Analysis: Chip equipment makers await sting from export controls – Mobile World Live
Seven months have passed since the US pressured the Japanese and Dutch governments into imposing controls on advanced chipmaking machinery exports to China, enough time for suppliers to report two quarters of earnings, with sales to the mainland surprisingly buoyant amid weak overall demand.
The wider US restrictions introduced in October 2023 were followed up in March by requests for the Netherlands to block domestic chip companies from repairing production equipment in China and Japan to limit the export of specialised manufacturing chemicals.
Analysis by Mobile World Live of four key suppliers – Dutch player ASML, Tokyo Electron, US-based Lam Research and Allied Materials (also headquartered in the US) – found that while two suppliers recorded double-digit declines in revenue and two booked broadly flat sales, all four saw shipments to China jump sharply.
Tokyo Electron in February revised a forecast for the wafer fab equipment (WFE) market upward from between $85 billion and $90 billion to $95 billion, as customers in China moved investments forward due to the new restrictions.
The shift was underscored by Chinese chipmaker Semiconductor Manufacturing International Corp (SMIC) boosting capex in Q1 by 77.7 per cent year-on-year to $2.2 billion.
Counterpoint Research senior analyst Ashwath Rao told Mobile World Live increased sales to China offset revenue declines in other regions due to active WFE investment in mature processes, such as deep ultraviolet (DUV) lithography, and DRAM, particularly in high bandwidth memory packaging for AI servers, which is continuing in 2024.
“China has been spending more on DUV equipment also to use it creatively for some leading nodes with techniques such as multi-patterning,” Dr Rao added.
SMIC’s lack of access to high-end extreme ultraviolet lithography (EUV) gear means it focuses on leading-edge processes using multi-patterning to manufacture at 7nm and 5nm.
In outlining corporate risk in its latest earnings report, US-based Lam Research noted sales to customers in China have been impacted and are likely to “be materially and adversely affected” by export licence requirements. It cautioned the US government has an ongoing process of assessing technologies that may be subject to new or additional export controls, which if imposed could further adversely impact its ability to sell products outside the US.
To end-March, such impacts certainty had not materialised. The sanctions appear to have had the opposite effect up to this point.
Opening quarter
ASML, an advanced chip equipment supplier, booked a fourfold increase in system sales to China in Q1 to €1.9 billion, accounting for 44 per cent of the total. This was up from just 8 per cent in the same period in 2023.
The Dutch company started the year with revenue falling 21.6 per cent to €5.3 billion, with the number of lithography systems sold dropping to 70 from 100 a year earlier, and full-year sales expected to be flat.
It forecast Q2 sales at between €5.7 billion and €6.2 billion, down from €6.8 billion a year earlier.
The second half of the year is expected to be stronger than the first half
ASML president and CEO Peter Wennink said in its Q1 earnings call in mid-April the company expects 2024 to be “a transition year” with sales similar to 2023, noting the semiconductor industry continues to work through the bottom of the cycle. “Our outlook for the full year 2024 is unchanged, with the second half of the year expected to be stronger than the first half, in line with the industry’s continued recovery from the downturn.” He was replaced as CEO by Christophe Fouquet in late April.
In October 2023, following a new round of US export controls, the company suggested the restrictions applied to a limited number of chip facilities in China, and it didn’t expect the measures to have a material impact on its 2023 results (it didn’t) and for its longer-term scenarios for 2025 and beyond.
ASML sales last year improved 30.2 per cent to €27.6 billion, with growth slowing in Q4 to 12.6 per cent to €7.2 billion.
China gains
Tokyo Electron’s revenue in fiscal 2024 (ending 30 March) decreased 17.1 per cent year-on-year to JPY1.83 trillion ($11.9 billion) with overseas sales, accounting for 90 per cent of the total, down 16.4 per cent.
Sales to China increased 63.7 per cent to JPY813 billion, making up 44.4 per cent of the total, up from 23 per cent a year earlier. Business in South Korea and at home were down by double digits, while sales to Taiwan were down by more than half.
The company forecasts a recovery in smartphone and PC demand and continued growth in AI services driving 20 per cent revenue growth in fiscal 2025.
Capital investment in China, which aims to improve semiconductor self-sufficiency, continued a strong growth trend from the previous fiscal year
Its earnings release noted capital spending in semiconductor production equipment, which is in an adjustment phase, showed signs of bottoming out in its fiscal H1, but spending on memory and cutting-edge logic and foundry chips was still generally restrained. It added capital investment in China, which aims to improve semiconductor self-sufficiency, continued a strong growth trend from the previous fiscal year.
Lam Research last month trimmed its Q2 sales forecast by $300 million to $3.8 billion compared with revenue of $3.2 billion a year earlier.
Despite a surge in China, revenue in the opening quarter dipped 2 per cent to $3.8 billion, following a 28.9 per cent decline in Q4. Q1 sales to China nearly doubled year-on-year to $1.6 billion, accounting for 42 per cent of total sales, up from 22 per cent and 31 per cent in the same period in 2023 and 2022.
In its earnings release in late April, it forecast a modest increase in WFE against a prior outlook, primarily driven by additional lithography shipments into China, with “no meaningful change” to its overall 2024 revenue profile expectations.
Significant fluctuations
Due to the nature of the capital-intensive chipmaking equipment business, Lam Research noted revenue may fluctuate significantly from quarter to quarter or year to year.
The company expects Chinese customers to continue investments, with the WFE market predicted to recover in the next two years.
Applied Materials, also US-based, saw a surge in sales to China in its fiscal Q1 (ending 31 December), with the mainland accounting for 45 per cent of sales, up from just 17 per cent a year earlier, but overall revenue was flat at $6.7 billion. Semiconductor system sales fell 4.9 per cent to $4.9 billion.
Sales to the mainland increased 162 per cent to nearly $3 billion. Shipments to Japan and South Korea were fairly stable year-on-year, while revenue from Taiwan dropped more than threefold.
In its earnings call in February, executives surprisingly didn’t mention China.
The company forecast Q2 revenue at $6.5 billion compared with $6.6 billion a year earlier; chip systems are expected to drop to $4.8 billion, down year-on-year from nearly $5 billion.
Its customers say the overall market dynamics are improving, with a “re-acceleration of capital investment” by cloud companies, fab utilisation is increasing across all device types and memory inventory levels are normalising.
It forecasts the equipment market to grow as fast as or faster than semiconductors over time, driven by increasing technical complexity.
With Chinese customers advancing billions of dollars in orders and chipmakers’ capex elsewhere still recovering, expect the likes of ASML and peers to start to feel the full effect of the widening US sanctions over the next few quarters.
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