After Samsung and SK Hynix, US Ends TSMC's Chip Tool Exemptions for China

TradingKey - TSMC stated on Tuesday that the U.S. government will revoke the "Validated End-User" (VEU) authorization for its Nanjing factory effective December 31, 2025, forcing the company to seek individual licenses for each shipment of U.S.-manufactured semiconductor production equipment to its Chinese facility.

According to regulations from the U.S. Department of Commerce's Bureau of Industry and Security (BIS), VEU authorization allows companies to import U.S. equipment for existing Chinese facilities without requiring separate approvals. TSMC's Nanjing plant received this authorization following U.S. chip export controls implemented in 2022, though its qualification was never publicly listed in the Federal Register. Consequently, BIS is revoking the authorization through direct notification rather than regulatory amendment.

How Will the New Rules Affect TSMC?

TSMC invested $3 billion to build its Nanjing wafer fab in 2018 and added another $2.88 billion investment in 2021 to double the facility's chip manufacturing capacity.

Currently, the factory primarily produces chips for consumer electronics, automobiles, and 5G communication equipment, with its most advanced manufacturing process being the 12-nanometer node — a technology that has been available for nearly a decade. In addition to 12nm, the Nanjing facility also operates production lines based on even earlier process technologies.

While U.S. authorities have indicated that licenses necessary to maintain existing facility operations will be granted, they have explicitly rejected approvals for any applications involving capacity expansion or technology upgrades. This means TSMC's Nanjing facility faces potential risks of equipment maintenance and upgrade limitations for its 12nm and more mature process production lines.

TSMC stated on Tuesday, “While we are evaluating the situation and taking appropriate measures, including communicating with the US government, we remain fully committed to ensuring the uninterrupted operation of TSMC Nanjing.”

This move mirrors the U.S. revocation of VEU qualifications for China-based facilities operated by Samsung Electronics and SK Hynix.

Following these adjustments, international semiconductor companies with significant manufacturing bases in China — including TSMC, Samsung, and SK Hynix — will be forced to submit numerous additional license applications to maintain daily operations at their Chinese factories. According to the U.S. Department of Commerce, the number of additional license applications required annually from Samsung and SK Hynix alone due to VEU revocation is expected to reach as high as 1,000.

Compared to Samsung and SK Hynix — whose majority of production occurs in China — TSMC's manufacturing footprint in China, the world's second-largest economy, is relatively small. According to Taiwan's Ministry of Science and Technology, TSMC's Nanjing facility contributed only a small portion of the company's total revenue last year, accounting for approximately 3% of the company's total production capacity.

“If license approvals are delayed, fabs may run into shortages that could disrupt operations within months,” said Arthur Lai, Macquarie Capital’s Asia head of technology research, in a note. Still, the group-level impact will be minimal given the low revenue contribution, Lai said.

The Deeper Meaning Behind U.S. VEU Revocation

TSMC, Samsung, and SK Hynix are currently among the few foreign chip manufacturers with large-scale production bases in China. Analysts generally believe that this series of U.S. actions may gradually increase the difficulty and costs for these international companies to operate effectively in this important market.

“The bigger story is Washington’s intent — this isn’t about today’s profits, it’s about freezing China’s chip capacity over the long term,” said Charu Chanana, chief investment strategist at Saxo Singapore.

The U.S. has broadly restricted China's access to materials and equipment that can be used to manufacture advanced chips in recent years, as part of a series of control measures aimed at limiting China's artificial intelligence capabilities. Export restrictions affect not only sales to Chinese enterprises but also any physical facilities within China, including factories operated by Samsung, SK Hynix, and TSMC.

Kevin Chen, a Citigroup Research analyst, stated in a recent report that these restrictions will further limit China's access to semiconductor production equipment and technology from foreign suppliers, exacerbating challenges for China's semiconductor supply chain. However, domestic Chinese memory manufacturers may benefit from rising market demand.

“Each new restriction forces China to double down on homegrown innovation,” Saxo’s Chanana said. “The risk for the U.S. is that the very pressure meant to constrain Beijing may end up accelerating the race for self-sufficiency in chips.”