Japan's Semiconductor Equipment Sales to China Plunge 10%: How Export Controls Reshape Global Supply Chains and AI Investment Logic

Event: Japanese Equipment Makers' China Revenue Plunges

In the third quarter of fiscal year 2026, Tokyo Electron (TEL), Japan's largest semiconductor equipment manufacturer, reported a 37% drop in revenue from the Chinese market, falling from 279.4 billion yen in the same period last year to 175.5 billion yen. The share of China sales in total revenue fell to 31.8% from 40.3% in the previous quarter, well below the previously expected 41-42%. TEL expects this proportion to stabilize around 30% in the second half.

This data is not an isolated case. Other major Japanese semiconductor equipment makers such as SCREEN Holdings, Advantest, and Nikon have also been impacted. According to industry estimates, overall sales to China by Japanese equipment makers fell approximately 10% year-over-year.

Background: How Export Controls Transmit from Policy to Corporate Earnings

In July 2023, Japan's Ministry of Economy, Trade and Industry officially implemented export controls on 23 categories of semiconductor manufacturing equipment, covering key processes such as lithography, etching, deposition, cleaning, and inspection. This move, along with coordinated restrictions by the United States and the Netherlands, formed a "trilateral blockade" aimed at cutting off China's access to advanced process equipment (e.g., sub-14nm logic chips and over-128-layer NAND).

Although Japanese equipment makers can still export mature process equipment (28nm and above) to China, tighter regulatory scrutiny and increased customer uncertainty have led Chinese customers to delay procurement orders. At the same time, China's domestic equipment substitution has accelerated, with some local wafer fabs beginning to reduce reliance on Japanese equipment and shift to domestic suppliers such as Naura Technology and AMEC.

In-depth Analysis

Technology Impact: Diverging Barriers Between Mature and Advanced Nodes

Export controls focus on advanced process equipment but do not impose strict restrictions on mature process tools. Japanese equipment makers remain competitive in mature processes; for instance, TEL's coater/developer equipment holds a very high market share at 28nm and above nodes. However, Chinese customers have doubts about whether they can continue to obtain equipment maintenance and spare parts in the future, which is also eroding Japanese equipment makers' share in the mature market.

The surging demand for AI chips (e.g., NVIDIA H100/B200) on advanced nodes (5nm/3nm) is a field where Japanese equipment makers are not absolute leaders—EUV lithography is dominated by ASML, high-end etching by Lam Research and Applied Materials. Therefore, Japanese equipment makers' AI "hedge" relies more on memory-related equipment (e.g., DRAM, NAND) and advanced packaging (e.g., hybrid bonding). TEL expects AI-related demand to account for 40% of its FY2026 revenue, with etching equipment for High Bandwidth Memory (HBM) and deposition equipment for 3D NAND being key growth drivers.

Supply Chain Impact: The "De-risking" Movement in the Equipment Supply Chain上游（零部件）：Japanese equipment makers' component suppliers (e.g., vacuum pumps, RF power supplies) are mostly domestic companies. Export controls have restricted sales to Chinese customers but have not affected orders from other regions. However, if China promotes equipment self-sufficiency, it may reduce imports of Japanese components in the long term.

中游（设备制造）：Japanese equipment makers are accelerating the construction of overseas service and manufacturing bases. TEL has already planned to expand R&D centers in South Korea and the U.S. to serve AI chip customers locally. However, in the short term, domestic capacity in Japan still dominates.

下游（晶圆厂）：Chinese wafer fabs (e.g., SMIC, Hua Hong Semiconductor) have shifted their expansion plans from advanced nodes to mature nodes. But the risk of overcapacity in mature nodes is accumulating—China's capacity expansion at 28nm and above could trigger a global price war, thereby depressing equipment makers' profit margins.

Competitive Landscape: Can Japanese Equipment Makers Retain the AI Dividend?

| Company | China Revenue Share (2026Q3) | AI-Related Equipment Layout | Risk Points | |---------|-------------------------------|-----------------------------|-------------| | Tokyo Electron | 31.8% (YoY -8.5pp) | Etch/deposition equipment for HBM, 3D NAND; coating/developing for advanced packaging | Declining China share; can AI orders be sustained? | | SCREEN Holdings | ~30% (estimated) | Cleaning equipment for HBM interposer; CMP equipment for advanced logic | Intensified competition in mature node cleaning equipment | | Advantest | ~25% (estimated) | Test equipment for AI chips (SoC test) | China test service revenue affected by controls | | Nikon | ~20% (estimated) | Lithography machines (ArF immersion for mature nodes) | Absence of EUV; China market share eroded by ASML |

Global competitive landscape: U.S. equipment makers (AMAT, Lam, KLA) still dominate in advanced nodes and benefited earlier from export controls (U.S. new rules in October 2022). Japanese equipment makers face "pressure from both sides" in the AI opportunity: high-end products cannot compete with the U.S., and the mid-to-low-end market is being caught up by China.

Regional Implications: Regional Reorganization of Global Supply Chains- United States: The CHIPS Act attracts TSMC and Samsung to build fabs, but equipment procurement still mainly comes from the US, Europe, and Japan. Japanese equipment suppliers are expected to receive orders from US wafer fabs, but transportation costs and local service capabilities remain challenges. - China: Accelerating equipment localization. Naura's revenue in 2025 has already grown 60% year-on-year, with etching, thin film deposition and other equipment entering SMIC's production lines. However, it is still difficult to fully replace Japanese equipment in the short term. - Taiwan, China/South Korea: Hubs for AI chip manufacturing (TSMC, Samsung), Japanese equipment suppliers' revenue in this region is increasing. TEL expects orders from South Korea to grow by more than 20% in 2026. - Europe: Infineon, ST, and others are expanding power semiconductor production. Japanese equipment suppliers have advantages in power devices (e.g., TEL's oxide film equipment), but Europe's attitude toward export controls on China is wavering. - Southeast Asia: Malaysia has become a packaging and testing hub. Japanese equipment suppliers (e.g., Disco) dominate in dicing and grinding equipment, but Chinese capital is pouring in to build packaging plants locally.

Investment Perspective: How Does the Capital Market View?

Despite the decline in China sales, TEL's stock price rose slightly after the earnings report, indicating that the market recognizes its AI transformation logic. Investors need to focus on two core indicators: 1. China's quarterly revenue share: If it remains below 30%, it indicates that the control effects have solidified; if it rebounds above 35%, it may mean loopholes in controls. 2. AI order backlog: TEL's book-to-bill ratio (B/B Ratio) needs to stay above 1.0 to confirm the sustainability of AI demand.

The risk is that overcapacity in China's mature process nodes may trigger a cyclical downturn in equipment investment, and AI investment itself also carries bubble risks (e.g., HBM inventory adjustment).

Long-Term Outlook: Industry Changes in the Next 3-10 Years

• Within 3 years: Japanese equipment suppliers' China revenue share will stabilize at 25-30%, with AI business becoming the main growth engine. China's equipment localization rate will increase from the current ~20% to 35%.
• Within 5 years: The global equipment market will form a tripartite pattern of "the US leading in advanced processes, Japan leading in mature/specialty processes, and China gradually achieving internal circulation." Japanese equipment suppliers need to build barriers in advanced packaging, power semiconductors, MEMS, etc.
• Within 10 years: If China achieves full-chain localization for 28nm, Japanese equipment suppliers will lose their largest single market. Whether AI demand can support scale at that time depends on whether new technologies such as quantum computing and photonic computing take off.

ConclusionJapanese semiconductor equipment makers' sales to China fell by 10%, a direct consequence of export controls and a microcosm of the structural restructuring of the global equipment supply chain. In the short term, the surge in AI demand provides an effective hedge, but in the long run, Japanese equipment makers must establish new growth pillars outside the Chinese market while facing competitive pressure from both the US and China. This case reveals the new normal of "politically driven technology transfer" in the semiconductor industry—where corporate strategic flexibility no longer depends solely on technological leadership, but also on the ability to adapt to geopolitics.