This article has been updated to mention a Thursday report about TSMC's plans to build a U.S. fab, and the report's impact on chip equipment stocks.
Chip equipment makers could be staring at both new opportunities and new risks as the U.S. government pays closer attention to where chips are manufactured.
Markets signaled a greater appreciation of the opportunities on Thursday, as equipment makers rallied in response to a Wall Street Journal report that Taiwan Semiconductor (TSM) - Get Report, by far the world's biggest chip contract manufacturer (foundry), plans to build a major new plant in Arizona.
The WSJ added that the plant (fab) could be operational by the end of 2023. It also noted (citing industry execs) that a major new fab would likely cost over $10 billion to build.
According to a WSJ source, the fab will make chips using TSMC's 5-nanometer (5nm) manufacturing process node, which is currently in the process of entering volume production. However, it's worth noting that TSMC's next-gen, 3nm, process node is expected to enter volume production in 2022, and thus should be mature by the time that the Arizona fab begins production.
Applied Materials (AMAT) - Get Report rose 5.8% in Thursday trading, KLA (KLAC) - Get Report rose 7.7% and Lam Research (LRCX) - Get Report rose 8.4%. Other equipment makers, including ASML (ASML) - Get Report and MKS Instruments (MKSI) - Get Report, posted more moderate gains.
The WSJ's Thursday report comes a few days after one from the paper that said the Trump Administration is in talks with both Intel (INTC) - Get Report and TSMC to build fabs in the U.S.. The paper added that some U.S. officials are also interested in having Samsung, the world’s other top-3 chip manufacturer, “expand its contract-manufacturing operations in the U.S. to produce more advanced chips.”
An Intel (INTC) - Get Report VP indicated that his company, which already operates a number of U.S. fabs, is in talks to build a plant that would securely provide chips for government clients, along with other customers. TSMC was reported to have talked with the Commerce and Defense Departments as well as major client Apple (AAPL) - Get Report about building a new U.S. fab.
Though TSMC currently has one fab in Washington State, the rest of its fabs, including the ones used to make advanced chips for a slew of high-profile U.S. chip developers, are located in Taiwan. And that in turn has unsettled U.S. government officials worried about Beijing’s continued desire to reunify mainland China with Taiwan.
Should Intel, TSMC and/or Samsung build expensive new fabs in the U.S., the likes of Applied, KLA, Lam and ASML would likely see a healthy top-line benefit. As it is, these companies are currently seeing strong orders from processor and foundry clients such as Intel and TSMC, along with some moderate improvement in demand from memory makers following big 2019 order cuts.
But while Washington’s interest in seeing new fabs built in the U.S. could prove a boon for chip equipment makers, its attempts to curb chip equipment exports to China might end up hurting their sales.
On April 28, the Department of Commerce announced that it’s expanding export restrictions on China, Russia and Venezuela for products that have potential military end uses. The DOC also announced that it’s eliminating civilian-usage license exceptions for products whose export is restricted for national security reasons. And it floated a proposal to modify license exceptions for the re-exporting of products by certain non-U.S. countries, arguing that these countries have allowed the re-exporting of goods to China that the DOC wouldn’t have authorized the direct exporting of.
After closely reviewing the DOC rules, Bernstein analyst Stacy Rasgon concluded that U.S. exports of U.S. chip manufacturing and test/inspection equipment could be impacted by the new restrictions on products with military end-uses, as could exports of some high-performance chips. He also noted that the proposed changes to license exceptions for re-exported products by non-U.S. countries could impact foreign chip equipment makers such as ASML (ASML) - Get Report and Tokyo Electron, should more than 25% of the content of their products be deemed to be of U.S. origin.
The new DOC rules come at a time when China has become a major export market for chip equipment makers in the U.S. and elsewhere, as Beijing continues aggressively supporting the development of its domestic chip industry. China’s biggest foundry, SMIC, is currently planning a Shanghai IPO after having delisted its shares from the NYSE in 2019.
The rules also come two months after it was reported that the Trump Administration, which last year placed sweeping export restrictions on China’s Huawei, is thinking about requiring foreign companies that rely on U.S. chip manufacturing equipment to obtain a license in order to supply Huawei.
Should such a rule go into effect, it would impact TSMC, which counts Huawei’s HiSilicon chip unit among its major clients.