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the international semiconductor industry association (semi) estimates that semiconductor manufacturers will spend us$400 billion on 12-inch wafer fab manufacturing equipment between 2025 and 2027, setting a new record, with mainland china, south korea and taiwan ranking among the top three. . in addition to the regional development of semiconductor wafer fabs, strong demand for ai chips in data centers and edge equipment is driving continued growth in spending. major sellers of semiconductor manufacturing equipment include asml of the netherlands, applied materials, kla and lam group of the united states, as well as tel (tokyo electron) of japan.

the semi report pointed out that global 12-inch wafer fab equipment expenditure is expected to increase by 4% to us$99.3 billion in 2024, and will increase by 24% to us$123.2 billion in 2025, breaking the us$100 billion mark for the first time. it is expected to increase by 11% in 2026. % to us$136.2 billion, and will increase by another 3% to reach us$140.8 billion in 2027. between 2025 and 2027, a total of more than us$400 billion will be spent.

mainland china is expected to invest more than us$100 billion in the next three years and remains the world's largest spending market for 12-inch wafer fab equipment. but the report also pointed out that mainland china’s spending will gradually decline from this year’s record high of us$45 billion to us$31 billion in 2027.

mainland china will become the largest investor in the construction of new chip factories and the largest source of revenue for the world's top chip equipment suppliers. the latest quarterly financial reports released by u.s. applied materials, lam group and kelei show that the chinese mainland market has contributed various 44% of the company's revenue. information disclosed by the company shows that for japan's tel and the netherlands' asml, the chinese mainland market is larger. 49.9% of tel's revenue in the june quarter came from mainland china. similarly, 49% of the netherlands' asml's revenue came from mainland china. against the backdrop of a global economic slowdown, mainland china was the only region where spending on chip manufacturing equipment continued to increase year-on-year in the first half of this year.

in order to consolidate its dominance in storage fields such as dram, high-bandwidth memory (hbm) and nand flash, south korea will spend a total of us$81 billion in the next three years, ranking second.

taiwan, china’s equipment expenditure on 12-inch wafer fabs in the next three years is us$75 billion, ranking third. tsmc will be taiwan's main engine for increasing capital expenditures. tsmc's capital expenditures next year are also expected to increase compared with this year, and are expected to be the second highest in history. this year's capital expenditure range has been slightly raised, from the original range of us$28 billion to us$32 billion, to a range of us$30 billion to us$32 billion, mainly to support customer demand.

semiconductor equipment market

semiconductor equipment is an important part of the semiconductor industry. its development level and technical level directly affect the development and competitiveness of the semiconductor industry.

semiconductor equipment companies have been thrust into the geopolitical arena from a relatively quiet life away from the international spotlight in recent years, as semiconductors have become first a national security issue for the united states, secondly a problem for its economic allies, and finally a problem for everyone around the world.

make your mark in artificial intelligence (ai) and letnvidiaafter becoming a superstar, more and more people in the industry realize that none of this would be possible without wafer factories in taiwan, china, and equipment from the netherlands and belgium.

despite decades of massive investment, mainland china still hasn't been able to crack the hard nut of semiconductors: advanced lithography equipment.

one company orchestrates an extremely advanced r&d effort across its entire supply chain and churns out equipment capable of printing the tiny geometries required by state-of-the-art technology.

the united states realizes that although it continues to maintain design dominance in the semiconductor field, manufacturing has been concentrated in south korea and taiwan, china, and the supply chain has also shifted.

the u.s. chip act can stimulate the growth of domestic advanced manufacturing capabilities in the united states, but it does nothing to eliminate dependence on europe's advanced chip manufacturing capabilities.

even with the chip act, success is not guaranteed because mainland china has been investing in semiconductor capacity for decades. the u.s. government had to prevent advanced lithography equipment from flowing into mainland china and implemented a series of embargo policies.

semiconductor equipment embargo

the u.s. embargo policy on amsl sales to mainland china is very delicate because the united states must rely on its relationship with the dutch government. since asml has large sales to mainland china, there are significant commercial interests.

the embargo on lithography machines began in 2019. the united states banned the supply of extreme ultraviolet (euv) lithography equipment capable of processes below 7nm to mainland china. these bans were later strengthened in 2023 and early 2024.

over time, the ban covered more products.

the latest development is a rupture between the united states and the netherlands, whether the embargo is truly motivated by national security concerns or more driven by commercial interests. the netherlands will fully comply with u.s. restrictions and has assumed responsibility for issuing licenses. asml applauds this and hopes that the dutch government will provide more lenient treatment than the united states.

before delving into the consequences of the embargo, it's worth taking stock of the semiconductor equipment market and its latest results.

semiconductor equipment classification

before any chip can be made, semiconductor equipment needs to be purchased. the multi-week journey from blank wafer to finished chip requires a lot of equipment.

these devices can be simplified into the following categories:

lithography - applying chip designs to wafers.

deposition – adding layers of material.

modify – change the material layer.

etching – removing material.

others – metering, cleaning, sorting machines and a host of specialized equipment.

these devices are located in the investment zone of the semiconductor market model and are affected by capital expenditures by chip manufacturers in 3 different categories: idms, foundries, and fab/foundry semiconductor companies.

this is not a business for the faint of heart. it now costs more than $50 billion to build a new cutting-edge semiconductor factory, and 75% of this cost is semiconductor equipment. the most expensive device is larger than a double-decker bus and sells for more than $350 million.

as geometries get smaller, chips become cheaper to produce, faster and consume less power. however, the flip side is that design costs are skyrocketing, and equipment and factory costs are also increasing.

comparing the revenue of semiconductor companies to that of equipment companies can provide an initial insight into this development.

the starting point is the bottom of the 2019 semiconductor cycle, and it can be seen that equipment company revenue exceeds semiconductor revenue. foundry revenue growth reflects this. in other words, collective investments in equipment and manufacturing costs for fabless companies are increasing significantly.

beyond the revenue perspective, there are several interesting things about the equipment business.

from an operating profit perspective, the equipment business is more attractive than the foundry and semiconductor businesses. it is worth noting that most semiconductor companies’ profitability in the second quarter of 2024 will come from nvidia; without nvidia, semiconductor companies’ growth rate will be a measly 24%.

as an investor, this is worth noting because this trend isn't changing anytime soon.

current status of semiconductor equipment

the following chart is based on semiconductor equipment company revenue, including services and other revenue. next is pure equipment analysis.

after experiencing growth momentum after the latest up cycle, semiconductor equipment comprehensive revenue peaked around the time the us chip act was introduced. this growth replaces a period of relative stability, with revenue holding steady at around $22 billion and gross and operating profits remaining stable.

the decline in investment by semiconductor companies was directly affected by the u.s. chip act, as projects were redirected to the united states.

this took semiconductor equipment companies by surprise, or they reacted too late. the result is rising inventory levels, which are now twice what they were in 2020.

equipment companies used to be concentrated in three countries: the united states, japan and the netherlands. in the early 2020s, only 3% of revenue came from outside these three countries, with the majority coming from mainland china.

despite a decade of massive investment in semiconductors, chipmaking equipment has proven the hardest to conquer. success in semiconductor equipment requires more than just money.

even after another five years, the same countries still dominate, although mainland china has struggled to gain market share, from 3% at the beginning of this century to 8.5% now.

the rapid cagr prevented expectations during the new year period of 2024 from rebounding to expected levels. mainland chinese equipment manufacturers sell almost exclusively to mainland china, but these are not the only equipment purchased by mainland chinese customers.

top semiconductor equipment market

after reviewing the revenue of equipment companies, it is worth studying the equipment revenue of the top companies to gain more insights. equipment revenue excludes services and other revenue from semiconductor equipment companies and is fully consistent with capital expenditures by semiconductor manufacturing companies.

the dominance of certain countries is due to the dominance of a few companies in the semiconductor equipment market.

the top companies account for almost all equipment revenue outside mainland china. each large company has its own area of ​​expertise, making most of them market leaders in sub-fields, the most prominent being asml in lithography and materials engineering. applied materials (amat).

since the united states introduced the "chip act" and imposed sanctions on ai and advanced lithography equipment, sales of western semiconductor equipment to mainland china have surged.

revenue from western equipment sales to mainland china increased in the second quarter, but mainland china's revenue share fell slightly from 45% in the first quarter to 44.4% in the second quarter.

this dominance is even more pronounced when compared to other countries' revenues.

the most obvious effect of the us chip act is that tsmc stopped investing in equipment as projects shifted to the united states.

western equipment companies discovered the importance of the chinese market after excluding mainland china revenue from total revenue: both a place of pain and a savior.

this is a key issue in u.s. embargo policy. it affects the economies of other countries, especially when talking about asml and the netherlands.

there has been a lot of back and forth between the dutch and us governments over the past few weeks. amsl accuses the u.s. government of favoring commercial interests over national security interests. meanwhile, the dutch government has aligned their restrictions with those of the united states, so export licenses will now be approved by the dutch rather than the u.s. government.

at last

the u.s. semiconductor equipment embargo will affect mainland china's acquisition of cutting-edge ai technology, including ai gpu chips, semiconductor equipment, etc. it will also affect the global semiconductor equipment market structure.

a chart of western equipment's cumulative sales to mainland china and the united states shows that since 2019, mainland china has purchased nearly $100 billion worth of semiconductor equipment, more than 2.5 times the amount purchased by the united states during the same period.

according to sources, the united states is considering imposing a stricter embargo on mainland china, such as the foreign direct products rules, which requires the united states to control all equipment sold to mainland china (because they all contain american technology), or trying to block amsl and other companies provide services to existing installed equipment in mainland china.

this will have a significant negative impact on asml and the dutch economy, making it difficult for the united states to reach an agreement.

in response to the netherlands' announcement in september that it would expand the scope of control of photolithography machines, the ministry of commerce of mainland china pointed out that recently, china and the netherlands have conducted multi-level and frequent communications and consultations on semiconductor export control issues. on the basis of the 2023 semiconductor export control measures, the netherlands has further expanded the scope of control of photolithography machines, and china is dissatisfied with this. in recent years, in order to maintain its global hegemony, the united states has continued to generalize the concept of national security and coerce certain countries to tighten export control measures for semiconductors and equipment. this has seriously threatened the stability of the global semiconductor industry chain and supply chain, and seriously damaged the legitimate rights and interests of relevant countries and companies. china has this is firmly opposed.

a spokesman for the ministry of commerce of mainland china said that the netherlands should proceed from the maintenance of international economic and trade rules and the overall situation of sino-dutch economic and trade cooperation, respect market principles and the spirit of contract, avoid relevant measures that hinder the normal cooperation and development of the semiconductor industries of the two countries, and not abuse export control measures. maintain the common interests of chinese and dutch enterprises and both parties, and maintain the stability of the global semiconductor industry chain and supply chain.