U.S. Chip Tool Giants Reroute Billions in China Revenue Through Southeast Asia Amid Escalating Tech Controls and China’s Localization Push

Despite stringent U.S. export controls aimed at curtailing China’s access to advanced semiconductor technology, leading American chip equipment manufacturers—Applied Materials, Lam Research, and KLA—collectively reported a substantial $19 billion in China-derived revenue during their fiscal 2025 reporting periods. This figure emerges from a recent Nikkei Asia analysis of corporate filings, highlighting a complex and evolving landscape where direct U.S.-to-China tool shipments simultaneously plummeted by 34% to approximately $2 billion, marking the lowest point since 2017. The significant disparity between these figures underscores a strategic rerouting of critical equipment through manufacturing hubs in Singapore and Malaysia, regions where these U.S. firms have significantly expanded their operational footprint over recent years. Concurrently, China’s domestic wafer-fab-equipment (WFE) vendors achieved record revenues in 2025, albeit experiencing a contraction in gross margins as intense price competition for market share, previously dominated by foreign suppliers, intensified within the Chinese market.

The Shifting Sands of Semiconductor Trade: U.S. Controls and Asian Rerouting

The robust revenue streams for Applied Materials, Lam Research, and KLA in China, even as direct exports from the U.S. declined, reveal the intricate adaptations of global supply chains in response to geopolitical pressures. Applied Materials, a global leader in materials engineering solutions, reported $8.53 billion in China revenue for fiscal 2025, constituting 30% of its total sales, a decrease from 37% in the previous year. Similarly, Lam Research, a prominent supplier of wafer fabrication equipment, garnered $6.21 billion from China, representing 34% of its total revenue, down from 42%. KLA, specializing in process control and yield management solutions, recorded $4.01 billion from China, accounting for 33% of its sales, a reduction from 43%. These declines in percentage share reflect the impact of U.S. export restrictions, which Applied Materials CFO Brice Hill noted equated to roughly 10% of the China market in fiscal 2024 and more than double that in fiscal 2025.

However, the continued high absolute revenue figures are largely attributed to a strategic pivot towards manufacturing and assembly operations in Southeast Asia. This geographical shift allows U.S. companies to fulfill orders for Chinese customers without directly violating U.S. export control regulations, which primarily target direct shipments of certain advanced technologies from the United States. For instance, Lam Research’s Batu Kawan campus in Penang, Malaysia, stands as its largest manufacturing site globally, encompassing 800,000 square feet. Applied Materials inaugurated a $450 million plant in Singapore in early 2024 and has pledged to double its local manufacturing and research and development headcount under its ambitious "Singapore 2030" plan. KLA further solidified this trend by completing the first phase of a $200 million expansion in Singapore in October 2024, with a second phase underway to expand the site to 420,000 square feet and create approximately 400 new jobs, projected for completion this year.

This strategic redirection is evident in customs data. Chinese customs recorded $5.7 billion worth of Singapore-origin chipmaking equipment imports in 2025, marking an increase of over 17%. Imports from Malaysia saw an even more dramatic surge, more than doubling the 2024 figure to reach $3.4 billion. These statistics underscore the pivotal role Singapore and Malaysia have assumed as intermediaries and manufacturing hubs in the global semiconductor supply chain, enabling continued trade flows between U.S. equipment makers and Chinese fabs under evolving regulatory frameworks.

U.S. Export Controls: A Chronology and Rationale

The current landscape of U.S. export controls on China’s semiconductor industry is rooted in a broader geopolitical strategy to safeguard national security and maintain technological leadership. The initial significant restrictions were implemented in October 2022 by the U.S. Commerce Department, targeting China’s ability to manufacture advanced logic chips (below 16nm/14nm), advanced DRAM (18nm half-pitch and below), and NAND flash memory (128 layers or more). These controls aimed to prevent China from developing capabilities that could be leveraged for military modernization or to gain a dominant position in critical emerging technologies.

The rationale behind these measures extends beyond mere commercial competition, focusing on preventing the transfer of "chokepoint" technologies—those few, highly specialized tools and components that are indispensable for advanced chip manufacturing and are primarily produced by a handful of companies in the U.S., the Netherlands, and Japan. By restricting China’s access to these crucial tools, the U.S. seeks to slow down China’s indigenous semiconductor development and prevent its military from acquiring cutting-edge capabilities. Subsequent updates and clarifications to these rules have sought to close potential loopholes and expand the scope of restrictions, signaling a persistent commitment to this strategy.

China’s Ambitious Localization Drive and Domestic Vendor Dynamics

In parallel with the international export control regime, Beijing has intensified its long-standing drive for semiconductor self-sufficiency, often termed "chip localization." This initiative, a core component of the broader "Made in China 2025" strategic plan, aims to reduce China’s reliance on foreign technology and build a robust, independent domestic semiconductor ecosystem. Billions of dollars have been poured into this effort through state-backed funds, subsidies, and incentives for domestic companies.

These efforts are yielding tangible results in terms of market share. Domestic tools accounted for approximately 35% of chipmaking equipment in use at Chinese fabs in 2025, a significant increase from 25% in 2024 and surpassing the government’s 30% target for that year, according to DigiTimes. This growth is further propelled by unofficial government directives, which reportedly require Chinese chipmakers to source at least 50% of their equipment domestically when establishing new fabrication capacity. A notable example is YMTC’s third Wuhan fab, which has already cleared this 50% domestic tooling threshold, indicating the practical implementation of this policy.

However, this rapid expansion has come at a cost for Chinese vendors. While every major Chinese WFE vendor posted record revenues in 2025, gross margins contracted across the board. This indicates intense price competition as domestic suppliers vie for market share that was previously held by foreign competitors, often undercutting each other to secure orders from Chinese fabs.

Domestic Vendor Financials Under Scrutiny

• Naura Technology Group, China’s most diversified equipment supplier, reported first-nine-months 2025 revenue of 27.14 billion yuan (approximately $3.97 billion), a dramatic increase from 6.05 billion yuan ($887 million) for all of 2020. Despite this revenue growth, its gross margin slipped by 2.8 percentage points year-over-year to 41.4%, and net margin contracted by nearly four points.
• AMEC (Advanced Micro-Fabrication Equipment Inc.) delivered full-year 2025 revenue of 12.4 billion yuan (approximately $1.82 billion), a 36.6% increase from 2024. Yet, its gross margin fell by 1.9 points to 39.2%, with a more pronounced drop of 5.8 points in Q3 alone.
• Piotech, a specialist in thin-film deposition, nearly doubled its revenue to 4.2 billion yuan (approximately $615 million) in the first nine months of 2025. However, its first-half net income declined by 27% as the company absorbed high costs associated with new products still undergoing customer validation.
• ACM Research, a U.S.-listed company primarily operating through its Shanghai subsidiary, posted 2025 revenue of $901 million, a 15% increase. Despite this, its gross margin fell significantly by 5.7 points to 44.4%, and its operating margin collapsed from 19.3% to 12.1%. Its Q4 gross margin of 41% fell below the company’s own long-term target band of 42% to 48%.

Charles Shi, a veteran semiconductor analyst with Needham & Co., commented on this trend to Nikkei Asia, stating, "While leading domestic equipment companies are still posting strong revenue growth, there are indications that their margin performance is deteriorating." He attributed this squeeze to domestic vendors aggressively undercutting each other for business at Chinese fabs, a segment previously dominated by foreign suppliers. This dynamic highlights the challenges of rapid localization, where the imperative to gain market share and prove capability can sometimes override profitability in the short term.

The Critical Chokepoints: Lithography and Advanced Metrology

Despite China’s significant progress in localizing various chipmaking tools, fundamental technical barriers persist in certain critical categories, particularly lithography. Gains in localization are concentrated in mature process tool categories, where Chinese vendors are routinely approaching or exceeding parity in areas such as cleaning, etch, deposition, and thermal processing.

However, lithography remains the primary laggard, representing only around 18% domestic share. Metrology also lags, with approximately 25% domestic share. The most glaring gap is in Extreme Ultraviolet (EUV) exposure tools, where domestic share remains at zero. This is a critical chokepoint technology, as only a handful of companies globally—ASML of the Netherlands, Canon, and Nikon of Japan—produce commercially viable lithography systems. ASML, in particular, holds a near-monopoly on cutting-edge EUV lithography, which is essential for manufacturing the most advanced chips (7nm and below). Chinese suppliers continue to face immense technical hurdles in developing competitive lithography systems, a challenge that is compounded by export controls on the necessary components and intellectual property.

This technological gap is a key focus for U.S. lawmakers. While ASML’s China share of net system sales fell from 41% in 2024 to 33% in 2025, and total China revenue (including service) came in at 29.1%, the continued presence of such critical equipment suppliers in the Chinese market remains a concern for Washington. ASML itself projected that the abnormally high recent cycle in China would lead to a drop in China’s share to around 20% of its 2026 revenue. Similarly, Tokyo Electron (TEL), arguably the most China-exposed among large tool makers, drew over 40% of its fiscal 2025 revenue from Chinese customers, with expectations for this share to fall to around 35% in the current fiscal year and potentially below 30% the year after, according to a TrendForce report citing TEL finance chief Hiroshi Kawamoto.

Over the five years from 2020 through 2025, China’s accumulated chip tool imports from Japan exceeded $42 billion, with Netherlands-origin shipments adding roughly $35 billion, according to Nikkei’s customs data analysis. These figures highlight the enduring reliance of China’s semiconductor industry on foreign-made advanced equipment, particularly from Japan and the Netherlands, which are key allies of the U.S. in the broader technological competition.

The Multilateral Alignment of Technology Controls on Hardware Act: A New Frontier?

U.S. lawmakers are keen to maintain and strengthen these technological barriers. A recent bipartisan legislative proposal, the "Multilateral Alignment of Technology Controls on Hardware Act," seeks to significantly tighten restrictions. This bill targets both Deep Ultraviolet (DUV) lithography, a less advanced but still crucial technology, and the Southeast Asia routing pattern that Nikkei’s report highlighted.

Crucially, the proposed legislation aims to enshrine restrictions on prominent Chinese chipmakers such as SMIC, CXMT, YMTC, Hua Hong, and Huawei directly into statute, bypassing reliance on the Commerce Department’s entity listings. This would establish country-wide prohibitions on the sale and servicing of "chokepoint" tools into China, irrespective of the end-user. This move would represent a substantial escalation from existing controls, potentially making it far more difficult for Chinese fabs to acquire or even maintain existing equipment.

The bill includes a 150-day deadline for the Commerce Department to secure matching controls from the Netherlands and Japan. Should these key allies fail to align their policies with the U.S. proposal, the bill authorizes an expanded Foreign Direct Product Rule to be applied unilaterally. This rule could prevent any company worldwide from selling products to China that are made using U.S. technology or software, even if the manufacturing occurs outside the U.S.

Analysts at Bernstein have described this proposal as "far stricter than any prior restriction," warning that it could render tool maintenance inside Chinese fabs "nearly impossible." Such a measure would have profound implications for the global semiconductor industry, forcing companies to choose between the U.S. and Chinese markets in ways not previously encountered. However, the bill currently remains in committee and faces an uncertain path through Congress, particularly given that the Netherlands and Japan have not publicly committed to matching its ambitious scope. Their cooperation is essential for the effectiveness of a truly multilateral control regime, and their economic interests in the Chinese market are substantial.

Global Supply Chain Reconfiguration and Geopolitical Ramifications

The ongoing semiconductor tech war between the U.S. and China, characterized by export controls, localization drives, and strategic supply chain shifts, is fundamentally reconfiguring the global technology landscape. The rerouting of chip tool shipments through Southeast Asia is a testament to the industry’s agility in navigating complex geopolitical constraints, but it also highlights the limitations and potential loopholes of current control regimes.

The implications are multi-faceted:

• Supply Chain Diversification and Resilience: Companies are actively diversifying their manufacturing and R&D footprints beyond traditional centers, leading to increased investment in regions like Southeast Asia. While this can enhance supply chain resilience by reducing single-point dependencies, it also adds complexity and cost.
• Economic Impact: U.S. equipment makers face a delicate balancing act, seeking to comply with national security directives while maintaining access to the lucrative Chinese market. Chinese domestic vendors, despite record revenues, face intense margin pressure, suggesting that the drive for self-sufficiency is coming at a significant economic cost in the short to medium term.
• Geopolitical Tensions: The "Multilateral Alignment of Technology Controls on Hardware Act" signifies a potential escalation in the U.S.-China tech rivalry, pushing allies like the Netherlands and Japan into a difficult position. Their decisions will heavily influence the effectiveness and global reach of future export controls.
• Technological Divide: The persistent gap in advanced lithography capabilities ensures that China remains significantly behind in leading-edge chip manufacturing, reinforcing the U.S. and its allies’ strategic advantage in the foreseeable future. However, China’s progress in mature nodes could lead to a bifurcated global semiconductor market.
• Southeast Asia’s Emerging Role: Nations like Singapore and Malaysia are emerging as crucial nodes in the global semiconductor supply chain, attracting significant investment and creating jobs. This also places them in a sensitive geopolitical position, balancing economic opportunities with the demands of major powers.

Looking Ahead: An Uncertain Path

The semiconductor industry stands at a critical juncture, caught between the forces of technological advancement, economic globalization, and geopolitical rivalry. While U.S. export controls have undeniably impacted direct trade flows and spurred China’s localization efforts, the industry’s adaptability has found new pathways for commerce. The proposed U.S. legislation represents a potential game-changer, but its success hinges on the willingness of key allies to align their policies, a commitment that remains uncertain.

The coming years will likely see continued innovation in semiconductor technology, alongside further adjustments in global supply chains as companies and nations navigate an increasingly fragmented and politicized landscape. The ultimate outcome will shape not only the future of chip manufacturing but also the broader balance of technological power on the global stage.