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According to government data compiled by Bloomberg, China continues to import semiconductor equipment at a record setting pace, with most orders coming from older generation machines. Due to its criticality in enabling advanced industries such as artificial intelligence and supercomputing, semiconductor equipment has become one of the most scrutinized industrial machinery in the world.
This has led to sanctions against China by the US due to American concerns of US origin technologies being used to harm American national security. These restrictions have forced China to buy older equipment in order to keep pace with its domestic demand for chip products.
Chinese Chip Manufacturing Equipment Imports Set New Record For First Seven Months Of Calendar Year
Today's report comes a month after ASML's earnings report for the second quarter, which showed that China was its largest customer for the second consecutive quarter. During Q1 and Q2 2024, 49% of ASML's shipments were to China, which is a marked difference from the shipments during 2022 and 2023. In 2022 and 2023, 14% and 29% of the Dutch chip manufacturing equipment maker's sales were to China, despite the fact that in Q3 and Q4 2023, 46% and 39% of the shipments were to the same country.
As per the data gathered by Bloomberg, China has bought roughly $26 billion of chip manufacturing equipment through July to set a new record. The previous high was in 2021, when the Asian country had bought ~$25 billion of equipment during the same time period. Among the list of firms that sold machinery to China is ASML, which has led to Dutch exports to China crossing $2 billion. US chip sanctions on China, which have accelerated under the Biden Administration, have also created friction between the private sector and the government.
Some of the tightest restrictions have seen the government prevent US citizens or permanent residents in the companies working in China and ASML, with Applied Materials reportedly facing multiple criminal probes for evading the Chinese sales restrictions. Following Applied Materials' second fiscal quarter earnings in May, Mizuho analyst Vijay Rakesh had noted that the firm's Chinese sales had boomed. "China up ~102% y/y (43% of total revs vs ~25-30% historical) with strong DRAM orders though dropping significantly into F4Q," wrote Rakesh, as he increased the share price target to $245 from $225 and kept a Buy rating on the shares.
The booming sales have also meant that The Netherlands is the largest exporter to China for wafer production equipment categorized under the HS-8486 heading. Due to the US restrictions, ASML is unable to sell its latest extreme ultraviolet (EUV) machines, which are essential for making the most advanced chips—including those used in artificial intelligence computers. EUV machines are suited for these use cases since ultraviolet light has a smaller wavelength than traditional machines.
However, it is possible to make advanced chips using older machines, provided manufacturers can use multiple design layers via masks during the manufacturing process. This increases production time and complexity of the operation, and another way to reduce these drawbacks is to have multiple machines running simultaneously.
US sanctions against China have also covered the older DUV machines, but these are limited to a handful of factories. Amidst the noose tightening, China has tried to keep at par with global chip manufacturing standards, but its progress is stunted. Despite the media hype surrounding Chinese tech firm Huawei's Ascend 910B AI chip, which purportedly competes with NVIDIA's A100, reports have suggested that yield problems mean that only one in five chips meets the required quality criteria.
Updated paragraph four with analyst comments at 02:49:53 ET, August 26th 2024.
About the author: Ramish is a seasoned technology writer and editor with more than a decade of experience. He specializes in semiconductor fabrication and market analysis. With a background in finance and supply chain management - via his bachelors in Finance and a micromasters in supply chain management from MIT - Ramish combines financial rigor with deep industry insight to deliver accurate and authoritative coverage.
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