February 22, 2024


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Chip Industry Braces for ‘Heavy Blow’ From China Export Curbs

Chip Industry Braces for ‘Heavy Blow’ From China Export Curbs

(Bloomberg) — The Biden administration’s new restrictions on doing business with China are sending shock waves through the global semiconductor industry, with chip-equipment makers girding for perhaps the most painful fallout.

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Applied Materials Inc., a leading maker of chipmaking equipment, on Wednesday slashed its forecast for the fourth quarter, warning that the new export regulations will reduce sales by about $400 million in the period. It now expects revenue of about $6.4 billion, plus or minus $250 million, compared with a previous forecast of roughly $6.65 billion.

In another sign of retreat, Applied Materials, along with KLA Corp. and Lam Research Corp., have started or are preparing to pull employees from Yangtze Memory Technologies Co., China’s most advanced maker of memory chips, people familiar with the matter have told Bloomberg. ASML Holding NV, another top producer of manufacturing gear, told its US employees in the US to refrain from servicing customers in China.

“The US government’s recent restrictions are serious and escalate the economic (and potentially geopolitical) conflict with China – the largest customer of semis,” Bank of America analyst Vivek Arya wrote, estimating the restrictions could shave off as much as $7 billion in 2023 sales for vendors like Applied Materials.

The Biden White House outlined the export curbs Friday, part of a years-long campaign to hamper China’s ability to develop the most advanced chips and equip its military. China is pouring billions of dollars into developing a domestic semiconductor industry that’s less dependent on the rest of the world, but those chipmakers still need to purchase highly specialized equipment from suppliers in the US, Europe and other parts of Asia.

“The new regulations could deliver a heavy blow to Applied Materials and Lam Research, which have a high sales exposure to China,” Bloomberg Intelligence analysts Masahiro Wakasugi and Brian Moran wrote in a research note Thursday.

The restrictions hit when the industry was already suffering a downturn, shifting from a worldwide shortage of chips during the pandemic — when demand for electronics skyrocketed — to a glut in a matter of months as demand cooled, reflecting the boom-and-bust nature of the sector. The Philadelphia Stock Exchange Semiconductor Index has dropped 12% since the restrictions were announced. The index is now down more than 44% this year.

Netherlands-based ASML has been selling its deep ultraviolet, or DUV, machines to Chinese customers but has held back its more advanced extreme ultraviolet, or EUV, technology. It’s not clear whether those existing sales will be affected by the new Biden administration regulations.

The semiconductor industry has had an inkling for weeks that tighter rules were coming, with Nvidia Corp. warning in September that US government restrictions on exporting AI chips to China could affect hundreds of millions of dollars in revenue.

Companies such as Applied Materials and Intel Corp. can’t easily walk away from China, which is the biggest single market for their products and part of a global supply chain for electronics.

Fallout has been swift and far-reaching, and Asia’s biggest chip stocks are also reeling. Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker, plunged a record 8.3% Tuesday, while Samsung Electronics Co. and Tokyo Electron Ltd. also retreated.

Applied Materials shares are down about 14% since last Thursday, the day before the new restrictions were announced. After that steep decline, its latest warning didn’t do much to jar investors. The stock was little changed in late trading Wednesday.

The Santa Clara, California-based company also trimmed its profit forecast. Excluding some items, earnings will be $1.54 to $1.78 a share in the fourth quarter, which ends Oct. 30. That’s down from as much as $2.18 previously.

The lower earnings outlook is a result of reduced sales and a writedown of 23 cents a share for inventory and manufacturing tied to the new export regulations, the company said. Applied Materials also expects the rules to hurt sales in its fiscal first quarter by roughly the same amount.

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