How does Tokyo Electron view the impact of China's semiconductor self-sufficiency rate increase on its equipment business?

Introduction

The rise of China's semiconductor self-sufficiency rate has become a reality that global chip equipment manufacturers must face. Toshiki Kawai, President and CEO of Tokyo Electron (TEL), said in a recent interview with Nikkei Asia that while China's efforts to build its own chip industry have indeed created new equipment competitors, he is confident that Japanese equipment makers can maintain their technological advantages. This statement reflects the strategic confidence of Japan's semiconductor equipment industry and has also sparked discussion along the supply chain about the logic behind it.

As one of the top three semiconductor equipment suppliers globally, Tokyo Electron holds a pivotal position in key process areas such as etching, deposition, and cleaning. Its customers include all leading wafer fabs such as TSMC, Samsung, and Intel. Against the backdrop of accelerating self-sufficiency in China, how does TEL maintain its competitiveness? What does this mean for the global equipment supply chain? This article analyzes from the dimensions of technology, supply chain, competitive landscape, and geopolitics.

Background

China is pushing forward semiconductor self-sufficiency with extraordinary intensity. According to SEMI data, China's semiconductor equipment market is expected to be around $30 billion in 2025, with the share of domestic equipment rising from about 15% in 2020 to nearly 30% in 2025. The Chinese government continues to support local equipment companies through policies such as the third phase of the "Big Fund," including companies like NAURA, AMEC, and SMEE, which have made breakthroughs in etching, thin-film deposition, and lithography.

At the same time, U.S. export controls on China have been continuously tightened, restricting Western equipment suppliers such as ASML and Applied Materials from supplying advanced process equipment to China, which has instead stimulated the localization of Chinese equipment. As a Japanese company, Tokyo Electron is relatively less affected by export controls, but it also faces changes in customer demand structure—Chinese wafer fabs are increasingly倾向于 purchasing domestic equipment, reducing their dependence on imported equipment.

In-depth Analysis

Technology Impact

• Tokyo Electron's technological barriers are mainly reflected in three areas:
• High aspect ratio etching: For 3D NAND and advanced logic chips that require extremely high aspect ratio etching, TEL has over 20 years of accumulation in charge-coupled plasma etching technology.
• Atomic layer deposition (ALD): In processes below 5nm, ALD is used for key thin-film deposition such as high-k dielectrics and metal gates, with TEL forming a tripartite balance with ASM and Applied Materials.
• Wet cleaning: Single-wafer cleaning technology is crucial for defect control. TEL's CELLESTA series holds a market share of over 40% in processes below 28nm.Chinese domestic equipment manufacturers have achieved substitution in some etching and cleaning processes for mature nodes (28nm and above), but there remains a significant gap in key parameter control, particle contamination management, and process repeatability required for advanced nodes. TEL's advantage lies in the close integration of its equipment with the process verification of advanced foundries such as TSMC and Samsung, forming an ecological barrier.

Supply Chain Impact

• Upstream: TEL's equipment relies on Japan's domestic supply chain (such as high-purity components and precision machining), an ecosystem that is difficult for China to replicate in the short term. Although China has made progress in components like quartz and ceramics, core modules such as ultra-high-purity gases, vacuum systems, and RF power supplies still depend on Japanese, European, or American supply.
• Midstream: TEL's customer structure is changing. Although China contributes about 15% of its revenue (fiscal year 2025), mainly from mature node capacity expansion, the proportion of domestic equipment procurement for China's advanced nodes (e.g., sub-14nm) is rising. TEL needs to maintain customer stickiness through closer technical support and customized services.
• Downstream: Chinese wafer fabs are accelerating "de-Americanization," but "de-Japanization" is not yet prominent. TEL benefits from its non-U.S. identity, making it relatively easier to obtain export licenses in China. However, if Japan expands export controls in coordination with the U.S., it could erode TEL's market share.

Competitive Landscape

• In the global semiconductor equipment market, Applied Materials, ASML, Tokyo Electron, Lam Research, and KLA rank among the top five. Chinese domestic equipment makers are trying to break through from two directions:
• Mature node substitution: Naura has made progress in etching and deposition, accounting for about 10% of China's equipment procurement in 2025.
• Specialty equipment: AMEC is competitive in dielectric etching and substrate etching, and its 5nm etcher has entered TSMC verification (not yet in mass production).

However, TEL's moat lies in its process know-how and global service network. Kawai pointed out, "Chinese equipment makers may catch up in individual technologies, but there is still a gap in system-level optimization and production line integration capabilities." In addition, TEL invests about $2 billion annually in R&D, exceeding the revenue of many Chinese equipment makers.

Regional Implications- Japan: The semiconductor equipment industry is seen as a new pillar of Japan's economy. Equipment exports have surpassed auto parts to become the largest export industry. TEL's growth has a significant impact on employment, tax revenue, and technology spillover effects. The government supports the equipment industry through subsidies and collaborative R&D, aiming to increase domestic semiconductor equipment production capacity by 30%. - China: Improving self-sufficiency rates benefit domestic equipment manufacturers in the long term, but in the short term, they face technological bottlenecks and risks of global supply chain decoupling. Chinese equipment manufacturers still rely on Japanese and European components; if geopolitical tensions escalate, they may encounter supply cutoffs. - United States and Europe: The U.S. has joined with Japan and the Netherlands to establish a multilateral export control framework for equipment. As a Japanese company, TEL must balance compliance with domestic rules and maintaining its market share in China. European companies ASML and KLA are also closely monitoring TEL's response strategies. - South Korea and Taiwan: TEL has deep collaborations with Samsung and TSMC, and its equipment is critical for advanced process mass production. If China's self-sufficiency leads to overcapacity, it could depress foundry prices, indirectly affecting demand for TEL's equipment.### Midstream Equipment Manufacturing TEL operates in the midstream design-manufacturing-service full chain. Its advantage lies in joint R&D with the most advanced foundries (e.g., TSMC's 3nm), creating process synergies. Chinese equipment makers lack similar deep collaboration opportunities, leading to slow iteration.

Downstream Wafer Fabs Mainland China's mature process wafer fabs (e.g., SMIC, Hua Hong) are expanding capacity, but advanced process nodes are constrained by difficulties in equipment acquisition. TEL, with its non-US identity, finds it relatively easier to obtain licenses, but still faces compliance costs from the gray areas of US long-arm jurisdiction.

Conclusion Tokyo Electron CEO's confidence is not unfounded. In the semiconductor equipment industry, which is technology-intensive and highly customer-sticky, first-mover advantages, system-level optimization, and global service networks form the moat of Japanese equipment makers. While China's rising self-sufficiency will erode their share in mature processes, the ecosystem barriers for advanced process equipment are difficult to overcome in the short term. Geopolitics is the biggest variable: if Japan fully cuts off equipment exports to China in coordination with the US, it may force China to accelerate full-chain substitution, ultimately harming TEL's long-term interests. Therefore, TEL will continue to maintain a delicate balance between technological leadership and the Chinese market. For investors, attention should be paid to Japan's export control policy developments, China's technological breakthroughs in domestic equipment, and the pull of AI investment cycles on demand for advanced process equipment.