2023-12-11 10:25:15 ET
Summary
- U.S. sanctions on Chinese companies have resulted in a resurgence of technical prowess by Huawei and SMIC, as well as consequences on non-Chinese semiconductor and equipment companies.
- Chinese equipment companies have experienced significant revenue growth, while non-Chinese companies have struggled to maintain growth.
- Loopholes in U.S. sanctions have allowed Chinese semiconductor companies to hoard non-Chinese equipment and reach advanced chip nodes.
I’ve written more than a dozen Seeking Alpha articles on U.S. sanctions, beginning with my first on August 11, 2021 entitled SMIC Is Closing The Gap With Industry Leaders Despite U.S. Sanctions .
What was meant by the U.S. Government, to curtail the shipment of chips or equipment that could be used by the Chinese military, has been a series of miscues that have hurt non-Chinese companies. Initial sanctions by the Trump administration on Huawei and SMIC (Semiconductor Manufacturing International Corp) stymied both companies. But missteps by the Biden administration have resulted in a resurgence of technical prowess by Huawei and SMIC, as well as consequences on non-Chinese semiconductor and equipment companies. These are discussed in this article.
Comparison of Chinese and Non-Chinese Equipment Growth
Chart 1 shows YoY WFE semiconductor equipment revenue growth for 3Q 2023 over 3Q 2022 based on a bottom-up analysis of all companies. This revenue growth is for semiconductor equipment only and does not include service, spare parts, or non-semiconductor business segments.
The mean value of the Top 6 Non-Chinese companies grew -0.6%, according to The Information Network's report entitled "Global Semiconductor Equipment: Markets, Market Shares and Market Forecasts."
Chart 1 also shows revenue growth of the Top 4 Chinese equipment companies, which registered a mean YoY growth of 39.4%, attributed to the failed U.S. sanctions, prompting Chinese semiconductor companies to buy from local companies, according to The Information Network's report entitled "Mainland China’s Semiconductor and Equipment Markets: Analysis and Manufacturing Trends"
Chart 1
Non-Chinese Companies
ASML ( ASML ) will overtake Applied Materials as the top WFE (wafer front end) Semiconductor Equipment supplier in 2023, according to December 5, 2023 Seeking Alpha article entitled " Applied Materials: Weak Earnings Means ASML Takes Over The #1 Equipment Spot In 2023 ."
Applied Materials' ( AMAT ) semi equipment revenues are up just 3.5% YoY. With consensus for its 1Q 2024 of -4.7%, it is likely that the company will report flat revenue growth for CY 2023. KLA’s ( KLAC ) revenues were slightly lower, growing 2.5%. KLA forecast revenue above expectations on growing adoption of AI tools.
But Lam Research ( LRCX ) was significantly lower than U.S. peers, with a YoY growth of -17.2%. The reason for Lam’s revenue drop is its high exposure to memory chips, which I discussed in a June 14, 2023 Seeking Alpha article entitled “Lam Research Earnings: All Eyes On Memory Chip Recovery.”
Japanese equipment companies SCREEN ( DINRF ) and Tokyo Electron ( TOELY ) also fared poorly.
Chinese Companies
PNC Process Systems Co., Ltd. recently reported earnings results for the nine months ended September 30, 2023. For the nine months, the company reported sales were CNY 2,198.65 million compared to CNY 1,925.5 million a year ago – a YoY growth of 14.2%.
Advanced Micro-Fabrication Equipment Inc. China reported earnings results for the nine months ended September 30, 2023. For the nine months, the company reported sales were CNY 4,041.27 million compared to CNY 3,043.06 million a year ago – a YoY growth of 32.8%.
Piotech Inc. reported earnings results for the nine months ended September 30, 2023. For the nine months, the company reported sales was CNY 1,702.51 million compared to CNY 991.52 million a year ago – a YoY growth of 71.7%.
ACM Research (Shanghai), Inc. reported earnings results for the nine months ended September 30, 2023. For the half year, the company reported sales was CNY 2,747.0 million compared to CNY 1976.7 million a year ago – a YoY growth of 39.0%.
Chinese Semiconductor Companies Have Been Able to Hoard Non-Chinese Equipment
In Table 1, I show the Top 6 Semiconductor equipment companies and their China revenues and percentage of revenues generated from China for CY 2019 and 2020 (before sanctions) and Q1-Q3 2023. In Q3, percentage of revenue was nearly the same for each company, indicating that Chinese semiconductor companies are importing equipment irrespective of process equipment type.
In 2019 and 2020, prior to sanctions, there is insignificant difference in the percentage of revenues non-Chinese companies were generating from sales to China. But these companies found a way around sanctions, resulting in an explosion of revenues in Q3 2023 and a hoarding of equipment by Chinese companies.
China Reaching 7nm Node Used in Advanced Smartphones from Huawei
Both Chinese semi and foreign equipment companies have taken advantage of loopholes in the U.S. sanctions. With the Commerce Department using the 14nm restriction limit, importers could easily acquire equipment by claiming its use on an older production line. Limited capacity for end-use inspections makes it challenging to verify that the equipment is not being used to produce more advanced chips.
U.S. sanctions in place against China’s Semiconductor Manufacturing International Corp. (SMIC) since December 2021 have been a failure.
I was the first to report that SMIC had reached the 7nm node in my May 17, 2022 Seeking Alpha article entitled SMIC May Have Reached 7nm Node Capability But Still Behind TSMC , months before it was reported by TechInsights.
The Huawei 5G Mate 60 Pro smartphone, featuring a 7-nm chip manufactured by SMIC, underscores the evident shortcomings of U.S. export controls. Notably, both U.S. and international chip equipment companies supply equipment to SMIC, ostensibly intended for 28-nm production, but capable of supporting the production of 7-nm chips.
Huawei’s smartphone sales grew in China by 41% in the third quarter of this year, compared to the same period last year, according to Counterpoint Research . Its share of the Chinese market rose from 11% to 14% QoQ. Meanwhile, Apple’s ( AAPL ) Q3 market share in China dropped from 16% to 15%, as shown in Chart 2.
Chart 2
Not Only Apple but Nvidia Impacted
Nvidia is a fabless design company, meaning it has no factories. TSMC currently makes its most advanced ICs in Taiwan. It has also used Samsung’s foundry services and in the future may outsource to Intel ( INTC ).
Nvidia is caught up in the new sanctions the U.S. is imposing on China. On September 1, 2022, the US Commerce department ordered Nvidia to stop exporting its top-of-the-line A100 and H100 GPUs to China. Nvidia promptly released the A800, a chip scaled back to comply with the rules.
In my October 26, 2023 Seeking Alpha article entitled “ Nvidia's A100 And H100 AI Chips Are Another Failure Of U.S. China Sanctions ," I highlighted how U.S. export restrictions have reportedly prompted the proliferation of China state-backed computer clusters, which stockpiled Nvidia Corporation chips.
Nvidia’s share price promptly dropped 12% and by mid-October, it had declined by almost 70% from its 52-week high in November 2021. But most other semiconductor stocks were also down due to cyclical weakness in the industry, and Nvidia’s share price has since rebounded by 290%.
A year later, in an October 17, 2023 8-K filing , Nvidia told investors its A100, A800, H100, H800, L40, L40S, and RTX 4090 products are likely to be affected. The U.S. government's export controls on certain Nvidia chips will slow sales in affected regions—including China, Vietnam, and parts of the Middle East—which in total make up between 20% to 25% of Nvidia's surging data center revenue.
U.S. Greed Means Sanctions Will Never Work
More than 20 years ago, China was forced to make chips two nodes bigger than the companies outside China, and on 8" wafers. SEMI, the industry consortia whose members include ASML and AMAT and every equipment company, lobbied congress to eliminate these restrictions because (1) China said they wouldn't make chips for military, (2) SEMI wanted members who pay fees to make more money. As a result, Congress eliminated the restrictions and now China is free to make the chips with the latest nodes on 12" wafers.
Now the U.S. is scrambling to impede China’s growth with sanctions, entity lists, and CHIPS acts. Sanctions have not impeded China, as SMIC is already at 7nm and China domestic equipment suppliers are making equipment at the 5nm node, selling to foreign chip companies, and growing 2x the rate of foreign competitors. The greed exemplified by SEMI on behalf of its members and U.S. sanctions have accelerated the determination and resolution for China to excel.
Now in 2023, Semiconductor Industry Association (SIA) is acting in a similar vein. On October 17, 2023 the SIA released the following statemen t in response to the new export controls announced that day by the U.S. Commerce Department. SIA represents 99% of the U.S. semiconductor industry by revenue and nearly two-thirds of non-U.S. chip firms.
“We are evaluating the impact of the updated export controls on the U.S. semiconductor industry. We recognize the need to protect national security and believe maintaining a healthy U.S. semiconductor industry is an essential component to achieving that goal. Overly broad, unilateral controls risk harming the U.S. semiconductor ecosystem without advancing national security as they encourage overseas customers to look elsewhere. Accordingly, we urge the administration to strengthen coordination with allies to ensure a level playing field for all companies.”
The U.S. is in the situation it’s in because of greed. Twenty years ago, it was equipment suppliers. Now its semiconductor suppliers. This is exemplified by the recent meeting of China’s XI, when he was given a standing ovation as he took the stage to address a dinner with business executives at a summit of Indo-Pacific leaders in California. Those in attendance for the $2,000-per-plate dinner included Apple ( AAPL ) CEO Tim Cook, Blackstone ( BX ) CEO Stephen Schwarzman and leaders from Pfizer ( PFE ), FedEx ( FDX ), Boeing ( BA ) and Kohlberg Kravis Roberts ( KKR ). Broadcom ( AVGO ) CEO Hock Tan paid a $40,000 fee to sit at the table with Chairman Xi.
For further details see:
ASML: U.S. Tech Sanctions On China Are Backfiring