Applied Materials' China Exposure and Market Share Pressures: A Reassessment of Long-Term Attractiveness in a Shifting Semiconductor Landscape

The semiconductor industry is at a crossroads, and Applied Materials (AMAT) finds itself navigating a treacherous intersection of geopolitical headwinds, regulatory constraints, and a rapidly evolving competitive landscape. Once a dominant force in China's wafer fabrication equipment (WFE) market, the company now faces a stark reality: its revenue from the region has plummeted from 45% of total revenue in Q2 2024 to 25% in Q2 2025. This decline is not merely a statistical anomaly but a symptom of a broader structural shift in the global semiconductor ecosystem.

The China Conundrum: A Market in Retreat

Applied Materials' exposure to China has long been a double-edged sword. In FY 2024, the country accounted for 37% of the company's revenue, making it its largest market. However, U.S. export restrictions on advanced-node equipment and services have crippled its ability to maintain its historical edge. The Applied Global Services (AGS) segment, which provides critical maintenance and optimization for Chinese clients, has been particularly hard-hit. AGS alone contributed 23% of AMAT's FY 2024 revenue, but its value has eroded as U.S. policies restrict access to tools and support for Chinese foundries.

The geopolitical calculus is clear: China's push for self-reliance in semiconductor manufacturing has collided with U.S. export controls, creating a vacuum that domestic firms are swiftly filling. For instance, Hwatsing Technology has surged in the chemical mechanical planarization (CMP) tool segment, increasing China's market share by 8 percentage points between 2019 and 2024. Similarly, NAURA and AMEC have gained traction in deposition and etch tools, with China's share in deposition tools rising from 2% to 7% in the same period. While U.S. firms still dominate advanced-node etch and clean tools (59% market share), the trajectory is unmistakable—local players are closing the gap.

Strategic Rebalancing: Diversification as a Lifeline

Faced with these pressures, Applied Materials is recalibrating its strategy. The company is pivoting toward the U.S. and “friendshored” markets like India and Southeast Asia, where government incentives align with its expansion goals. The Trump administration's $600 billion domestic manufacturing push, including partnerships with Apple and TSMC, has created a tailwind for AMAT's U.S. operations. In Q2 2025, the U.S. accounted for 11% of AMAT's revenue—a figure management expects to grow as it capitalizes on the CHIPS Act and other subsidies.

However, geographic diversification alone is insufficient. AMAT must also defend its technological moats. Its leadership in advanced packaging, hybrid bonding, and AI-driven process optimization remains a critical differentiator. These capabilities are in high demand for AI chips and high-bandwidth memory (HBM), where Chinese domestic tools still lag. For now, AMAT's expertise in these areas provides a buffer against full-scale substitution.

Competitive Pressures: The Rise of the Dragon

The most immediate threat to AMAT's long-term attractiveness lies in China's indigenization efforts. State-backed initiatives like the National Integrated Circuit Industry Investment Fund (Big Fund II) have accelerated the development of domestic equipment firms. By 2024, Chinese companies captured 38% of global fab equipment sales—a leap from 6% in 2010. This growth is not just volume-driven; it's quality-driven. Chinese firms now supply 28nm to 5nm node tools for logic, memory, and packaging, challenging AMAT's dominance in mid-critical layers like etch and deposition.

The only remaining bottleneck for Chinese firms is EUV lithography, where ASML's monopoly persists. However, even in this domain, AMAT's role in materials science and post-lithography processes ensures it retains relevance. The question is whether these niches will be enough to offset broader market share losses.

Investment Implications: Navigating Uncertainty

For investors, AMAT's story is one of resilience amid adversity. While its China exposure has weakened, the company's operational discipline—evidenced by a 30.7% operating margin in Q3 2025—demonstrates its ability to adapt. Its $1.7 billion share repurchase program and focus on high-margin technologies like AI packaging also signal confidence in its long-term value proposition.

However, risks remain. The normalization of U.S.-China trade relations is uncertain, and Chinese firms are unlikely to cede ground in mid-tier tools. AMAT's pivot to the U.S. and India is promising, but scaling these markets will take time. Investors should monitor two key metrics:
1. AMAT's U.S. revenue growth as a percentage of total revenue.
2. China's market share in deposition and etch tools over the next 12–18 months.

A bullish case for AMAT hinges on its ability to leverage its technological edge in AI-driven manufacturing and maintain profitability despite China's retreat. A bearish scenario involves further erosion of market share in critical segments and prolonged geopolitical instability.

Conclusion: A Company in Transition

Applied Materials is no longer the uncontested leader it once was in China, but it remains a cornerstone of the global semiconductor equipment industry. Its strategic agility—diversifying geographically, doubling down on next-gen technologies, and maintaining operational efficiency—positions it to weather the storm. For investors, the key is to balance optimism about its long-term potential with caution regarding the short-term headwinds. In a world where the semiconductor supply chain is fracturing, AMAT's ability to adapt may determine whether it thrives or merely survives.