By Jacky Wong
Ahead of real conflicts, countries stockpile ammunition and fuel. Chinese companies are busy stockpiling chip-making equipment parts.
That has brought huge bounty to Western and Japanese vendors -- but also portends worrying developments ahead.
The latest to benefit from China's splurge is Japanese chip-equipment maker Tokyo Electron. Its shares have gained 20% since it raised its profit outlook around two weeks ago. China comprised nearly half of its total net sales last quarter, after sales there doubled from a year earlier.
Strong demand from China helped offset weakness elsewhere last year as capital spending from global semiconductor companies, especially memory-chip makers, slowed. Imports of semiconductor equipment to China rose 14% year on year in 2023 to nearly $40 billion, according to the country's customs data. Industry association SEMI reckons that global semiconductor equipment sales fell 6.1% year on year in 2023 to $101 billion: a significant improvement from its original forecast in July of an 18.6% decline.
There are a couple of reasons for China's spending spree. First, Chinese chip makers have been rushing to stockpile equipment in anticipation of tougher Western export restrictions. That is particularly true for lithography machines, which use light to print tiny circuits on silicon wafers. Japan and the Netherlands, key suppliers of such machines, have rolled out their own restrictions on exports to China, in concert with the U.S.
China's imports of lithography machines from the Netherlands almost quadrupled year on year in 2023, according to China's customs data. Net system sales to China from Dutch company ASML, the market leader in lithography equipment, tripled in 2023. China made up 29% of ASML's total net system sales last year -- up from just 14% in 2022.
ASML hasn't been able to sell its cutting edge extreme ultraviolet lithography, or EUV, machines to China for quite a while. But new, more recent restrictions mean it won't be able to export some less advanced machines there either. The company said last month that the Dutch government has revoked licenses for exporting certain lithography machines to China. ASML says around 10% to 15% of its sales to China could be affected this year.
For companies, the bad news is that China's stockpiling binge last year could dent sales growth in 2024. Even so, China's aggressive investment in semiconductor manufacturing capacity is a long-term trend.
China's effort to make the most advanced chips is hampered by sanctions, but its companies are pushing hard in more mature technologies. China's largest contract chip maker Semiconductor Manufacturing International Corporation, or SMIC, says its capital expenditure this year will remain roughly the same as last year at around $7.5 billion.
Another longer term risk for manufacturers of chip-making gear is China's drive to wean itself off Western supplies. While it will take a long time for China to catch up on some keystone technologies such as lithography, there are already niches where Chinese suppliers can replace Western counterparts. Bernstein estimates that domestic suppliers made up around 14% of China's wafer-fabrication equipment market last year, up from 3% in 2018. It expects that share to rise to 29% in 2026.
Such local champions include Advanced Micro-Fabrication Equipment Inc. China, or AMEC, which makes etching tools to create circuit patterns on wafers. The company hasn't reported 2023 full year results yet, but its latest public estimate puts revenue growth at 32% year on year. The company reckons sales of its key dry etching equipment rose 49%. New orders for the machine rose 60% last year, pointing to continued growth.
For Western and Japanese chip equipment makers, export restrictions to China are both a blessing and a curse. For now, they are raking in huge sales. But long-term risks are multiplying, especially at the lower end of the technological spectrum.
Write to Jacky Wong at jacky.wong@wsj.com
(END) Dow Jones Newswires
February 26, 2024 06:55 ET (11:55 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments