Chinese chip equipment manufacturers struggle to profit from US export controls at home

As US export controls tighten, Chinese manufacturers of equipment needed to produce semiconductors are expected to benefit from a rush to domestic orders, although executives and analysts warn that the push could be short-lived.

Since Washington introduced sweeping restrictions on October 7 to limit Chinese companies’ ability to obtain or produce advanced computer chips, Yangtze Memory Technology, China’s largest memory chip maker, has launched at least 20 tenders for a ” wide range of chip manufacturing equipment.

“The current strategy is that if there are working home semiconductor manufacturing equipment, anyway [the suppliers] need help, we will buy from Chinese companies. If not, we buy from non-US suppliers, mostly Japanese, ”said a senior engineer from YMTC.

“I predict that most orders would end up in the hands of domestic suppliers who would prioritize customers 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 with Japanese ones, including Hitachi and Tokyo Electron, as a sign of how domestic suppliers are still lagging behind their foreign rivals with their technology.

To make matters worse, the loss of access by Chinese chip makers to certain irreplaceable tools made in the United States has disrupted most of the manufacturing plant construction projects that drive the business of home equipment manufacturers.

According to research by Sanford C. Bernstein, Chinese semiconductor equipment revenues tripled between 2018 and 2021, driven by the aggressive expansion of domestic chip makers. But the investment group estimates that only 15% of Chinese chip makers’ equipment demand this year was met by local suppliers, well below the government’s ambitious 30% target.

Export controls will hold back this crucial sector even more, analysts said. “They may want to increase self-sufficiency in terms of chip manufacturing equipment in reaction to export controls, but in reality localization will be slower due to controls,” said Mark Li, semiconductor analyst at Sanford C. Bernstein. in Hong Kong. “The biggest bottleneck is that their customers, due to lack of access to foreign equipment, will not be able to expand further.”

Three people with direct knowledge of the situation said that although YMTC has not canceled or postponed equipment orders already placed, the company’s expansion plans are on hold. ChangXin Memory Technologies, YMTC’s smaller rival, has also suspended some expansion plans, according to a person familiar with the matter.

Jefferies analysts predict that this disruption of Chinese chip makers’ capital spending plans, particularly in the memory segment, will lead to a drastic drop in demand for semiconductor manufacturing equipment in the coming years.

YMTC and CXMT should still have enough equipment to meet their expansion plans next year, but “if they can’t access advanced equipment from the US and can’t find good enough alternatives from Japanese or European suppliers, they will probably have to completely discontinue. ‘expansion,’ Jefferies analyst Nick Cheng wrote in a research note. As a result, China’s total investment in chip-making tools would drop from the analyst’s previous forecast from $ 26 billion to $ 18 billion in 2024 and from $ 24 billion to $ 16 billion in 2025.

This would deprive Advanced Micro-Fabrication Equipment, one of China’s largest chip equipment manufacturers, of a quarter of Jefferies’ projected revenue for 2025. ACM Research, a rival of AMEC, would lose nearly 20% of revenue forecast for that year. , provides the note.

The chip companies did not respond to an official request for comment.

Despite stocking efforts, several equipment companies may also be struck by the inability to source foreign components for their products.

“Only the assembly part of our products is completely based in China, while the rest require foreign technology and components. . . only component limitations can easily suffocate us, “said a senior engineer at AMEC.

Additionally, equipment manufacturers are facing a talent drain as engineers seek higher-paying jobs in chip design houses and semiconductor manufacturers.

“Chinese equipment companies should also be concerned about the stability of their existing R&D team as we have received many inquiries from equipment engineers about switching to other industries that have not been affected as much by the new sanctions,” he said. a Shanghai-based headhunter agent.

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

“The new sanctions are forcing companies like us to seek further cooperation with each other,” said an AMEC manager. “Executives from several companies, including ACMR, AMEC and others, are breaking through walls and have held meetings on this.”

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