The Foreign Direct Product Rule: What Semiconductor Companies Need to Know

What the FDPR Is

The Foreign Direct Product Rule, codified at 15 CFR § 736.2(b)(3) and the related supplement, extends the reach of the Export Administration Regulations (EAR) beyond the borders of the United States. Under the basic FDPR, a product manufactured abroad using US-origin technology, software, or equipment that is controlled under the EAR becomes subject to US export controls — even if no US materials were physically incorporated into the final product.

The rule has existed in some form since 1959, but its practical significance for the semiconductor industry was limited until 2020. The Huawei FDPR, introduced in August 2020, was the first time BIS used the rule as a targeted enforcement instrument at scale. It required any company in the world supplying chips produced with US semiconductor manufacturing equipment to obtain a US licence before shipping to Huawei.

The 2022 Expansions That Changed Everything

On 7 October 2022, BIS published what is widely described as the most significant overhaul of US export controls since the Cold War. The October 2022 rules introduced two major FDPR expansions relevant to the semiconductor industry:

• The Advanced Computing FDPR: Applies to foreign-produced advanced chips and computers destined for China. The rule triggers when a product meets specific performance threshold parameters — most relevantly, chips with a total processing performance above a defined threshold or chips with certain interconnect speeds. A non-US company manufacturing a chip using US semiconductor manufacturing equipment must obtain a US licence before shipping qualifying chips to China.
• The Semiconductor Manufacturing Items FDPR: Extends US controls to foreign-produced equipment or components for advanced semiconductor fabrication when destined for a facility in China capable of producing advanced chips. This is the rule that most directly affects equipment makers in the Netherlands (ASML), Japan, and South Korea.

The thresholds were subsequently tightened in October 2023, and BIS has signalled further adjustments as fabrication technology advances. Understanding where your product sits relative to current thresholds is not a one-time exercise — it requires continuous monitoring of BIS rulemaking.

The Two Triggering Conditions

For the FDPR to apply to a foreign-produced item, two conditions must be met simultaneously:

• The technology or software condition: The item must be the direct product of US-origin technology or software that is subject to the EAR and controlled for national security reasons (NS column on the CCL). This includes EDA software, process design kits, and semiconductor manufacturing equipment with US-origin components.
• The destination or end-user condition: The item must be destined for a person on the Entity List, or for certain destinations or uses specified in the applicable FDPR (for the China-specific rules, any destination in China that meets the capacity thresholds).

For the Huawei FDPR specifically, the second condition is met whenever Huawei or any of its designated affiliates are a party to the transaction — as a purchaser, intermediate consignee, ultimate consignee, or end-user.

Who Is Actually Affected

The FDPR's practical reach is far broader than most companies initially realise. Consider the following chain:

• A Taiwanese fabless chip designer uses US EDA software (Cadence, Synopsys, Mentor) to design a chip.
• The chip is manufactured at TSMC using equipment from Applied Materials, Lam Research, and KLA — all US companies.
• The finished chip is assembled and tested in Malaysia.
• The chip is sold to a Chinese smartphone manufacturer that is on BIS's Entity List.

Under this scenario, the Taiwanese fabless company, TSMC, and the Malaysian assembly house may all have FDPR exposure — despite none of them having any direct US business relationship with the end customer. The US-origin EDA software and the US-origin manufacturing equipment are sufficient to trigger the rule.

Companies that assumed they were outside US jurisdiction because they were incorporated outside the US, or because they did not export to the US, were caught off guard by the 2020 Huawei rule and again by the 2022 expansions. The FDPR does not care about corporate domicile. It cares about the origin of the technology used in production.

The Compliance Challenge: Tracing US Content

The fundamental compliance challenge the FDPR creates is a supply chain visibility problem. To determine whether the FDPR applies to your product, you must trace every piece of technology and software used in its design and manufacture back to its origin country, and assess whether any US-origin controlled technology was involved.

For a company running a modern semiconductor process, this is not a trivial exercise. A leading-edge logic process may involve more than 1,000 individual process steps, each potentially relying on equipment, software, and chemicals from dozens of suppliers. Determining US content across that stack requires structured supplier engagement, internal documentation, and periodic re-assessment as the supply chain evolves.

BIS does not publish a definitive list of what constitutes "US-origin technology." The determination requires legal and technical analysis. Companies typically engage export control counsel to conduct formal FDPR assessments, particularly before entering new markets or supplying new customers.

Monitoring FDPR Rulemaking

The FDPR thresholds, scope, and entity-specific applications are not static. BIS has amended the FDPR rules multiple times since October 2022, and further amendments are anticipated as chip performance metrics evolve. Key rulemaking to track includes:

• Changes to the performance thresholds in the Advanced Computing FDPR — particularly the bits-per-second interconnect and total processing performance parameters.
• Expansions of the Semiconductor Manufacturing Items FDPR to include additional tool categories.
• New Entity List additions that trigger the Huawei FDPR or entity-specific FDPRs — any entity added with FDPR language in the Federal Register notice requires immediate assessment.
• Ally coordination announcements from the Netherlands and Japan, whose domestic controls increasingly mirror and sometimes exceed the US FDPR in scope.

A single Federal Register notice can change your company's compliance obligations overnight. Monitoring needs to be continuous and source-direct — not dependent on law firm newsletters that arrive days after publication.

Penalties and Enforcement

FDPR violations are treated as EAR violations. BIS has authority to impose civil penalties of up to $300,000 per violation or twice the value of the transaction, whichever is greater. Criminal penalties for wilful violations can reach $1,000,000 per violation and 20 years imprisonment for individuals.

BIS has demonstrated willingness to pursue enforcement actions against non-US companies. In 2023 and 2024, several enforcement actions against entities outside the United States were resolved through settlement agreements. The fiction that US export controls do not reach foreign companies has been firmly dispelled.