U.S. trade restrictions were supposed to slow China's chip industry ambitions. But that hasn't really happened, which has had a mixed impact on semiconductor stocks.
"If anything, the sanctions have had the opposite effect," Robert Maire, president of consulting firm Semiconductor Advisors, told Investor's Business Daily.
China Turns To Chip Gear Makers
The U.S. export restrictions seek to prevent China from getting advanced chips it could use for military purposes, including artificial intelligence applications. That has cut off China as a market for the latest graphics processors from Nvidia and AMD.
The sanctions also cut off imports of high-end semiconductor equipment. However, China has loaded up on other gear to make chips — including some types the U.S. had hoped to prevent.
Last quarter, Chinese chipmakers, led by Semiconductor Manufacturing International Corporation (SMIC), gorged on chip gear from Applied Materials, ASML, KLA and Lam Research. Those semiconductor stocks now are trading near recent or even record highs.
"Virtually half of all the semiconductor equipment being sold on the planet now is going to China," Maire said.
"China is ordering equipment faster and in a more furious manner because they think they're going to be cut off," he added. "So, they're trying to order everything that isn't nailed down in the meantime. That's one of the reasons for the crazy ramp in what they've been getting. Because they've been trying to get it in before the real restrictions hit."
China Chip Sanctions Called Ineffective
In fact, the agency keeping track of the implications of trade ties with China downplayed the impact of the trade curbs. The U.S.-China Economic and Security Review Commission said in a 741-page report published Nov. 15 that China sanctions have been ineffective.
The agency said Chinese firms have been able to buy U.S. semiconductor equipment for making chips at the 14-nanometer node or smaller, despite U.S. restrictions at those dimensions, Reuters reported.
"Importers are often able to purchase the equipment if they claim it is being used on an older production line," the commission said. "And with limited capacity for end-use inspections, it is difficult to verify the equipment is not being used to produce more advanced chips."
Huawei's Surprise
The real kick in the knee came when China telecom giant Huawei introduced its Mate 60 Pro smartphone in August. That handset uses SMIC's 7-nanometer Kirin 9000S chip.
"Everyone was suggesting that they wouldn't be able to make chips below 14 or 10 nanometers. But they've made one at 7 nanometers," Maire said. "In my view, they'll be able to make 5 nanometer (chips)."
China still lags the top chip foundries like Taiwan Semiconductor Manufacturing and South Korea-based Samsung, which can make chips at 3-nanometer scale. The industry measures circuit widths on chips in nanometers, which are one-billionth of a meter.
Some Semiconductor Stocks Posting Gains
China's recent equipment buying spree has boosted sales for semiconductor stocks in the chip-gear segment.
Applied Materials said China accounted for 44% of its sales in its quarter ended Oct. 29, up from 20% a year earlier. Its sales to China jumped 122% year over year to $2.96 billion.
ASML's China sales surged 283% year over year in euros to the equivalent of $2.66 billion in the third quarter. That's despite being the main target of trade restrictions to China because of its lithography equipment for making leading-edge chips. ASML's China sales accounted for 46% of its Q3 revenue, up from 15% in the year-earlier period.
"We are shipping lithography systems for mature and mid-critical nodes to China, while of course complying with export regulations," ASML Chief Executive Peter Wennink said on a Q3 investor call. ASML can't sell its extreme ultraviolet (EUV) lithography equipment to China, only its less-capable deep ultraviolet (DUV) lithography machines.
KLA's sales to China accounted for 43% of its total revenue in the September quarter, up from 31% a year earlier. KLA's China sales rose 22% year over year to $1.03 billion.
Lam's China sales made up 48% of its total revenue in the September quarter, up from 30% in the year-earlier period. Lam's China sales rose 10% year over year to $1.67 billion.
Warning Of Potential Chip Glut
But China's buying spree could have an unintended consequence for the U.S. chip industry.
Most of the equipment China is buying is to produce mature-node foundry and logic chips and trailing-edge DRAM memory chips.
"Were it not for China, the industry would be in one of its normal, ugly down cycles," Maire said.
However, once that equipment is up and running, China could flood the market with lower-priced chips for applications that don't need cutting-edge chips, Maire said. That includes cars, appliances and consumer electronics.
Semiconductor stocks could take a hit from new production capacity, including GlobalFoundries and Micron Technology, he said.
Are Trade Curbs Making China Stronger?
There are bigger worries about the longer-term impact of the trade restrictions on the U.S.-China tech rivalry.
Investment bank Barclays believes the U.S. export controls against China are "fast-tracking the nation's march to self-sufficiency."
The Chinese government is funding the country's push to advance its semiconductor industry, Barclays analysts said in a Nov. 16 report.
"Export controls are not entirely the answer and seem to be fighting a losing battle, at least for now," Barclays said.
Follow Patrick Seitz on X, formerly Twitter, at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
