2022 was a pivotal year for the global semiconductor manufacturing equipment (SME) market. Following a post-pandemic recovery that saw dramatic revenue growth across the sector in 2021, 2022 brought mixed results as the electronics industry braced itself for a painful market correction heading into 2023. Despite the worsening macroeconomic and geopolitical environment, the five leading front-end equipment suppliers performed relatively well thanks to the continued expansion of major foundries like TSMC. Tokyo Electron (-0.8%) and Dutch lithography giant ASML (0.5% YoY) reported flat growth from their exceptionally high base year performances in 2021, while American suppliers Applied Materials (8.6%), Lam Research (15.3%), and KLA (28.4%) significantly outperformed the overall market. Chinese suppliers also reported remarkable growth across the board due to strong demand from domestic mature node semiconductor manufacturers and growing tailwinds from China’s semiconductor supply chain localization efforts.
At the other end of the spectrum, assembly and test equipment suppliers (Teradyne, K&S, Besi) registered substantial revenue declines as oversupply across the semiconductor market, and particularly in the memory segment, began to chip away at demand for back-end equipment. The weakness that began to appear in the back-end equipment segment in 2022 has already begun to filter through to the front-end, where suppliers are preparing for substantial revenue declines in 1H 2023. Applied Materials, KLA, and Lam expect that memory fab utilization rates will remain low in Q1 2023 and may fall even further in Q2. They also forecast global wafer fabrication equipment (WFE) market demand to decline by about 20%, from $95Bn in 2022 to $75Bn in 2023.
FRONT- AND BACK-END SEMICONDUCTOR EQUIPMENT MANUFACTURERS’ REVENUE IN 2022
Geopolitical risk dominated the headlines at the top-end of the SME market in the second half of 2022 after the five leading front-end equipment suppliers found themselves caught in the crosshairs of an increasingly zero-sum US-China tech competition. The new export controls announced by the US Commerce Department on October 7th effectively banned American suppliers from selling equipment for the production of leading-edge semiconductors to China.[1] The US also created new rules that prohibit non-US companies from supplying leading-edge WFE to China without a license if the equipment includes US-made components or IP.
While the immediate effects of the US controls were limited, the restrictions will begin to chip away at the revenues of the major US suppliers in 2023. KLA, LAM, and Applied Materials anticipate that the export controls will reduce their 2023 revenues by $500M-$900M, $2Bn-2.5Bn, and $2.5Bn, respectively. As the chart below shows, the combined effects of the US export controls and intensifying efforts by China to de-Americanize its supply chain contributed to a dramatic decline in Applied Materials’ China exposure over the course of 2022. LAM and KLA registered more modest declines, though they are at risk of sustained market share erosion in China, particularly as the US-China competition appears likely to escalate over the next few years. Although the US controls will have a less significant impact on the operations of ASML and Tokyo Electron, recent commitments by the Dutch and Japanese governments will further limit those companies’ ability to sell their most advanced systems to Chinese customers.
FIGURE 1: APPLIED MATERIALS’ CHINA EXPOSURE DECLINED DRAMATICALLY IN 2022
In the long-run, Chinese suppliers like Naura, AMEC, ACM Research, and SMEE (private) stand to benefit from the forced retreat of non-Chinese WFE manufacturers from China’s advanced semiconductor supply chain. With revenues ranging from $150M to $700M, China’s leading equipment manufacturers are currently far behind their non-Chinese counterparts in terms of both scale and technology. However, these companies have reported strong growth in recent years and are well-positioned to take advantage of the Chinese government’s commitment to developing a comprehensive domestic supply chain.
[1] The US export controls define leading-edge semiconductors as: · Logic chips with non-planar transistor architectures (i.e., FinFET or GAAFET) of 16nm or 14nm, or below; · DRAM memory chips of 18nm half-pitch or less; or · NAND Flash memory chips with 128 layers or more
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