Navigating the Semiconductor Trade War: Hidden Gems in the Equipment and Materials Sector

The escalating U.S.-China semiconductor trade conflict has reshaped global supply chains, creating both risks and opportunities for investors. While giants like TSMC and Intel dominate headlines, smaller, under-the-radar suppliers of critical equipment and materials are emerging as key beneficiaries of shifting export controls. These companies operate in niche markets with high barriers to entry, positioning them to profit as industries diversify production and governments prioritize self-sufficiency.

The New Semiconductor Landscape: Export Controls and Fragmentation

The U.S. Bureau of Industry and Security (BIS) has intensified restrictions on advanced semiconductor technologies since 2024, targeting China's access to cutting-edge AI chips, extreme ultraviolet (EUV) lithography tools, and advanced-node manufacturing equipment. Simultaneously, China has retaliated by banning exports of critical raw materials like gallium and germanium, which are essential for semiconductor production. This two-front battle has forced industries to rethink supply chains, favoring suppliers that can navigate geopolitical minefields.

The result? A fragmented market where friendshoring—reliance on trusted allies like Taiwan, Japan, and South Korea—has become a priority. Companies supplying equipment or materials to these regions, while avoiding exposure to restricted entities, stand to gain.

Under-the-Radar Suppliers to Watch

1. Equipment Suppliers: Precision Toolmakers

Advanced semiconductor manufacturing relies on specialized equipment for lithography, etching, and metrology. Smaller firms in this space often fly under the radar but are indispensable:
- Tokyo Electron (Tokyo, Japan): A leader in chemical vapor deposition (CVD) and atomic layer deposition (ALD) tools, critical for chip layering. Its dominance in niche processes like 3D NAND fabrication positions it to supply foundries outside China.
- Ultratec (now part of Lam Research, LRCX): Provides wafer inspection systems that detect defects in advanced nodes. Its tools are essential for foundries like TSMC's U.S. facilities.

2. Material Suppliers: Rare Earth and Critical Elements

The U.S.-China conflict has exposed vulnerabilities in rare earth and semiconductor material supply chains. Companies with secure access to these resources are poised to thrive:
- Cabot Microelectronics (CCMP): Specializes in polishing slurries for silicon wafer planarization. Its ability to supply materials to non-China foundries aligns with U.S. "friendshoring" goals.
- II-VI Incorporated (IIVI): A global leader in quartz crystals and gallium arsenide substrates, key for high-frequency semiconductors. Its diversified customer base reduces China dependency risks.

3. AI Infrastructure Enablers: The Hidden Middlemen

While AI chipmakers like NVIDIA (NVDA) grab headlines, lesser-known firms supply critical components for AI hardware:
- Xilinx (AMD, via its acquisition): Provides field-programmable gate arrays (FPGAs) used in AI accelerators. Its programmable chips are vital for adapting to evolving export controls.
- Keysight Technologies (KEYS): Offers AI-driven metrology software, ensuring compliance with strict U.S. due diligence requirements.

4. Foundry Support Specialists: The Unseen Backbones

Companies enabling foundries to meet BIS's “presumption of denial” rules for entities like SMIC are critical to reshoring efforts:
- ASML's Suppliers: Firms like Nikon (NIKOY) and Canon (CAJ), which provide lithography-related components, benefit as EUV tool production scales.
- Screen Holdings (Japan): Supplies coating and developing systems for photoresist materials, a bottleneck in advanced node production.

Investment Strategy: Focus on Niche Resiliency

Investors should prioritize firms with:
1. Geopolitical Agility: Supply chains that avoid China's banned materials and U.S.-restricted entities.
2. Technological Uniqueness: Dominance in niche tools/materials with no direct substitutes.
3. Government Ties: Partnerships with governments funding “friendshoring” initiatives (e.g., the U.S. CHIPS Act or EU's Critical Raw Materials Plan).

Top Picks for 2025:
- Cabot Microelectronics (CCMP): Low valuation (P/E ~15) with 20%+ revenue growth from foundry reshoring.
- II-VI Incorporated (IIVI): Diversified into photonics and EV materials, offering exposure to multiple tech trends.
- Keysight Technologies (KEYS): Software-driven compliance solutions align with BIS's due diligence mandates.

Risks and Considerations

• Volatility: Supply chain disruptions (e.g., rare earth shortages) could spike prices but also increase demand for reliable suppliers.
• Regulatory Uncertainty: BIS's evolving rules require close monitoring. Firms with transparent compliance programs will outlast competitors.

Conclusion: Bet on the Unsung Heroes

The semiconductor trade war isn't just about chips—it's about the invisible machinery and materials that make those chips possible. Investors who identify the niche suppliers enabling this fragmented, geopolitically aware supply chain will find opportunities in an otherwise turbulent market. As governments and industries prioritize resilience over cost, the unsung heroes of the semiconductor ecosystem are primed to shine.

Actionable Recommendation: Build a portfolio weighted toward materials and equipment specialists like CCMP, IIVI, and KEYS, with a 6-12 month horizon. Pair these with sector ETFs like SMH or SOXX for broader exposure, but stay selective—only the most agile will dominate this new era.