Markets are concerned over the sustainability of artificial intelligence (AI) spending as tech stocks came under pressure amid concerns that billions of dollars may not generate the expected returns, while China is reportedly very close to mass-producing state-of-the-art chipmaking technology to reduce foreign reliance.
Tech stocks have surged alongside AI investments, but investors are concerned that the billions of dollars in capital spending may not translate proportionally into financial results, leading to renewed scrutiny of the high price-to-earnings ratios, particularly among chipmakers.
China’s unprecedented progress in semiconductors continues to heighten risk perceptions across the industry.
China is reportedly nearing the mass production stage for deep ultraviolet (DUV) lithography machines, critical for advanced chipmaking. Beijing is believed to be accelerating such efforts to further reduce its reliance on foreign technology.
Chinese memory chipmaker ChangXin Memory Technologies (CXMT) began trading at around $8.05 per share earlier this week on its first day on the Shanghai Star Market, surging 531.06% by the close of the morning session.
The firm specializes in memory chips powering AI servers, smartphones, and personal computers, and it is one of the world’s largest dynamic random-access memory (DRAM) manufacturers.
Recent developments in China suggest the country is advancing technologically faster than many competitors, prompting investors to question whether competition in the sector will intensify and whether the West's AI spending boom is sustainable given current high valuations.
China's moves toward technological independence have fueled forecasts that leading companies in the sector could lose market share and profitability to emerging Chinese alternatives.
Analysts say investors are also moving away from semiconductor stocks to other sectors, which also contributes to selling pressure.
Investors began questioning not only the return on their AI investments, but also whether the competitive edge that drove high profitability in the sector to date can be maintained.
With the rise of Chinese manufacturers, competition in the global semiconductor sector could significantly intensify, thus downwardly pressuring the pricing power, market share, and profit margins of industry leaders.
Investors are having to reassess company valuations amid these developments, as they have reached historic highs in recent years driven by the AI boom.
The selling pressure also stems from investors realizing gains on high-yielding semiconductor stocks and shifting their portfolios towards safer stocks, analysts say.
Behind the market selloff lies a complex combination of several factors, such as the normalization of high valuations, shifting competitive dynamics, and portfolio rotation, while uncertainties over semiconductor firms, especially those at the forefront of the AI craze, cause investors to expect risks rather than positive developments.
Over the past five trading days, shares of Broadcom fell 20.5%, Intel dropped 18.3%, Micron Technology declined 25.4%, and Arm Holdings was down 20.5%.
The selloff spilled over to the Asian equity markets, with South Korea being particularly hit hard.
The nation’s Kospi index, which is heavily weighted towards semiconductor and tech firms, fell around 21% over the last five trading days.
SK Hynix shares lost 30.9% on a weekly basis, while Hanmi Semicon shares dropped 23%.
China’s developments in the chipmaking business was only one of the triggers for this week’s selloff, an Asian markets analyst told Anadolu.
Sadi Kaymaz stated that Dutch tech firm ASML manufactures photolithography machines used in chip production, but its previously climbing shares reversed course after China reportedly developed its own DUV lithography system.
Kaymaz noted these developments had only a marginal impact on sales, while the main pressure on the markets in recent times has been due to the financing of AI investments and the return on these expenditures.
“The West’s most critical and strategic advantage rests on semiconductors, and the tech expertise of many Western countries is being transformed into technological marvels by ASML — China is challenging this Western superiority for the first time,” he said. “China is challenging them because the chip equipment sector has been framed as a zero-sum game over the past decade, while every machine China acquires is deemed as a loss in the West.”
Kaymaz stated that these DUV machines currently are not among the most advanced systems used in Taiwan or South Korea, as they emit longer-wavelength light and cannot create fine patterns on silicon wafers used in microchip production in a single pass like more advanced systems.
He said it would be extremely difficult for China to directly manufacture advanced two- or three-nanometer chips even if it successfully produced its own DUV machines.
“It’s not impossible because we know they’ve been able to produce seven-nanometer chips using Dutch DUV machines in various ways,” he said. “DUV development has to do with the most advanced chipmaking, for instance, most types of what we call ‘smart devices’ can be made with these machines.”
Kaymaz emphasized that manufacturing a single machine is not the same as keeping it continuously running in a production plant, so the yield issue remains a significant challenge difficult to overcome for advanced Chinese chips.
“ASML sold some 131 DUV systems last year, so China’s production of just five units will not shift the dynamic in the short term,” he added.
