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In a filing on Wednesday, Seagate Technology Holdings stated that it had received a warning from the US government that it may have broken export control regulations by delivering hard disc drives to a client on a trade blacklist. According to a source with knowledge of the situation, the customer is China's Huawei, which is prohibited from purchasing U.S. exports and specific items made abroad without permission due to its listing on the Commerce Department's Entity List. According to the complaint with the U.S. Securities and Exchange Commission, Seagate was cautioned in a "proposed charge letter" it received from the Commerce Department on August 29.
However, the company contends in the filing that the hard disc drives are exempt from U.S. export laws and that it did not engage in the behavior that the Commerce Department said was illegal. Seagate, a Dublin-based business with operations in both California and there, declared it was working with the Commerce Department to find a solution. Between August 2020 and September 2021, the entity stated corporation and its affiliates received the in-question products, according to the statement. The customer listed in the filing was not identified. According to the source, the business stopped shipping to Huawei a year ago.
Seagate stated that the timing and terms of any outcome are unknown. It was also unable to determine the range of loss or penalty, while it stated that a major impact on the business was probable. For administrative charges, the corporation might face civil fines of up to $300,000 per violation or twice the amount of the transaction, whichever is greater. According to the source, the corporation expects to make its case during an upcoming meeting with the Commerce Department. It delivered an initial response to the letter in late September and filed more material this week. A US regulation determines how certain foreign-made commodities headed for Huawei become subject to US export regulations.
The Foreign Direct Product Rule, as updated in August 2020, prohibits companies from shipping goods made outside of the United States to Huawei if those goods are the direct result of specific U.S. software or technology or are produced by necessary equipment that is the direct result of U.S. software or technology. Only a U.S. license will allow for the making of such shipments. The restriction was created to stop Huawei from obtaining semiconductors from throughout the world after Huawei was included on the Entity List in 2019 for activities that were detrimental to American national security interests.
According to the source, Seagate believes that its hard drives created abroad are exempt from the prohibition since they are neither direct products of any U.S. semiconductor technology or software nor of any machinery that is itself a direct product of any U.S. semiconductor technology or software. The individual claimed, however, that the Commerce Department's proposed fees are based on an interpretation that foreign-made goods are subject to the rule if machinery that is a direct byproduct of American semiconductor technology or software was used to produce any component of the finished good, regardless of how far in the production process it was used.
The hard disc drives are manufactured in China and Thailand, and they do not include enough American content to be subject to US export regulations. The company has not applied for US licenses for hard disc drives, but it has applied for licenses for other things when it concluded they were required. Republicans on the Senate Commerce Committee produced a report last October that claimed Seagate had likely sent limited equipment to Huawei for as long as a year, providing it a competitive edge over Toshiba (6502.T) and Western Digital (WDC.O), the other leading suppliers of hard disc drives.
Yash Ranjan10/28/2022
