Wednesday witnessed a tumultuous day for semiconductor stocks, primarily influenced by developments unfolding in China’s semiconductor chip industry. A report from the South China Morning Post revealed that semiconductor chip production in China surged impressively by 40% in the first quarter of the year, surpassing the growth rate of total global semiconductor sales.
Among the prominent casualties of this news were leading chipmaker Advanced Micro Devices (AMD), which saw its shares plummet by 4.5%. Likewise, Lam Research and Applied Materials, both integral players in semiconductor chip manufacturing equipment, experienced significant drops of 4.3% and 4.5%, respectively.
The importance of China in the semiconductor industry cannot be overstated. Chinese chipmakers are witnessing an unprecedented surge in demand for their products, particularly from sectors such as electric vehicles (EVs) and smartphones. Despite concerns surrounding the global slowdown in sales within these sectors, Chinese EV sales surged by an impressive 29% in Q1, while smartphone sales saw a robust 17% increase.
Faced with restrictions on accessing advanced chips and chipmaking equipment from the West, Chinese companies are intensifying their efforts to achieve self-reliance in semiconductor production. This trend poses significant challenges for Western semiconductor manufacturers and equipment suppliers. Additionally, it may help explain why equipment manufacturer ASML missed its earnings expectations.
The unintended consequence of US export controls on advanced chip technology to China is leading to a wave of state-backed investment in the semiconductor industry, potentially paving the way for Chinese dominance in global legacy-chip production.
For semiconductor stocks like AMD, Lam Research, and Applied Materials, the increasing dominance of Chinese chipmakers raises concerns about revenue sources. While AMD derived 22% of its revenue from China in 2022, that figure plummeted to 15% in 2023. Similarly, Lam Research and Applied Materials experienced declines in revenue from China.
As China seeks to assert its position in the semiconductor market, further declines in revenues and potentially share prices for Western semiconductor companies could be looming on the horizon.