The share price of Tokyo Electron (TEL), Japan’s leading provider of semiconductor manufacturing equipment, soared after the US Commerce Department banned foreign foundries’ chip sales to Huawei and other Chinese companies if they are made with American machines.
Tokyo Electron, with $11 billion in revenue, is among the companies best placed to capitalize on the move away from dependence on the US.
China is now TEL’s biggest market, and company executives told investors last week that it will remain so. The Commerce Department announced May 15 that it would put the extraterritorial sales ban in place within 120 days. Detailed rules are expected July 15.
Huawei, China’s leading telecom equipment manufacturer, designs its own chips for smartphones (the Kirin series of chipset) and artificial intelligence processors (the Ascend series), but fabricates them at Taiwan Semiconductor Manufacturing Corporation, the world’s largest and most advanced chip foundry.
The new American export controls will prevent TSMC from selling to Huawei. Domestic Chinese foundries like SMIC can produce older-generation chips, but not the densest and most energy efficient chips that power Huawei and ZTE high end smartphones.
The United States does not have a monopoly in any of the ten stages of chip production, although Applied Materials, LAM Research and other American firms are market leaders in several areas. Tokyo Electron offers equipment for six of the ten stages.
The Dutch firm ASML dominates Extreme Ultra-Violet Lithography, the standard process for engraving top-of-the line five- and seven-nanometer chips. The Dutch government under pressure from Washington has prevented ASML from selling to Chinese chipmakers.
China became Tokyo Electron’s largest market in 2019, and China’s crash program to build domestic chip-making capacity will boost the firm’s sales during 2020.
In a recent earnings call, Tokyo Electron told investors that the US restrictions on exports to China won’t affect its business.
Q: What are the current and medium- to long-term implications of the US further restricting exports to China?
A: Although we cannot comment on the impact on individual customers, we thoroughly investigated the various effects known at present, including the effects of Covid-19, and we announced that the WFE [wafer fabrication equipment] market would grow by about 10% in CY2020…. In addition to IOT [internet of things], AI and 5G, ICT [information and communication technology] is being widely implemented as we work towards a new normal, and semiconductors have taken on additional importance, with a need for higher performance. Capital investments can be expected to continue to take place somewhere in the world and the WFE market to continue to grow. We believe it is important that we continue to be a world leader in terms of our capacity for technological innovation.
Q: Have there been any cancellations of already-placed orders or delays in customer investment due to the United States’ strengthening of its restrictions on exports to China?
A: here has been nothing of note along these lines.
Q: Have there been any changes in investment trends at Chinese local manufacturers due to the strengthening of US restrictions on exports to China? Has investment increased since the beginning of CY2020?
A: We do not foresee any significant changes in the investment plans of our Chinese local customers this year. We will continue to keep an eye on such effects next year and beyond.
Industry sources reported in May that Samsung, the second-largest chip fabricator, had built a complete production line without US equipment. Samsung has the capacity to replace TSMC as Huawei’s chip fabricator, and negotiations between the two companies reportedly are continuing. China meanwhile will try to accelerate its program for domestic chip production, apparently with substantial help from Japan.