'Picks and shovels' trade comes unstuck as AI hardware stocks plunge on competitive threat from China

By Jules Rimmer

Reports of China's breakthrough in AI technologies sends Asian chip makers sprawling

Reports that the Chinese have been able to develop DUV lithography machines have raised concerns that they will be able to undercut incumbents in chip manufacture.

The competitive threat posed by cheaper Chinese substitutes has once again assailed semiconductor stocks, leading to dramatic falls in some of the biggest memory chip makers in Asia on Tuesday.

South Korea's Kospi KR:180721 benchmark index - a bellwether for sentiment in the sector - plunged almost 11% Tuesday amid panic-selling and deleveraging, forcing regulators to halt trading via circuit-breakers for the ninth time in 2026. The two index heavyweights chiefly responsible for the massive rally in Korea over the last eighteen months or so, SK Hynix (KR:000660) and Samsung Electronics (KR:005930), plummeted 14% and 13%, respectively.

Pure-play memory chip maker Kioxia Holdings (JP:285A), Japan's largest stock by market capitalization as recently as June, registered a decline of 18% and has now slipped to fourth in the rankings. In a month, Kioxia's share value has halved.

Semiconductor stocks have generally been in correction mode of late, as seen in concerted profit-taking for the Philadelphia Semiconductor Index SOX, with sharp losses for Micron and other names on Monday. This latest acceleration downward, though, was triggered by reports of a breakthrough by Chinese technology companies.

The Information carried a story on Monday in which it revealed three Chinese companies - Semiconductor Manufacturing International Corporation (HK:981), Hua Hong Semis (CN:688347) and CXMT (CN:688825) - had made significant advances in the production of deep ultraviolet (DUV) lithography machines that had hitherto been almost the sole preserve of ASML (NL:ASML). This technology is used in the manufacture of advanced semiconductor chips, and news of the development has prompted a fall of more than 10% for Europe's largest stock this week.

If China can design its own lithography machines, it follows that they can produce cutting-edge chips themselves too. This explains much of the enthusiasm behind the record-breaking flotation of CXMT in Shanghai yesterday.

"When China walks into a room, profit walks out" is a favorite epigram of Louis Gave from Gavekal Research and fears of this phenomenon impacting AI hardware stocks are gathering momentum. In a phone conversation Tuesday, Harvey Robinson, tech analyst at U.K. brokerage house Panmure Liberum, commented that China appears to have used innovation to circumvent the restrictions placed on the export of AI technology by the U.S. government.

The DUV lithography machines are still some way behind the state-of-the-art lithography machines built by ASML, but "they are doing more with less" and in many instances, their machines can approach the efficiency of industry leaders at a much lower cost. Robinson added that the AI model launched by Moonshot last week signaled that more efficient models will necessitate less capex going forward.

This obviously undermines the investment argument for the "picks and shovel" stocks of the AI infrastructure build-out, like the chip makers.

The developments come at a crucial time for the Korean chip makers. SK Hynix reports its second-quarter results Wednesday and Samsung Thursday. Both companies have ambitious plans to massively expand production, doubling capacity in the next two years. To fund this capex commitment, SK Hynix raised $29 billion earlier this month by issuing Nasdaq-listed depositary receipts (SKHY) and while rumors have circulated that Samsung was contemplating a similar move.

Valuations on the stocks reflect some of the market's concerns about the cyclicality of the earnings cycle for chip makers. Both SK Hynix and Samsung trade on just three times end-2027 earnings according to FactSet, before any possible guidance upgrades during results announcements this week.

In premarket trading Tuesday, SK Hynix ADrs were indicating a fall of 4% to around $137.

-Jules Rimmer

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07-28-26 0616ET