Applied Materials, Lam Research and KLA together control around 35% of the global market for chip production tools. Since October, all three have been either relocating non-Chinese staff from China to Singapore and Malaysia, or increasing production capacity in Southeast Asia, according to five people familiar with the situation.

“This has been happening for a while. These American toolmakers could not properly serve the Chinese market like they used to anymore,” one of the sources with direct knowledge of the matter said. Many non-Chinese employees were offered the choice of being sent back to their company’s home market or posted to Southeast Asia, the people said.

Sources made clear that all three companies still have a presence in China despite these shifts.

An executive at a supplier of subsystems serving Lam Research and KLA said the trend emerged late last year. “Our customers have been asking us to accelerate our support to their Southeast Asia locations in the past few months. We also noticed they’ve increased their personnel there.”

The US government in October introduced export controls that sharply restrict China’s access to production equipment for advanced chipmaking if it contains American technologies. The controls also limit Americans’ ability to work for certain Chinese tech companies. Last month, the US further reached an agreement with Japan and the Netherlands – the two other global leaders in chip production tools – to restrict their equipment exports to China too.

The export controls, Washington’s harshest yet, are a major setback for China’s tech ambitions. Chip production toolmakers and their engineers are essential for helping chipmakers like Taiwan Semiconductor Manufacturing Co and China’s Semiconductor Manufacturing International Co build, operate and maintain chip production lines.

But the export controls are also pinching American companies. China has been a major growth driver for the chip equipment industry for years and was the largest buyer in 2020 and 2021, according to industry association SEMI, thanks to Beijing’s push to become self-reliant in semiconductors. The country used to account for nearly 30% of US chip equipment makers’ revenues, but that figure dropped to 20% for Applied Materials, 24% for Lam Research and 23% for KLA in their latest quarterly results.

Lam Research said on Jan 25 it will slash 7% of its global workforce, cutting 1,300 permanent jobs and around 700 temporary positions. Many of the temporary employees in Taiwan, one of the company’s key growth markets, had already received notice that their contracts would not be renewed after the Lunar New Year holidays, Nikkei Asia learned.

“We are increasing in Southeast Asia in light of the current geopolitics, but the question for our industry is: What’s next if China no longer could be our growth driver?” a senior source in KLA told Nikkei Asia. KLA’s Asia headquarters is in Singapore.

A senior executive at a Japanese chip production toolmaker said the industry will see slowing chip demand due to a global economic downturn and the rise of China’s homegrown chip equipment players in the long run. “It is inevitable that they [China] will bet and cultivate their own.”

Shifting idled personnel from China to Southeast Asia was a “natural move” for these companies as they all have an existing presence in the region, sources said. When the US chip industry first started to offshore manufacturing capacity to Asia in the 1960s to lower costs, Singapore and Malaysia became choice destinations. Today, they have semiconductor manufacturing, packaging and testing clusters. Chipmakers like Intel, GlobalFoundries and United Microelectronics all have facilities in Southeast Asia and plan to expand there further.

Applied Materials in December last year launched its “Singapore 2030” plan to bolster its manufacturing and research and development capabilities in the city-state. The company said the expansion will build on its 30-year history in Singapore.

Lucy Chen, vice-president of Isaiah Research, said based on her supply chain checks, American equipment suppliers have been laying off staff in China and shifting away from the country in waves, with a peak happening in December, when the US export controls hit company revenues.

“These American equipment players have an existing manufacturing presence in Southeast Asia, but what’s awkward now is the industry is having a cyclical downturn at the moment,” Chen told Nikkei Asia.

“The pace of China’s chip advancement will be slowed in the next three to five years because of the US-Japan-Netherlands agreement, but the country will increase its investment in the equipment sector,” she added. “For the longer term, China will nevertheless figure out ways to be self-reliant.”

Asked about its activities in Southeast Asia, Lam Research told Nikkei Asia that the company has a strategy of being geographically close to its customers and that this has led it to make investments throughout Asia, including in a new technology production facility in Malaysia, a technology centre in South Korea and an engineering facility in India.

“As a result of macroeconomic headwinds, recent trade restrictions limiting our ability to do business in China, and an anticipated decline in global wafer fabrication equipment spending in calendar year 2023, we are taking a range of actions across our business to manage costs,” the company said.

A spokesperson said KLA has employees and functions around the world, and continues to invest in regions including Asia to enable the company to continue to deliver for its customers.

Applied Materials, which has been in China since 1984, told Nikkei Asia it maintains a large team to support local and global customers in the country but did not comment on its plans for non-Chinese staff in the country. “We are committed to compliance with all laws and regulations, including export controls and trade regulations, in the countries where we operate,” the company said.