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China tech

Applied Materials halts work for red-flagged Chinese chip maker

US chip tool leader pulls staff from San'an Optoelectronics following government listing

Applied Materials of the U.S. is a key supplier to China's Xiamen San'an Optoelectronics. (Photo provided by Applied Materials)

TAIPEI -- California-based Applied Materials, the world's top chip and display equipment maker, has ordered staff to halt all deliveries and servicing for China's biggest LED chip maker, who was named on a red flag list recently issued by the U.S. government.

Xiamen San'an Optoelectronics is one of at least three Chinese customers of Applied Materials who were identified on the U.S. government's "unverified list," people with knowledge of the situation told Nikkei Asian Review. While the list does not embargo dealings with these entities, it requires American companies to treat them with caution. U.S. suppliers can no longer use existing licences to sell them products or service installed equipment, but have to reapply for new ones. San'an Optoelectronics is also the world's biggest LED chipmaker by revenue and listed in Shanghai.

Xi'an Jiaotong University, one of China's top 15 colleges, and a unit of Chinese Academy of Sciences, the country's top research agency, are also Applied Materials customers named on the unverified list, which was published on April 11, a supply chain source familiar with the move said. Some 37 Chinese companies and research institutions were named on the list, as well as seven organizations in Hong Kong, four in the United Arab Emirates, two in Malaysia and one in Indonesia.

The U.S. government's move marks another setback to the companies and research institutions who are crucial to China's ambitions to become a global tech superpower.

Applied Materials supplies almost all the world's leading semiconductor and panel manufacturers. Market leaders such as Intel, Samsung Electronics, Taiwan Semiconductor Manufacturing Co, and China's national display champion BOE Technology Group could not make products without the company's tool and services.

As an industry leader in advanced tools for the critical semiconductor industry, Applied Materials' decision to immediately stop all business with those on the list could influence other U.S. vendors, as well as those outside the country, industry sources told Nikkei.

On April 12, Applied Materials sent a notice to all staff involved with the named companies that they should "immediately stop all pending and future equipment delivery, and cease all service activities at their sites," according to the notice obtained by Nikkei. The U.S. chip tool giant also demanded that staff, contractors and other personnel immediately withdraw from the sites of those companies, the notice said.

The notice warned that failure to follow this compliance could lead to significant violations of U.S. trade law.

The company's actions come just weeks after Applied Materials' CEO Gary Dickerson traveled to China in late March to attend SEMICON China, one of the industry's biggest events and an important showcase for Chinese technology ever since Beijing made chip industry development a top policy priority in 2014.

At the event, Dickerson made his first clear and public statement about the U.S.-China trade tensions which have hit the chip industry hard. "The strained relationship between China and the U.S. can put decades of economic growth at risk," Dickerson said. He also warned it would be "a lose-lose proposition" if the world's two biggest economic powers were unable to get along.

Applied Materials generated some 26% of its revenue from China, its biggest market, in the most recent quarter ending Jan. 27. The U.S. company did not immediately respond to a request for comments. San'an also did not respond to the request for comments.

China's commerce ministry spokesman Gao Feng last week hit back at the new unverified list, saying the U.S. move could harm Chinese companies' reputation and disrupt normal trade activities. Beijing said it objected to the abuse of national security and export control rules and demanded the U.S. withdraw the new curbs as soon as possible.

Akin Gump, an international law firm, warned companies in a research note that they would have to respond to the requirements of the unverified list. "As a result of this development, U.S. and non-U.S. companies and others should update their internal control program screens to ensure compliance with the new requirements," the research note said.

Harry Clark, a partner with Orrick, Herrington & Sutcliffe LLP in Washington, told Nikkei that being added to the unverified list does not mean a broad ban on U.S. exports and re-exports to the entity, but it would need to obtain extra licences and file additional reports if dealing with such entities. It also applies to foreign persons.

"My firm advises clients to be especially careful to ensure that any export or re-export involving an unverified list entity is scrupulously compliant with the regulation," Clark said.

Nikkei staff writer Lauly Li contributed to this report.

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