Japanese chip equipment manufacturers (Tokyo Electron, Screen, etc.) strategically pivot to AI chip manufacturing to offset losses from export controls to China.
Tokyo Electron, Screen Holdings, and Advantest are experiencing the process of export controls translating from policy documents into actual sales figures.
This story is no longer theoretical. Japan's largest semiconductor equipment manufacturer Tokyo Electron stated that China's share of its revenue declined from 47.4% in the fourth quarter a year ago to 26.8% in the fourth quarter of fiscal year 2026. In yen terms, China sales fell from 27.94 billion yen in that fiscal year to 17.55 billion yen. Without sugarcoating, the market that once made Japanese chip tool executives look exceptionally superior is now closed off by policies beyond their control.
The primary reason is not that China has lost interest in semiconductors. Far from it. In July 2023, Japan, together with the United States and the Netherlands, restricted exports of 23 categories of advanced semiconductor manufacturing equipment, and these controls are now showing up in company financial data. According to Value The Markets reporting, Screen Holdings and Advantest are facing similar pressure, as they have historically derived approximately 24% to 30% of their revenues from Chinese customers.
By contrast, Tokyo Electron has a clearer path forward. The company's full-year revenue for fiscal 2026 reached 244.35 billion yen, a record high, with net profit of 57.445 billion yen. The company told investors that equipment related to advanced chips should account for close to 40% of sales by fiscal 2026, driven by demand for AI servers, high-bandwidth memory, and advanced packaging. On paper, this is feasible.
Frankly, this only works if AI infrastructure buildout remains red-hot.
China is not an alternative customer for these companies. It is the market that can absorb capacity, support mature process expansion, and provide leverage to Japanese suppliers when demand is uneven elsewhere. These restrictions cover equipment for the most advanced chips but also affect the 14nm and 28nm capacity that Chinese fabs are still trying to expand. Research released by the AI Policy and Strategy Institute points to a deeper issue: Japan's controls are effective because Japanese companies hold near-monopoly positions in certain equipment categories. China cannot simply find perfect substitutes elsewhere.
This is real leverage. And it is real cost. Screen Holdings and Nikon don't have another Shenzhen or Shanghai waiting for orders of similar magnitude. Singapore, Malaysia, and Europe are trying to capture a larger share of the semiconductor supply chain, but fabs are slow physical entities. You need site selection, cleanroom construction, utility provisioning, engineer recruitment, and equipment installation. Order volumes will follow these efforts. They won't materialize out of thin air just because export control lawyers say the map has changed.
Tokyo Electron's spending reflects the expectation that the new landscape will eventually pay off. Its R&D budget for fiscal 2027 is planned to increase from 27.78 billion yen to 33 billion yen, and the company is also building an intelligent fab designed to triple capacity. This is serious commitment, not a press-release pivot. But you should separate capacity from demand. The new fab will only help if TSMC, Samsung, SK Hynix, and the next wave of non-China fabs continue buying at the pace investors currently expect.
China has not remained idle either. According to the South China Morning Post, Beijing is using export restrictions on tungsten—a material used in chip manufacturing tools—to pressure Japan. This is part of a decoupling process that often goes overlooked. One side restricts machines. The other restricts materials. Companies that never wanted to become diplomatic tools end up having to explain profit margin impacts on earnings calls.
Tokyo Electron is best positioned because its product portfolio more naturally aligns with the AI cycle. Its equipment supports advanced packaging and high-bandwidth memory manufacturing, areas now closely tied to AI accelerator demand from TSMC, Samsung, and SK Hynix. Advantest has a different kind of buffer. It manufactures chip test equipment whose testers are essential for HBM and logic chips going into AI systems.
Screen Holdings faces the toughest situation. Its cleaning and surface treatment tools are widely used at mature-process fabs, which happen to be the fastest-expanding area of China's semiconductor plans before the export controls. If your strongest customer base is being compressed by policy, you can't solve the problem with AI slogans. You need replacement orders, and that takes time.
The timeline is awkward. TSMC's Arizona expansion, Samsung's Taylor project in Texas, and European chip investments under the EU Chips Act could all become meaningful customers for Japanese tool makers. But most of this capacity is not expected to ramp to full production before 2027 or 2028. Until then, these companies are using AI demand to fill the gap left by the China market. This is a reasonable bet, but it's not the same as restoring the old China market.
A recent Financial Times report adds another reason this story remains current: Tokyo Electron has severed ties with former executive Jay Chen, who was closely connected to the company's China business. Tokyo Electron took this action after discovering that Jay Chen had family ties to a Chinese startup developing competitive chip manufacturing tools. According to the Financial Times, Tokyo Electron said it found no evidence of any confidential information leakage. Nevertheless, the incident illustrates how business issues can quickly evolve into governance and security problems.
Value The Markets reported that Tokyo Electron refused to specify which customers are receiving redirected capacity, while Screen Holdings and Advantest did not respond to requests for comment. This silence fits the current mood. Japanese equipment makers are trying to replace massive China business while avoiding loudly stating who benefits from this shift. The financial data says it all: this is not a single quarter's fluctuation. This is the beginning of a structural reset in the flow of capital toward Japanese chip equipment.
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