Tokyo Electron Ltd.’s shares experienced a significant drop following the company’s revised forecast for the silicon wafer market, which fell short of expectations and added to the mixed outlook surrounding AI spending. Despite reporting better-than-expected earnings, the Japanese supplier to Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. saw its shares decline by as much as 4.6% on Friday. Tokyo Electron had initially projected double-digit growth for the broader market in 2025, but revised its forecast to align with 2024’s sales figures, citing accelerated deliveries to Chinese customers in 2024 as a contributing factor to a potential lull in investment from China in the current year.

Tokyo Electron, a key player in the global chip gear market, is closely monitored as an indicator of future spending on chips for artificial intelligence development. The company reported an operating profit of ¥199.6 billion ($1.3 billion) for the December quarter, a 51% increase from the previous year, surpassing analyst estimates of ¥174 billion. However, despite the positive earnings report, Tokyo Electron did not raise its revenue outlook, unlike compatriot Advantest Corp., which had done so a week earlier.

The mixed signals from supply chain players have raised doubts about the sustainability of lavish spending on AI. While Dutch lithography supplier ASML Holding NV reported a surprisingly high number of orders, Arm Holdings Plc and Advanced Micro Devices Inc. provided cautious forecasts. Tokyo Electron also announced plans to build a ¥104 billion plant in Miyagi prefecture, expanding its capacity as customers like Samsung, TSMC, and SK Hynix Inc. continue to invest in wafer-processing tools.

Tokyo Electron CEO Toshiki Kawai noted that much of the investment in 2025 will come from cutting-edge logic makers and high-bandwidth memory producers aiming to meet AI server demand. However, the company expects chip gear purchases by Chinese customers to slow down, particularly among new entrants to chipmaking. China is projected to account for a mid-thirties percentage of Tokyo Electron’s sales in the business year starting April, down from over 40% in the current fiscal year. Kawai acknowledged the impact of US restrictions on exports of chip-related technologies and other geopolitical factors.

The emergence of Chinese startup DeepSeek’s low-cost and open-source AI model has raised concerns about increased price competition and reduced revenue for AI industry leaders like Nvidia Corp. However, AI industry leaders argue that cheaper AI models could lead to more new entrants, further supporting demand for AI infrastructure in the long term. Tokyo Electron is still evaluating DeepSeek and its potential impact, with Finance Division Officer Hiroshi Kawamoto stating that it’s too early to determine the outcome. If lower-cost AI leads to an expansion of the market, it could be a positive development, Kawamoto noted.