Caught in the Crossfire: Short Target in the Looming US Tool Ban Saga
41% Of Revenue At High Risk
The US has taken significant actions to counter China’s rise in the new cold war. Over the last 6 months, these actions include the October 7th regulations and a trilateral partnership between the US, Japan, and Netherlands. There have been brazen attempts to evade the restrictions by Chinese companies, and there are still some major gaps in the regulations. Rumors are swirling about another salvo to counter China. The next salvo has a wide range of possibilities, including continuing to crack down on leading-edge logic to shifting focus to high-end RF applications that can be used in aerospace and spy balloons to military-grade analog semiconductors. Today we want to discuss a specific wafer fabrication tool type that we believe could be impacted.
While Japan and the Dutch have agreed in principle to some looser regulations, the US likely wants to go further. At the same time, the US must be measured and deliberate in its next salvo of regulations; otherwise, there could be very negative ramifications. If US companies are prevented from selling certain kinds of wafer fabrication tools, foreign firms that are not manufacturing or designing their tools in the US, could easily provide substitutes.
For example, if dry etch tools were regulated, Lam Research, the market share leader in dry etchers, would rapidly be substituted for competing tools from Tokyo Electron. Because TEL is a Japanese company that primarily designs and manufactures in Japan, many of the avenues of regulation would not be effective. Likewise, if epitaxial growth or ALD were regulated, then ASM International, a Dutch firm, could win massive market share in China.
Today we want to discuss a specific potential action that would have outsized impacts on two US firms’ business. These two firms are based in the US and total ~95% market share in this specific type of wafer fabrication tool. This makes it a ripe target for regulation, given this type of tool is critical for manufacturing leading-edge logic, RF, and military-grade analog chips.
One of these firms is a mid-cap with 41% of its revenue in China. More than 95% of its revenue is directly related to this tool type. The other is a large cap with 28% of its revenue in China, but this type of tool represents less than 10% of its revenue. The rest of this report will be for subscribers, given the mid-cap could be severely impacted in the stock market. Just to be clear, we have no inside knowledge of upcoming regulations besides hearing numerous rumors that there are more upcoming targeting wafer fabrication equipment. This is our speculation on a target that would be logical for the US to block, given the US has a near monopoly in this sector.