foreign direct product rules.

BIS rejected the company’s approach, finding that the semiconductor manufacturing equipment continued to be “U.S.-origin” under the specific circumstances, to include: Applied Materials began production of the equipment in the U.S.; nearly all the U.S. and foreign origin parts needed to complete production were exported by Applied Materials from the U.S. to AMK in South Korea; and Applied Materials adopted this process (which it referred to as a “dual build process”) for the sole purpose of producing equipment for sale to SMIC, in order to avoid U.S. licensing requirements.

According to BIS, a partially-manufactured U.S.-origin product is not transformed into a foreign-origin product by completing manufacturing — even substantial manufacturing — in a foreign location using parts and components exported from the U.S.  Thus, the semiconductor manufacturing equipment remained subject to the EAR under Section 734.3(a)(2), which provides that “all U.S.-origin items wherever located” are subject to the EAR, and the equipment could not be reexported to SMIC without BIS authorization.

BIS’s statement of the law deserves emphasis:

BIS deems that U.S.-origin items or items physically located in the United States on which production begins in the United States are not rendered “foreign-made” when the items are exported and then undergo further assembly and testing in a foreign country when, as here, those activities outside the United States involved little or no foreign-origin parts that were shipped to the foreign location from a non-U.S. location.

Although the EAR contemplates and allows for manufacturing processes that involve the incorporation of U.S.-origin controlled content into foreign-made commodities, this case puts companies on notice that shifting production to foreign locations to avoid U.S. export restrictions may have severe consequences, if done incorrectly.  Going forward, companies engaged in manufacturing processes involving the U.S. and foreign countries must consider whether products originating in the U.S. and completed abroad are sufficiently “foreign” to be subject only to the de minimis and foreign direct product rules, rather than controlled as U.S.-origin items.

BACKGROUND

As set forth in the Proposed Charging Letter, Applied Materials lawfully sold SMIC approximately $1.4 billion in U.S.-origin semiconductor manufacturing equipment controlled under ECCN 3B991 or designated as EAR99 between 2016 and September 2020, when no license was required for the exports.  That changed on September 25, 2020, when BIS sent Applied Materials an “is-informed” letter under Section 744.21(b) of the EAR, notifying Applied Materials that a license was required to export, reexport, or in-country transfer to SMIC certain EAR-controlled items, including items classified under ECCN 3B991, because of a risk of diversion to a military-end use in China.  Shortly thereafter, on December 18, 2020, SMIC and several of its subsidiaries were added to the Entity List, thereby creating a licensing requirement for all items subject to the EAR to be exported, reexported, or transferred to SMIC.

Applied Materials responded to these changes by applying for export licenses from BIS.  But as Applied Materials continued to wait for approval of its license applications, the company faced the potential loss of more than $1 billion per year in revenue if SMIC replaced Applied Materials with foreign suppliers.  Applied Materials therefore pursued another strategy: shifting its SMIC manufacturing abroad, so its products would become foreign-origin items (according to the company’s analysis) not subject to the EAR under the de minimis or foreign direct product rules. In the absence of U.S. jurisdiction, the products could be sold to SMIC without a BIS license, despite SMIC’s status as a Chinese Military End User and Entity List party.

Applied Materials attempted to achieve this by implementing what it referred to as a “dual-build” manufacturing process for equipment being sold to SMIC — and only for the equipment sold to SMIC.  The “dual-build” process began at its Gloucester, Massachusetts business, which partially produced the equipment at issue and compiled all parts and components needed for final production.  Next, it exported the partially-completed equipment from the U.S. to AMK in South Korea, along with all (or nearly all) of the U.S. and foreign parts and components needed to complete production.  AMK in South Korea then completed the assembly and testing of the semiconductor manufacturing equipment and sent it to SMIC in China.  Finally, SMIC added a foreign-produced outer system enclosure and factory interface, which provided automation and safety features, without which the semiconductor manufacturing equipment could not be safely operated.

Global trade personnel at Applied Materials reasoned that the semiconductor manufacturing equipment produced through this “dual-build” manufacturing was “foreign origin” because it had been “substantially transformed” in South Korea, borrowing a concept from the Customs regulations, and was not captured by the de minimis or foreign direct product rules.

Based on this theory, AMK reexported or attempted to reexport approximately $126.3 million worth of semiconductor manufacturing equipment to SMIC, between November 2020 and July 2022. (Note that the violations in this case occurred before the EAR was updated with Section 734.4(a)(9), which provides that there is no de minimis level for certain Category 3B items going to Entity List Footnote 5 parties, such as SMIC. Therefore, at the time of the violations in this case, SMIC’s status as an Entity List party was not relevant to the de minimis analysis.)

THE “U.S. ORIGIN” BASIS FOR EAR JURISDICTION

BIS rejected the company’s legal analysis.  In the Proposed Charging Letter, BIS noted that “substantial transformation” does not appear in the EAR and is not the correct test for determining whether an item is U.S.-origin (and therefore subject to the EAR).

BIS determined that the semiconductor manufacturing equipment in this case was U.S.-origin, based on the fact that its Gloucester business began the production of the equipment in the U.S. and exported the partially manufactured equipment along with all of the U.S.-origin and foreign-origin parts necessary to complete production to South Korea, for the sole purpose of producing semiconductor manufacturing equipment for SMIC.  BIS explained: “what occurred in South Korea can be described as the combination of U.S.- origin and non-U.S.-origin content typically sent from the United States and assembled into already partially assembled U.S.-origin items, with little or no content sourced from outside the U.S. with which the U.S.-origin content was incorporated, and so no foreign-made item resulted.”

Based on these facts, the equipment was EAR-controlled under EAR Section 734.3(a)(2), which provides that all U.S.-origin items wherever located are subject to the EAR.  As noted above, BIS deemed that “U.S.-origin items or items physically located in the United States on which production begins in the United States are not rendered ‘foreign-made’ when the items are exported and then undergo further assembly and testing in a foreign country when, as here, those activities outside the United States involved little or no foreign-origin parts that were shipped to the foreign location from a non-U.S. location.”

BIS acknowledged that the EAR contemplates and allows for manufacturing processes that involve the incorporation of U.S.-origin controlled content into foreign-made commodities, and that such products are not subject to the EAR if they do not contain more than a given percentage of controlled U.S.-origin content (the de minimis rule) and are not caught by the foreign direct product rules.  But because the Applied Materials “dual build” manufacturing process did not create a foreign origin product, the de minimis and foreign direct product rules were irrelevant to the jurisdiction analysis in this case.

KEY TAKEAWAYS

On its face, this is a case about the scope of EAR Section 734.3(a)(2), and the circumstances under which a product is considered “U.S.-origin.”  Based on this case, manufacturers and exporters should assume that a U.S.-origin item cannot be converted into a foreign-origin item by shipping a partially manufactured version of the item from the U.S. to a foreign country, along with all the parts necessary to manufacture the item, for further manufacture and testing in the foreign country.  Such products remain subject to U.S. jurisdiction.  Moreover, because BIS considers such items U.S.-origin, the de minimis rule does not apply, even if the item contains less than a de minimis amount of controlled U.S.-origin content.

It is unclear how far this interpretation of “U.S.-origin” might extend.  Although its application to the facts of this case is straightforward, its reach beyond these facts is uncertain.  For example, what if no assembly had occurred in the U.S., and instead all necessary parts and components (U.S. and foreign) were exported to South Korea for assembly and testing (i.e., standard kitting)?  What if some assembly took place in the U.S., but key parts required to complete the manufacturing process were of foreign origin and shipped from non-U.S. locations?  What if the equipment had been designed and developed by AMK in South Korea, but Applied Materials shipped the partially assembled equipment and necessary parts from the U.S.?  More broadly, at what point does a foreign assembled product become foreign origin for purposes of the EAR, and how much should motive matter in the analysis?

The deeper lesson from this case is that companies that try to structure their business to avoid U.S. export regulations run the risk of an enforcement action, especially in cases involving high-sensitivity technologies, Chinese military end users, and Entity List parties.  BIS’s message should be clear: companies should avoid attempting to do indirectly what they cannot lawfully do directly, and should operate with full transparency when adopting creative regulatory interpretations.