China's semiconductor industry is expected to experience a decline in investments, particularly in semiconductor equipment, over the next two years.
UBS predicts a significant reduction in spending, with China's expenditure on wafer fab equipment (WFE) estimated to drop to approximately $29.7 billion in 2025, a 7% decrease from previous estimates and a 19.5% drop compared to 2024. The outlook for 2026 is equally pessimistic, with projections set at $28.4 billion.
This decline is attributed to stricter U.S. export controls and a weakening demand for semiconductor products. ASML, a leading supplier in the chip manufacturing sector, has reported a decline in orders from Chinese clients, exacerbated by high inventory levels and concerns about new U.S. restrictions. UBS analysts expect that countries like Japan and the Netherlands will support these export measures, further hindering China's ambitions in chip manufacturing.
Despite these challenges, there are opportunities in China's technology landscape, particularly in the field of artificial intelligence (AI). Domestic AI providers are expected to capture a market share of around 20% this year, indicating growth in this sector. The tightening of export restrictions may drive innovation among Chinese companies, leading to self-reliance and enhancing their competitive edge. This shift towards self-reliance could benefit Chinese firms in the long term.
UBS recommends investing in NAURA Technology Group Co Ltd, a Chinese manufacturer of semiconductor equipment, as they believe the company has the potential to thrive despite industry challenges. Advanced Micro Fabrication Inc, on the other hand, has been downgraded to a "Neutral" rating due to limited room for further growth. Investors are advised to consider the implications of these developments on their portfolios as the semiconductor industry continues to evolve.