Reports of a new Chinese breakthrough in AI technologies sends Asian chip makers sprawling
Reports about rising Chinese competitors are raising concerns that chip-manufacturing incumbents will be undercut. Shown: a silicon wafer being patterned by a lithography machine at an ASML facility.
The competitive threat posed by cheaper Chinese substitutes has once again assailed semiconductor stocks, leading to dramatic falls Tuesday in some of the biggest memory-chip makers in Asia.
South Korea's benchmark Kospi KR:180721 index - a bellwether for sentiment in the sector - plunged almost 11% Tuesday amid panic selling and deleveraging, forcing regulators in Seoul to halt trading via circuit breakers for the ninth time in 2026. The two index heavyweights chiefly responsible for the massive rally in Korea over the last 18 months or so, SK Hynix (KR:000660) and Samsung Electronics (KR:005930), plummeted 14% and 13%, respectively.
Pure-play memory-chip maker Kioxia Holdings (JP:285A), Japan's largest stock by market capitalization as recently as June, registered a decline of 18% in Tokyo and has now slipped to fourth in the rankings. In a month's time, Kioxia's share value has been halved.
Semiconductor stocks have generally been in correction mode of late, as shown by concerted profit-taking in the Philadelphia Semiconductor Index SOX, with sharp losses for Micron and others on Monday. This latest acceleration downward, though, was triggered by reports of a breakthrough by Chinese technology companies.
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The Information carried a story on Monday in which it reported that three Chinese companies - Semiconductor Manufacturing International Corp. (HK:981), Hua Hong Semiconductor (CN:688347) and CXMT (CN:688825) - had made significant advances in the production of deep ultraviolet (DUV) lithography machines that had hitherto essentially been the sole preserve of Netherlands-based ASML (NL:ASML). This technology is used in the manufacture of advanced semiconductor chips, and news of the development has prompted a fall of more than 10% for Europe's largest stock this week.
If China can design its own lithography machines, it follows that it can produce cutting-edge chips themselves, too. This explains much of the enthusiasm behind the record-breaking flotation of CXMT in Shanghai on Monday.
"When China walks into a room, profit walks out" is a favorite epigram of Louis Gave from Gavekal Research, and fears that this phenomenon will impact AI hardware stocks are gathering momentum. In a phone conversation Tuesday, Harvey Robinson, tech analyst at U.K. brokerage house Panmure Liberum, commented that China appears to have used innovation to circumvent restrictions placed on the export of AI technology by the U.S. government.
The DUV lithography machines remain some way behind the state-of-the-art lithography machines built by ASML, but "they are doing more with less," and, in many instances, the Chinese machines can approach the efficiency of industry leaders at a much lower cost. Robinson added that the AI model launched by Moonshot last week signaled that more efficient models will necessitate less capital expenditure going forward.
This obviously undermines the investment argument for the "picks and shovels" stocks of the infrastructure build-out for artificial intelligence, like the chip makers.
The developments come at a crucial time for the Korean chip makers. SK Hynix reports its second-quarter results Wednesday, with Samsung following on Thursday. Both companies have ambitious plans to massively expand production, doubling capacity in the next two years. To fund its capex commitment, SK Hynix raised $29 billion earlier this month by issuing Nasdaq-listed depositary receipts (SKHY), while rumors have circulated that Samsung was contemplating a similar move.
The valuations of the stocks reflect some of the market's concerns about the cyclicality of the earnings cycle for chip manufacturers. Both SK Hynix and Samsung trade on just three times earnings forecasts for the end of 2027, according to FactSet, before possible guidance upgrades during quarterly results announcements this week.
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In premarket trading Tuesday, SK Hynix's ADRs were indicating a fall of 4% to around $137.
-Jules Rimmer
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