This article was originally published on Forbes on Dec 12, 2024,02:47pm EST

Semiconductor stocks will come into focus in 2025 as geopolitical tensions rise. China is likely to retaliate following Trump’s most recent threats of 10% additional tariffs to all Chinese goods. This escalation in tariffs and retaliation is expected to have an impact on semiconductor sales in China, particularly affecting chipmakers with higher exposure to China.

Nvidia, AMD and Micron have some of the lowest exposure among the leading chipmakers, while wafer fab equipment (WFE) manufacturers and Qualcomm have some of the highest exposure.

Tariffs to Impact Chipmakers, WFE Spending

Tariffs have not yet been implemented, yet the risks to the semiconductor industry and supply chain are already becoming visible.

A report from the Commercial Times highlighted that the supply chain is scrambling to secure product prior to early 2025, with segments such as “display panels, IC design, memory, and optical communications” seeing an increase in rush orders.

Optical firm Lianyi highlighted that telecom customers have “increased their efforts to replenish inventory at the end of the year, adding a wave of demand.” Additionally, to mitigate impacts of potential tariffs, some Chinese firms are attempting to shift production to Thailand and Vietnam, leading to longer supply times and additional order placements to secure enough supply. This comes as the US is continuing to implement stricter export restrictions on US-made chips to China, with the Commerce Department announcing restrictions on 24 types of chipmaking equipment, as well as bans on numerous Chinese firms.

As a result, wafer fab equipment (WFE) spending in China is expected to take a rather large hit next year. Wafer fab equipment (WFE) refers to the equipment used to process wafers into chips, through processes like etching, deposition, and through ultraviolet wavelengths in a process called EUV lithography.

Through the first half of 2024, China’s spending on WFE totaled more than $25 billion, putting it on track to spend $50 billion this year for the first time ever. For 2025, WFE spending is projected to drop below $40 billion, in line with 2023’s levels, and tracking for a -20% to -25% YoY decline. Some of the WFE manufacturers that are heavily exposed to China include ASML at nearly 50% of systems revenue year-to-date, and Applied Materials, KLA and Lam Research at 37% to 43% of revenue.

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WFE Firms at Risk from Elevated China Exposure

In 2024, chipmaking equipment manufacturers had some of the highest exposure levels to China in the broader semiconductor industry, with ASML seeing China contribute nearly half of its systems revenue.

Here’s how the leading WFE manufacturers stack up in terms of exposure to China.

Chipmaking equipment manufacturers had some of the highest exposure levels to China in the broader semiconductor industry, near or above 40% of revenue. Source: I/O Fund

More than 48% of ASML’s systems revenue year-to-date has come from China while Lam Research and KLA both see China contributing ~42% of total revenue. Applied Materials’ China exposure in fiscal 2024 was slightly lower at 37%. This is a rather steep increase from the 26% to 29% range from fiscal 2023 for all four companies.

This year-over-year surge in China revenue to elevated levels presents significant risk as export restrictions and tariffs combine as two primary headwinds. As a result of these two threats, as well as declining WFE spending and declining domestic utilization rates weighing on the equipment market’s growth, China exposure is expected is decline dramatically next year.

Take ASML as an example. So far in 2024 (Q1 to Q3), China has accounted for $7.06 billion of its $14.56 billion in systems revenue. For the full year, China is expected to maintain this contribution level in the high-40% range, before dropping to 20% in 2025. This suggests China revenue could decline approximately -33% YoY to ~$7 billion. Applied Materials has just over $10 billion in revenue from China, Lam has over $6 billion, and KLA has over $4 billion, exposing the trio to hundreds of millions to billion-dollar losses in revenue streams should China revenue decline in the double-digits next year.

On the other hand, some of the market’s leading AI players have the lowest China exposure, with less than 20% of revenue from China.

Nvidia Among AI Favorites with the Lowest China Revenue

Despite being the subject of some of the strictest export restrictions for its leading AI GPUs, Nvidia has some of the lowest exposure to China as a percentage of revenue, alongside competitor AMD and key suppliers Micron and TSMC.

In its most recent quarter, Nvidia’s China (and Hong Kong) revenue rose 34.4% YoY to $5.42 billion, as it “ramped new products designed specifically for China that do not require an export control license.” As a percentage of revenue, China accounted for 15.4% of revenue, up from 12.2% in Q2 and 9.6% in Q1.

China accounted for 15.4% of revenue for Nvidia in Q3, up from 12.2% in Q2 and 9.6% in Q1. Source: I/O Fund

Even with this acceleration in China revenue since Nvidia was hit with export restrictions in Q4 2023, China’s contribution remains lower than historical levels, in the low 20% region. Nvidia’s upcoming GB200 NVL36, NVL72, and B200 all face export restrictions and require licenses to ship to China, while the A100, A800, H100, H800, L4, L40, L40S, and RTX 4090 have already been restricted. This means that moving forward, China’s growth will continue to primarily come from China-specific products rather to those that could be subject to restrictions.

AMD and Micron similarly have low revenue exposure from China and restrictions in place preventing sales of certain chips to the region. Certain variants of AMD’s Instinct GPUs and Versal FPGAs are restricted from being sold to China, while China banned Micron from key infrastructure products in 2023 due to national security risks.

For fiscal 2023, AMD’s China revenue was approximately 15% of revenue, down from 22% in fiscal 2022. AMD has not provided any quarterly updates on China revenue through FY24, though management said last quarter that they are “underrepresented in China market in the server CPU side,” with opportunities to gain share.

Micron’s China exposure has hovered in the 16% of revenue range for FY22 through FY24, due to bans from China limiting its growth in the nation. While the low exposure to China may seem like a positive, Micron faces competitive headwinds and pressure from Chinese firms in its primary markets. Analysts questioned management about China capacity hitting the market, and if it would have any impacts on Micron’s business. Management acknowledged that there has been China capacity in the market, saying that it is “primarily limited to China-oriented, China-exported customers who are using some of that supply or attempting to use it” for lower performance categories such as DDR4, LP4 and lower end NAND. However, they noted that they are focusing on the “higher profit pools” of DRAM and NAND such as HBM, LP5, and data center SSDs, so the “portion of the business that's exposed to those kinds of trends in China are really becoming smaller as a percent of our revenue over time.”

Taiwan Semiconductor (TSMC) is exposed to a different realm of geopolitical risk due to its concentration in Taiwan, though it has faced some pressure from the US to restrict sales to China, which are quite low. Earlier in November, TSMC halted advanced chip shipments of 7nm and below to Chinese AI and GPU customers, viewed as a temporary strategy to comply with the United States government. The US reportedly believed that a sanctioned Chinese firm placed orders with TSMC via a middleman, and is attempting to crack down on this; TechNode reports that if these loopholes are closed, TSMC will be one of the most affected. Additionally, the US is seeking to place blanket restrictions on 7nm and below shipments to China, which TSMC is hoping will only be for Chinese AI customers, and not smartphone, as that would have a more substantial impact – Apple and Qualcomm are two primary customers with large smartphone revenue streams in China.

In FY23, China accounted for just under 12.5% of TSMC’s revenue, up from the 10-11% level from the prior two years. Of the major semiconductor players in the market, TSMC has the lowest exposure to China, less than Nvidia, AMD and Micron.

Here’s how the four stack up against some of the other more-AI exposed chipmakers.

Nvidia, AMD, and Micron are among the leading AI-exposed chipmakers with the lowest revenue contribution, while Qualcomm and Broadcom are among the highest. Source: I/O Fund

Two names stand out here for its elevated exposure to China – Qualcomm and Broadcom.

In FY24, Qualcomm generated nearly 46% of its revenue from China, a significant improvement from China’s contribution of 67% of its revenue just three years ago. Qualcomm is seeing strong growth emerge from China from both smartphone and auto customers, noting that in Q1, QCT handset revenue is expected to grow single digits YoY driven by “greater than 40% sequential revenue growth from Chinese OEMs.”

Broadcom generated over 32% of its revenue from China in FY23, down from the 35% range it had seen in three of the prior four years — much of this exposure to China stems from Apple. What’s interesting about Broadcom’s situation is that it believes that a majority of the products shipped to China ($11.5 billion revenue in FY23) are included in devices shipped back to the US or Europe, exposing it potentially to two-way tariffs, to China and from China.

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What Tariffs Mean for Semiconductor Stocks

As tariffs risks rise with additional tariffs likely to be placed on China, and China threatening to retaliate with a 20% price cut advantage for domestic goods. Experts say the new policy will also affect US products sold in China, potentially impacting chipmakers with substantial Chinese revenue streams if they cannot outcompete domestic alternatives.

What this means is that not only will semiconductors face geopolitical risks from tariff threats and a possible trade war, but they will also face a tougher selling climate in China as the country pushes for more domestic production towards its goal for 70% semiconductor self-sufficiency by the end of 2025.

For Nvidia, although its share of China revenue is quite low at 15%, the country is a $20 billion plus market for them due to their rapid revenue growth, whereas for AMD, China was not even a $3.5 billion market in FY23. Though China’s 20% price advantage policy aims to promote domestic alternatives to US products, China is still hard-pressed to find a suitable alternative to Nvidia’s GPUs, with Huawei’s Ascend 910B only rivaling Nvidia’s A100 released four years ago.

For companies like ASML, and its peers in WFE manufacturing, where China contributes 40% or more of revenue, the backdrop gets a bit more challenging as WFE spending in China is estimated to dry up slightly next year, with spending potentially dropping -25% YoY. These companies will in turn have to rely on growth in the Americas and leading-edge nodes to offset declining (or normalizing) China contribution.

This is a scenario that brings a lot of ‘what-ifs’ to the table, as it’s impossible to predict what exactly will happen come 2025 when it comes to tariffs and when it comes to Chinese revenue streams. At the moment, the geopolitical risk is rising for semiconductors from these retaliatory threats, and it could create some better entry points for AI semis next year. To navigate this difficult territory, join Portfolio Manager Knox Ridley next Thursday, December 19 at 4:30 pm EST to discuss semis, SOXX versus the S&P 500, and what he sees ahead for some of the leading AI chip stocks in the market. Learn more here.

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