Japan's semiconductor equipment industry faces new challenges following export restrictions on China. This situation has resulted in a significant decline in revenue, with sales to China dropping by 10% across the sector. Companies like Tokyo Electron, Japan's leading semiconductor equipment manufacturer, have seen their China sales fall sharply from 279.4 billion yen to 175.5 billion yen in just one fiscal quarter.
#What Led to the Export Control Squeeze?
Export control measures implemented in July 2023 target 23 categories of semiconductor manufacturing equipment. This aligns Japan's regulatory actions with similar restrictions introduced by the US and the Netherlands, aimed at limiting China's access to advanced chip production technologies.
As a consequence, China's share of Tokyo Electron's total sales decreased to 31.8%. This marks an 8.5 percentage point drop from the previous quarter, a stark decrease from earlier projections of 41-42%. Tokyo Electron now forecasts that this share will stabilize around 30% in the latter half of FY2026. The effects of these restrictions are also impacting other firms in the industry, including SCREEN Holdings, Advantest, and Nikon, which have historically relied on China for 24-30% of their revenue.
#How is Tokyo Electron Adjusting to the Loss?
Despite the significant decline in revenue from China, Tokyo Electron remains optimistic about future growth. The company anticipates that demand driven by artificial intelligence (AI) may account for up to 40% of total revenue by FY2026. This forward-looking approach has already led to an upward revision of sales forecasts, bolstered by anticipated increases in AI demand and other categories.
#What Should Investors Keep in Mind?
For investors, it will be crucial to adjust expectations regarding China’s contribution to sales moving forward. It is advisable to model expectations at about 30% for Tokyo Electron, down from previous peak projections. While China continues to purchase large amounts of legacy chip equipment, the country’s internal policies are pushing local chipmakers toward alternatives. Overcapacity in legacy production could also adversely affect global equipment orders.
The positive revision of sales forecasts from Tokyo Electron, despite declining revenues from China, indicates confidence in AI's potential for driving growth. Investors should closely monitor two critical metrics: China’s percentage of quarterly revenue and backlog associated with AI orders. Understanding these factors will provide greater insight into the company's prospects as the industry navigates a complex landscape.