U.S. Suppliers Halt Operations at Top Chinese Memory Chip Maker

BEIJING–U.S. chip-equipment suppliers are pulling out staff based at China’s leading memory-chip maker and pausing business activities there, according to people familiar with the matter, as they grapple with the impact of Commerce Department semiconductor export restrictions.

State-owned Yangtze Memory Technologies Co. is facing a freeze in support from key suppliers including

KLA Corp.

KLAC -2.17%

and

Lam Research Corp.

LRCX -0.94%

, the people said. The suspensions follow last week’s sweeping curbs imposed by the U.S. on China’s chip sector, ostensibly to prevent American technology from advancing China’s military power, though the impact might reach further into the industry.

The U.S. suppliers have paused support of already installed equipment at YMTC in recent days and temporarily halted installation of new tools, the people said. The suppliers are also temporarily pulling out their staff based at YMTC, the people said.

Chip-making equipment vendor Applied Materials Inc. on Wednesday slashed its sales projection for the current quarter by about $400 million, citing the restrictions. The company, one of the largest producers of chip equipment in the world, counts China’s leading chip-makers among its many customers. It generated more than 27% of its sales from China in the second quarter, or nearly $1.8 billion. A large portion of those sales go to multinational firms that operate in China and are expected to be exempt from controls targeting Chinese chip-makers.

Applied said it was pursuing export licenses and authorizations, but added that it expected a similar impact to sales in the first quarter of next year.

U.S. chip equipment manufacturers have dozens of employees stationed at YMTC’s factory. They play a crucial role in operating the factory and developing its manufacturing capabilities, as they bring in expertise on highly technical chip production tools, people familiar with the situation said. If the halt is extended, customers such as YMTC face being cut off from upgrades, maintenance expertise and future technology they need to develop chips.

YMTC, KLA and Lam Research didn’t respond to requests for comment.

While the moves might be temporary, they are immediate signs of business disruptions facing Chinese chip makers and U.S. technology suppliers as Washington escalates its efforts to stifle China’s emerging semiconductor industry. The U.S. export control measures, which restrict companies sending chips and chip-making equipment to China, are some of the broadest the U.S. has enacted against China’s semiconductor industry. They veer from previous actions that often targeted individual companies and a narrower subset of technology.

The rules, announced Friday by the Commerce Department, add new license requirements for advanced semiconductors and chip-making equipment destined to a facility in China. Licenses for facilities owned by U.S. and U.S.-allied firms would be decided on a case-by-case basis, while Chinese-owned facilities would face a presumption of denial.

Intel Corp. and South Korean memory maker

SK Hynix

on Wednesday said they had secured exceptions to keep their China-based facilities running. Other U.S. and allied firms were expected to receive similar approvals.

Even before Commerce issued the rules, Nvidia Corp. in August warned its business could be impacted by new licensing requirements. The company, soon after, said it had secured authorization to continue developing some of the advanced chips in China that could have been impacted, as well as to support its U.S. customers and fulfill orders at a Hong Kong facility until next September.

“I believe the U.S. government intends to force the more advanced production facilities of Chinese companies like SMIC and YMTC to shut down entirely,”

Gregory Allen,

a senior fellow at the Center for Strategic and International Studies, said. “However, the more advanced Chinese production facilities of South Korean and other internationally-owned companies will merely be prevented from expanding beyond their current production footprint.”

The potential impact on Applied Materials and other leading U.S. chip-industry players underlines how American companies’ bottom lines are being increasingly impacted by the Biden administration’s bid to curb the growth of China’s industry. Chip-industry advocates have long argued that overly broad export controls could end up hurting U.S. industry by depriving it of money to fund innovation and keep ahead of China.

American companies dominate the global chip-production equipment supply chain, with a combined share of 41%, while China’s is 5% or lower, according to a Boston Consulting Group analysis.

The Commerce Department’s measures are far reaching because they restrict the ability of “U.S. persons” to support the development or production of some of the most cutting-edge chips in China.

“U.S. persons” would include those with American passports and green-card holders as well as U.S. companies, said

Kevin Wolf,

a former Commerce Department official and a partner at Akin Gump Strauss Hauer & Feld LLP.

KLA is known for its inspection and testing equipment and Lam Research for etching machines. Another major American supplier to China’s chip industry,

Applied Materials,

produces tools including those that deposit layers of materials on wafer surfaces—all critical steps in producing chips. China, the biggest market for the three U.S. chip equipment suppliers, contributes around 30% of the companies’ revenues.

Share prices of Applied Materials, KLA and Lam Research have all dropped by more than 20% over the past month.

Beyond the broad new restrictions targeting China’s chip sector, the U.S. last week placed YMTC on a list of companies the Commerce Department is concerned about, called an unverified list. Companies on the list could be added to a more restrictive export blacklist if its concerns aren’t allayed.

Based in China’s central Hubei province, YMTC is a maker of flash memory chips used for storage, and China’s largest maker of memory chips overall. It is responsible for about 6% of global memory output, according to market tracker TrendForce.

The company last year began shipping a type of advanced memory chip containing 128 layers, putting it within the scope of new U.S. restrictions. More layers allow a chip to store more data.

YMTC is controlled by the Hubei government and China’s national integrated circuit fund. Previously, it was a unit of Chinese chip conglomerate Tsinghua Unigroup Co., which in recent years has been heavily indebted and completed a yearlong asset restructuring in July.

—John McKinnon contributed to this article.