But recent earnings reports from equipment manufacturers like Applied Materials and Lam Research show the U.S.’s broadside against China’s chip sector may be starting to bite. 

Applied Materials, the largest U.S. chip equipment manufacturer, issued a lukewarm revenue forecast last week, citing the risk of new export controls from Washington. Revenue from China, the company’s largest market, dropped 25% in the most recent quarter to reach $2.2 billion, out of a total $7.2 billion.

China’s contribution to Applied Materials’ revenue has dropped from 45% a year ago to 31% today.

And the company thinks it’ll drop even further. “For Q2, we expect that China as a percentage of total revenue will be about five percentage points lower than in Q1,” CFO Brice Hill told analysts last week. 

Equipment manufacturers, for now, are still reporting an increase in overall revenue, as the tech industry piles into the AI boom. But analysts warn these companies will sorely miss what China has: a lot of semiconductor manufacturing, and a consumer market eager to snap up the products that use those chips. 

“China is not just a semiconductor manufacturing hub,” says Moonsup Shin, head of hardware, semiconductor, and data centers for Asia-Pacific at Bain & Company. “Around or more than 50% of the semiconductors manufactured by Chinese manufacturers are consumed in China.”

And worse, there’s no ready-made alternative waiting. Regions like Southeast Asia are investing in local manufacturing to position themselves as neutral territory in a chip war. Yet in practice, these up-and-comers lack both China’s manufacturing and consumer demand.

Downward slide

Applied Materials isn’t the only manufacturer of chipmaking equipment worried about China controls. Lam Research’s China revenue over the last three months of 2024 dropped 10% year on year to reach $1.4 billion. China’s revenue contribution also dropped, from 40% a year ago to 31% now.

“Our sales to customers in China, a significant region for us, have been impacted and are likely to be materially and adversely affected by export license requirements and other regulatory changes, or other governmental actions in the course of the trade relationship between the U.S. and China,” Lam Research warned in its earnings report. 

The dips and warnings come after the mainland Chinese market grew to form a significant part of these companies’ revenues. 

China revenue at KLA Tencor, another major American equipment maker, is largely holding up, which David Chuang, a senior research analyst at Isaiah Research, credits to the company’s metrology tools. China doesn’t yet have a domestic alternative for KLA Tencor’s products, used in measurements and inspections, meaning Chinese foundries “will do anything to acquire metrology tools,” Chuang says.

Why does China matter?

While China’s chip industry doesn’t yet make the most cutting-edge semiconductors, it dominates in what the industry calls “mature” chips, older-generation components used in everything from electric vehicles to home appliances. 

“China remains a major region for manufacturing of legacy node logic and memory chips, adding to its role as the world’s largest consumer of ICs [integrated circuits],” wrote KLA Tencor in its earnings statement.

The flood of Chinese shoppers snapping up consumer electronics means a huge demand for chips, which in turn sustains China’s chip sector. Overseas demand for devices from companies like Huawei, Xiaomi, and Transsion only adds to China’s demand for chips. 

Chip export controls

Since 2019, the U.S. has aggressively policed chip sales to China, slapping sanctions on individual companies like Huawei and Semiconductor Manufacturing International Corp. (SMIC).

The U.S then introduced export controls in 2022 that not only restricted China’s access to advanced chips, but also to the equipment needed to make those chips. The U.S. later tightened those restrictions, and pushed other countries like the Netherlands and Japan to impose their own rules.

Ironically, regulations helped equipment companies, at least initially. Chinese chip manufacturers rushed to stockpile machinery owing to fears that Washington might impose tougher export controls later.

But that rush of demand may start to ease, as Beijing pours more money into the chip sector in a drive for self-sufficiency. China is now encouraging firms to use domestic equipment where possible, shrinking the available market for foreign companies.

That, Chuang says, creates a “double negative” as American chipmakers are squeezed by both Washington’s and Beijing’s policies. 

China doesn’t yet have the ability to produce the cutting-edge machines made by U.S. and other non-Chinese firms. Yet Shin points out that Chinese companies have had some success in substituting noncritical equipment. 

Analysts have also previously suggested that manufacturers have been able to use older equipment in innovative ways to create more advanced chips.  

The U.S. and Japan, more developed markets, are both investing in new onshore chip plants in a bid to decouple their supply chains from China. Yet both Shin and Chuang think these markets won’t grow to the same extent as China.

Shin suggests India could be a replacement for China, given its large consumer population and ambitions to be a tech powerhouse. But it’ll take a long time for the country to catch up: India needs to build its ecosystem almost entirely from scratch. 

But even then, there may not be a replacement for the Chinese chip sector. “It’ll be hard to replace what the Chinese companies buy,” Chuang says.