Applied Materials Sees China Revenue Rising Despite Export Controls

Record Quarter Amid Policy Headwinds

Applied Materials delivered $9.12 billion in revenue during the May-July quarter, marking the highest quarterly performance in the company's history. The numbers arrive at a moment when US semiconductor equipment makers face mounting restrictions on sales to Chinese customers, yet the California-based firm projects its China business will expand through 2026.

At DailyTechWire, we've tracked how export controls have reshaped equipment flows across Asia over the past three years. What makes Applied Materials' guidance notable is the divergence: while Washington tightens the aperture on advanced lithography and deposition tools, AI infrastructure buildouts are creating parallel demand channels that absorb capacity Washington hasn't yet restricted.

The company raised its full-year revenue outlook for 2026, citing persistent orders for equipment used in memory fabrication and packaging, two segments where Chinese fabs still operate without the licensing friction that governs leading-edge logic tools. Applied Materials manufactures chemical vapor deposition systems, etch tools, and metrology equipment, much of which falls into categories that remain permissible for export under current Bureau of Industry and Security rules, provided the end use isn't military or advanced-node production.

Where the Growth Is Coming From

China accounted for roughly 30 percent of Applied Materials' revenue in recent quarters, a share that has remained stable even as the Biden administration introduced three rounds of semiconductor restrictions between October 2022 and October 2023. The resilience stems from two factors: legacy-node capacity expansion and the equipment intensity of packaging.

Chinese foundries and memory makers are doubling down on 28-nanometer and older processes, nodes that serve automotive, industrial, and consumer electronics markets. These fabs require the same deposition, etch, and inspection tools as cutting-edge facilities, just not the extreme-ultraviolet lithography systems that dominate headlines. Applied Materials holds leading positions in plasma etch and chemical mechanical planarization, tools essential across all process nodes.

Packaging has emerged as a second growth vector. As chipmakers pursue chiplet architectures and heterogeneous integration to work around transistor scaling limits, the back-end of the line is seeing unprecedented capital intensity. Applied Materials' wafer-level packaging and advanced interconnect tools are shipping to Chinese outsourced assembly and test houses that serve global customers, a segment largely untouched by export controls.

The AI infrastructure thesis is straightforward: hyperscalers are ordering high-bandwidth memory and accelerator substrates faster than fabs can add capacity. DRAM and NAND manufacturers in China are benefiting from this tide, even if they're not producing the most advanced nodes. Applied Materials sells into these expansions.

The Tension Between Commerce and Security

Applied Materials' outlook underscores a tension Washington hasn't fully resolved. Export controls aim to deny China access to technology that enables military AI or advanced weapons systems, yet the rules carve out exceptions for equipment serving commercial markets. The result is a patchwork: some tools require licenses that are rarely granted, others ship freely, and many fall into a gray zone where approvals depend on end-user assurances and site inspections.

Industry executives have argued privately that overly broad restrictions risk ceding market share to Japanese and European competitors without meaningfully slowing China's chip ambitions. Tokyo Electron and ASML face similar rules, but smaller tool vendors in Korea and Europe operate under less stringent regimes. Applied Materials' ability to project China growth suggests it has navigated this landscape successfully so far, likely by concentrating shipments in mature-node and packaging categories where licenses are routine.

The Commerce Department's October 2023 rule update tightened controls on advanced memory, specifically high-bandwidth memory used in AI accelerators. Yet enforcement has been uneven, and Chinese memory makers have found workarounds, including procuring equipment through third countries or relabeling end uses. Applied Materials hasn't disclosed how much of its China revenue comes from memory versus logic or packaging, but the aggregate growth projection implies that at least one of these segments is expanding briskly.

What Asia's Equipment Market Looks Like Now

Beyond China, Applied Materials is riding a broader wave of fab construction across Asia. Taiwan Semiconductor Manufacturing Company is adding capacity in Arizona, Japan, and Germany, but its home island remains the epicenter of leading-edge investment. Samsung is pouring capital into its Pyeongtaek and Hwaseong campuses in South Korea, targeting both logic and memory. In Japan, a consortium including TSMC and Sony is building an advanced image sensor facility in Kumamoto, with equipment orders flowing to Applied Materials and peers.

Southeast Asia is also entering the picture. Singapore's Globalfoundries and Malaysia's backend houses are upgrading lines to handle chiplet packaging and radio-frequency components for 5G and automotive. These projects are smaller in dollar terms than the megafabs in Taiwan and Korea, but they represent a geographic diversification of supply chains that equipment makers are keen to support.

The regional capital expenditure cycle is entering its third year of elevated spending, driven by government subsidies in the US, EU, Japan, and India, as well as private investment in AI and high-performance computing. Applied Materials' record quarter reflects this synchronization: when multiple regions build simultaneously, equipment utilization stays high and pricing power remains with vendors.

Implications for the Export Control Debate

Applied Materials' China guidance will likely feature in Washington's ongoing debate over semiconductor policy. Hawks in Congress and the Pentagon have called for tighter restrictions, arguing that any equipment sale to China indirectly supports its chip ambitions. Industry groups counter that categorical bans would devastate US equipment makers without stopping China, which would simply buy from foreign competitors or accelerate indigenous tool development.

The data point that matters is whether Chinese fabs are achieving performance milestones that threaten US technological leadership. So far, the evidence is mixed. China's Semiconductor Manufacturing International Corporation has demonstrated 7-nanometer production using older-generation DUV lithography, a workaround that surprised analysts but remains far from the 3-nanometer and 2-nanometer nodes TSMC and Samsung are ramping. Memory makers in China lag by two to three generations in DRAM and NAND density.

If Applied Materials can grow its China revenue while these gaps persist, it suggests the current control regime is threading the needle: limiting China's access to the frontier without collapsing commercial markets that fund US R&D. Whether that balance holds will depend on how aggressively China pursues indigenous equipment development and whether allied countries tighten their own export rules in coordination with Washington.

The AI Demand Engine

Underneath the geopolitical noise, the simplest explanation for Applied Materials' performance is that AI is consuming chips faster than the industry can supply them. Training a frontier language model requires thousands of GPUs or custom accelerators, each built on advanced packaging substrates and high-bandwidth memory stacks. Inference, the phase where models answer queries, is even more equipment-intensive per dollar of revenue because latency requirements favor specialized ASICs over general-purpose processors.

This demand is geographically distributed. US hyperscalers are the largest buyers, but Chinese internet giants, Korean electronics firms, and Japanese automakers are all building AI infrastructure. Applied Materials sells into the entire ecosystem, from the logic fabs making GPU dies to the memory fabs producing HBM to the packaging houses stacking chiplets.

The company's raised guidance implies it expects this cycle to extend through 2026 at minimum. Historically, semiconductor equipment spending is cyclical, with sharp downturns following periods of overcapacity. The AI thesis is that workload growth will absorb new capacity quickly enough to avoid a traditional bust, or at least delay it. Applied Materials is betting on that narrative, and so far, order books support it.

What Comes Next

For investors and policymakers, Applied Materials' results offer a real-time snapshot of how export controls interact with market forces. The company is threading a path that allows it to serve Chinese customers in permissible categories while benefiting from AI-driven spending elsewhere. Whether that path remains open depends on decisions in Washington, Brussels, and Tokyo, as well as on how quickly Chinese firms develop domestic alternatives.

The next inflection point will likely come in late 2026, when the US reviews its semiconductor controls under the annual regulatory cycle. If Chinese fabs have made unexpected progress at advanced nodes, pressure will mount for tighter restrictions. If the status quo holds, Applied Materials and its peers may continue to grow China revenue even as the policy environment remains restrictive.

In the meantime, the company's record quarter is a reminder that technology markets are rarely zero-sum. AI demand is large enough to lift multiple regions simultaneously, and equipment makers are positioned to capture value across the board. The challenge for governments is ensuring that commercial growth doesn't inadvertently accelerate strategic threats, a balance that remains elusive three years into the export control era.