China Taking On US Fuels $147 Billion Rally in Japanese Chip Stocks
(Bloomberg) -- Japanese producers of chipmaking equipment are capitalizing on surging demand from China, catapulting their shares to new heights while helping build out a tech supply chain the US has warned may be a threat to global security.
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In the 16 months since the US and its allies began curbing exports of advanced chip technology, China has amped up the purchase of legacy equipment to make older-generation semiconductors. Its effort toward some self-sufficiency has been a boon for the likes of Tokyo Electron Ltd., which added $12 billion to its market value Tuesday after hiking its outlook citing a record proportion of sales going to China.
Revenue has soared at Japanese suppliers that compete with the likes of Applied Materials Inc., Lam Research Corp. and Teradyne Inc. China’s become the single largest destination for a growing number of Japanese companies that make equipment used to wash, clean, pattern and cut silicon. That reliance is likely to grow further, executives said on recent earnings calls, pointing to strong demand from Chinese makers of logic and power semiconductors.
The MSCI Japan Semiconductor and Semiconductor Equipment Index has more than doubled, with its companies gaining $147 billion in value since the Biden administration heightened restrictions on China’s access to US chip technology in October 2022.
“We expect strong demand from China to continue or grow stronger still,” Tokyo Electron Deputy General Manager Hiroshi Kawamoto said last week. The company’s shares reached a new high in Tokyo on Tuesday, the first trading day after its earnings report, with a 12% rise that was their biggest jump in almost four years.
Read More: Tokyo Electron Adds $12 Billion in a Day on Strong China Demand
China only makes about 20% of the chips it needs, and Kawamoto expects it will keep investing aggressively in legacy silicon to lower its reliance on imported semiconductors. “Many changes are occurring in the Chinese economy as a whole, but as far as our sector is concerned, we feel no impact.”
More than half of Kyoto-based Screen Holdings Co.’s chip equipment sales are expected to come from China in the current quarter, CEO Toshio Hiroe said, lifting the wafer cleaning systems maker’s reliance on China to 44% in the year to March, up from 19% the previous year. Screen rose as much as 7.1% on Tuesday.
Canon Inc. expects China to make up about 40% of its chip gear sales in 2024, double what it was five years ago. Kokusai Electric Corp. is hiring staff in China to meet demand in a market that it expects will make up close to half of its revenue, while Disco Corp. expects China to make up close to 40% of sales this fiscal year.
Behind US chip export restrictions is concern about China gaining access to the machines, components and spare parts it needs to produce advanced semiconductors, especially AI chips, according to Gregory C. Allen, director of the CSIS Wadhwani Center for AI and Advanced Technologies.
“Nothing that Japan sells today is going to dissuade China from its goal of producing all of these machines domestically as soon as possible,” he said. “However, if Japan exports machines, components, and critical knowledge, it can significantly speed up China’s advanced node production in the short term and its indigenization goals in the medium and long term.”
The US Commerce Department is gathering information on Chinese production of legacy chips and US companies’ reliance on Chinese suppliers. While based on technology developed a decade or more ago, shortages of older-generation semiconductors idled production lines for cars, air conditioners and PCs during the pandemic.
Not only could the US and its allies expand curbs on chip gear shipments, there remains uncertainty about nascent Chinese chipmakers’ ability to attain mass production.
Demand in China may be plateauing for some front-end processes — in which integrated circuitry is fabricated onto silicon wafers, before they are cut into individual chips — according to Ryuichiro Koba, Disco’s investor relations head. “We don’t know which direction things will go,” he said.
“Things are good now, but there’s a risk that business could shrivel up suddenly in the future, posing a risk for companies if they invest on capacity to meet demand from China,” Omdia analyst Akira Minamikawa said.
--With assistance from Peter Elstrom, Grace Huang and Kurt Schussler.
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