When the U.S. government imposed sweeping sanctions against Chinese semiconductor and supercomputer sectors in October, the global semiconductor industry immediately lost some $240 billion in stock valuation. As the new quarterly reports cycle kicks in, we're learning how much revenue American companies will lose because of the new rules. The numbers are staggering, but they will not kill these firms. Furthermore, according to Applied Materials, a major maker of fab tools, Chinese companies can tune their process technologies to circumvent the new rules slyly.
"We expect some customers may decide to change their plan or change their technology, so it does not go above the threshold that is affected by the rules at this point," said Brice Hill, the chief financial officer of Applied (via SeekingAlpha).
A Way Out for Chinese Semiconductor Sector?
The latest U.S. export regulations restrict the import of American tools and technologies that can produce logic chips with non-planar transistors on 14nm/16nm nodes and below, 3D NAND with 128 or more layers and DRAM memory chips of 18nm half-pitch or less. These are all fairly advanced process technologies widely used today and require tools from U.S. companies such as Applied Materials, KLA and Lam Research.
To ship wafer fab equipment (WFE) that falls under the new rules, U.S. fab tools producers, as well as companies that produce equipment containing American technology, must obtain an export license from the U.S. DoC. License applications are set to be reviewed with a presumption of denial, so when companies like Applied reveal the 'impact numbers,' they presume that the DoC will not approve any shipments to Chinese companies like SMIC and YMTC.
Applied Materials stresses that some of its customers might adjust their process technologies to avoid the new regulations. For example, while Applied does not explicitly say it, we could speculate that SMIC could possibly come up with a 17nm fabrication process, whereas YMTC could reduce the number of active 3D NAND layers in its chips.
"There are some customers that we are trying to clarify that we can apply for licenses for or we can get authorizations for once they establish that their technology is within the guidelines," said the CFO of Applied during the company's recent conference call. "On the other side, we expect some customers may decide to change their plan or change their technology, so it does not go above the threshold that is affected by the rules at this point."
However, the development of such nodes and validation/qualification by customers will take some time, so do not expect this avenue to work in the short term future.
For example, going from 14nm to 17nm will require SMIC's customers to change their existing designs significantly to hit specific performance and power targets on a thicker node. Furthermore, lower transistor density will mean bigger die sizes, which affects costs, yields and even packaging dimensions. Therefore, we expect SMIC's current clients with 14nm-class designs to continue using the node and the company's services while the foundry can provide them. Meanwhile, a hypothetical 17nm node (assuming it makes financial sense) might be used for entirely different designs. Of course, all the assumptions about SMIC's hypothetical 17nm node are merely speculative.
For 3D NAND maker YMTC, things are also extremely complicated. The company's 128-layer 3D NAND devices correspond to a very specific 3D TLC or 3D QLC capacity, So just switching some layers off will affect the economic feasibility of these devices. While 3D NAND makers have some freedom with the number of active layers and capacity, their devices are qualified 'as is' by developers of SSD controllers and actual drives. Adoption of devices configured differently is a lengthy process, so, again, YMTC will keep supplying components that it can produce while it can.
All in all, while many things are theoretically possible (as at the end of the day, neither SMIC nor YMTC wants to write off billions of dollars worth of equipment), they are costly, and they cannot be implemented overnight.
10% of Revenue
Applied Materials, a major producer of wafer fab equipment, this week said that the U.S. sanctions against the Chinese semiconductor industry that prohibit it from supplying its advanced tools to its clients in China would cost it $2.5 billion of revenue in fiscal 2023, or 10% of the company's revenue of $25.79 billion in FY2022. The company will keep trying to get appropriate export licenses from the U.S. Department of Commerce.
"We currently expect that the unmitigated revenue impact of the new rules could be up to $2.5 billion in fiscal 2023," said Brice Hill, the chief financial officer of Applied. "We continue to work through the regulatory requirements, including seeking licenses and approvals where appropriate. We hope to reduce the revenue impact by between $500 million and $1 billion to a net impact of $1.5 to $2 billion."
Impact Already Hits
Applied's results for the fourth quarter of fiscal 2022, which ended on October 31, have already been impacted by the new regulations.
"In Q4, the new rules reduced our Semi Systems and AGS revenue by approximately $280 million, which was in the range of our expectation on October 12th," said Hill. "In Q1, we expect the new rules to reduce Semi Systems and AGS revenue by approximately $490 million combined and reduce our gross margin by around one percentage point – both on an unmitigated basis."
KLA Assesses the Impact
KLA, another major WFE producer from the U.S., said in late October that its earnings would be impacted by the new U.S. export rules.
"Specific to KLA, while a meaningful amount of our business in China is focused on legacy node investment, which is not the focus of the recent export restrictions, our systems and service revenue will be adversely impacted going forward as we are unable to provide systems and support to certain customers for certain end uses," a statement by KLA reads. "We are assessing the broader implications and engaging collaboratively with the U.S. government to provide the necessary information about our products and services to fully determine the impact on our business operations moving forward."
