Chipmakers find it harder to operate in China but say that doing business there is key to their survival, as the country accounts for roughly a third of sales
Chipmakers are finding it increasingly hard to operate in China but say doing business in the country is still key to their survival.
Context & Ripple Effects
This story is the latest turn in a four-year squeeze. As far back as 2020, TSMC was caught between Washington's tech policy and its Chinese customers, and by 2022 China's heavy-investment push for semiconductor self-reliance was already showing cracks and triggering investigations. What has changed since is the arithmetic: China still represents roughly a third of chipmakers' sales, so exit is not on the table.
The pressure now runs both ways. On one side, US export curbs constrain what can be sold; on the other, China is cutting down on US tools in its self-sufficiency drive — including an undocumented rule requiring at least 50% domestically made equipment for new capacity — while equipment vendors keep selling into the gap, with Applied Materials and Lam Research drawing 40%+ of sales from China on legacy tools the curbs don't touch.
First-order effects
- Chipmakers must keep serving a market that is roughly a third of their revenue while operating conditions there deteriorate — every product roadmap and capacity decision now has to clear two regulatory regimes at once.
- Equipment makers are managing the same tension from the supply side: Applied Materials and Lam Research sustain outsized China exposure by shipping legacy chipmaking tools that fall outside US export restrictions.
Second-order effects
- Export controls are pushing Chinese fabs toward workarounds rather than capitulation — reported retrofitting of older ASML DUV lithography machines to produce advanced smartphone and AI chips exposes gaps in the controls themselves.
- Beijing's 50%-domestic-equipment requirement for new capacity, backed by three state venture funds of over $7.1 billion each for early-stage hard-tech startups, starts converting today's captive customer base into tomorrow's competitor — shrinking the long-run addressable market for US and allied toolmakers.
Third-order effects
- If the pattern holds, the industry splits into two partially closed ecosystems: a US-led bloc enforcing tool and chip restrictions, and a Chinese stack built on retrofitted DUV gear and domestic equipment — with the roughly one-third revenue dependence becoming a structural vulnerability for Western chipmakers as substitution matures.
- Regulation becomes the industry's primary planning variable: procurement rules that aren't publicly documented, and export lists that redraw market boundaries overnight, mean capacity decisions are now made against policy risk as much as demand forecasts.
The trend: The semiconductor industry is bifurcating into interdependent-but-diverging US and Chinese ecosystems, with China's outsized share of sales forcing global chipmakers to serve both sides for as long as the bridge holds.