Chinese chip equipment makers are struggling to profit at home from US export controls

As U.S. export controls bite, Chinese manufacturers of equipment needed to make semiconductors are expected to benefit from a rush of domestic orders, though executives and analysts warn the boost could be short-lived.

Since Washington was introduced sweeping ban on October 7 to limit the ability of Chinese companies to obtain or manufacture advanced computer chips, Yangtze Memory Technology, China’s largest memory chip maker, has issued at least 20 tenders for a wide range of chipmaking equipment.

“The current strategy is if there is domestic semiconductor production equipment that can be used, though [the suppliers] need help, we will buy from Chinese company. If not, we shop from non-US vendors, mostly Japanese,” the senior said YMTC engineer

“I expect most of the orders will go to domestic suppliers who will prioritize clients like us, but there are still some pieces beyond their capabilities,” the person said.

The company will instead replace US toolmakers such as KLA and Applied Materials and Japan, including Hitachi and Tokyo Electron, in a sign of how homegrown suppliers still lag foreign competitors with their technology.

To make matters worse, Chinese chipmakers’ loss of access to non-substitutable US-made equipment has halted most construction projects for production facilities that run domestic equipment manufacturers’ businesses.

CHINESE semiconductor equipment revenues tripled between 2018 and 2021, driven by the aggressive expansion of domestic chipmakers’, according to research by Sanford C. Bernstein. But the investment group estimates that only 15 percent of equipment demand from Chinese chipmakers will be covered by homegrown suppliers this year, far short of the government’s ambitious target of 30 percent.

Export controls will hold this important sector back, analysts say. “They may want to step up self-sufficiency in terms of chip manufacturing equipment in reaction to export controls, but in reality, localization will be slower as a result of controls,” said Mark Li, a semiconductor analyst at Sanford C. Bernstein. in Hong Kong. “The biggest bottleneck is that their customers, because of the lack of access to foreign equipment, will not be able to expand again.”

Three people with direct knowledge of the situation said that while YMTC did not cancel or suspend orders for equipment that had been installed, the company’s plans to expand were delayed. ChangXin Memory Technologies, a smaller YMTC rival, has also put some expansion plans on hold, according to a person familiar with the matter.

Analysts at Jefferies predict this disruption to Chinese chipmakers’ capital spending plans, especially in the memory segment, will lead to a dramatic decline in demand for semiconductor production equipment in the next few years.

YMTC and CXMT should still have enough equipment to meet next year’s expansion plans, but “if they cannot access advanced equipment from the US and cannot find sufficient alternatives from Japanese or European suppliers, they may have to stop expansion altogether”, Jefferies. analyst Nick Cheng wrote in a research note. As a result, China’s total investment in chipmaking equipment will drop from previous analyst forecasts of $26bn to $18bn in 2024, and from $24bn to $16bn in 2025.

That would rob Advanced Micro-Fabrication Equipment, one of China’s largest chip equipment makers, of a quarter of Jefferies’ forecast revenue for 2025. ACM Research, rival AMEC, will lose nearly 20 percent of its projected revenue for that year, the note predicted. . .

The chip company did not respond to requests for official comment.

Despite stockpiling efforts, some equipment companies may also be hit by the inability to procure foreign components for their products.

“Only the assembly part of our product is completely based in China, while the rest requires foreign technology and components… only the limitations in the components can easily choke us,” said a senior engineer at AMEC.

In addition, the equipment makers are facing a talent drain as engineers seek high-paying jobs in chip design houses and semiconductor factories.

“Chinese equipment companies should also worry about the stability of their existing R&D teams because we have received many inquiries from equipment engineers about moving to other sectors that have not been affected by the new sanctions,” the Shanghai-based said. head hunter

In the face of increasing challenges, the response of some equipment companies is to explore greater collaboration with their rivals.

“The new sanctions force companies like ours to look for cooperation again,” said the AMEC manager. “Executives from various companies, including ACMR, AMEC and others, are behind the wall and have had meetings about this.”

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