Japanese chip equipment manufacturers' sales to China declined 10% due to export controls.

Japan's semiconductor equipment industry is experiencing what it means to lose its largest customer. Export restrictions aimed at limiting China's access to advanced chip manufacturing technology have led to a 10% decline in Japanese semiconductor equipment sales to China, forcing manufacturers to rethink their business models in real time.

The data is startling. Tokyo Electron, Japan's largest semiconductor equipment manufacturer, saw its China sales plunge from 27.94 billion yen to 17.55 billion yen in the third quarter of fiscal year 2026.

Japan implemented restrictions on 23 categories of semiconductor manufacturing equipment in July 2023, in line with parallel efforts by the United States and the Netherlands to cut off China's access to advanced chip production tools.

China's share of Tokyo Electron's total sales fell to 31.8%, a decline of 8.5 percentage points from the previous quarter. Tokyo Electron had previously projected that China would account for 41-42% of its sales. The company now expects this figure to stabilize at around 30% in the second half of fiscal year 2026.

Tokyo Electron is not the only company feeling the pressure. SCREEN Holdings, Advantest, and Nikon are all affected by the same restrictions. Historically, China accounted for approximately 24-30% of revenue for Tokyo Electron and SCREEN in prior years.

Tokyo Electron predicts that AI-driven demand could account for 40% of its total revenue by fiscal year 2026. The company has already raised its sales forecast based on strong performance in AI and other demand categories.

From a China perspective, investors may need to estimate the China market based on approximately 30% of Tokyo Electron's future sales. This is below the peak of 41-42%. China continues to purchase large quantities of conventional chip equipment that fall outside the scope of export controls.

Domestic Chinese policy has been pushing local chip manufacturers toward local equipment alternatives. Overcapacity in conventional chip production could depress global equipment orders.

Despite the decline in China revenue, Tokyo Electron has raised its sales forecast, indicating that management believes AI tailwinds can provide further compensation. Investors following this sector should closely track two metrics: China's share of quarterly revenue and AI-related order backlogs.