The semiconductor industry has long been accustomed to downdrafts. But the geopolitical storm in the downside airflow is another matter entirely.

The third quarter earnings season will be a tough one for the chip industry. The sharp decline in sales of personal computers and smartphones continues to plague the industry, while concerns about the market for chips used in data centers, automobiles and other applications are also intensifying. Chip makers Samsung (Samsung) and Advanced Micro Devices Inc. (AMD, or AMD for short) late last week have pre-announced disappointing fiscal quarter results. On top of that, the U.S. government is cracking down even harder on exports of semiconductor technology to Chinese companies, with new rules announced last Friday that expand previous export controls.

The developments add up to further cloud the chip industry a month after discouraging news from chipmakers such as Nvidia (Nvidia Corp., NVDA) and Micron Technology Inc (Micron Technology Inc., MU). As of early Tuesday, the Philadelphia Semiconductor Index (SOX) has fallen about 11% in the past four days and 43% so far this year, almost double the decline of the S&P 500 over the same period. The category appears to be bottoming out, with the SOX currently trading at an expected price-to-earnings ratio of about 14 times, close to the lows touched in the past three years. But the wave of bad news may not be over yet, especially since the sector has become a hot political dispute on both sides of the Pacific.

Earnings reports due out in the coming weeks are unlikely to reverse that sentiment. Of the 15 chip giants that will report September quarter results, 10 companies are expected to report slower revenue growth compared to the June quarter, according to FactSet. Many more companies are expected to report further deceleration in growth for the quarter ending in December. Forecasts for next year are likely to be even gloomier: the 15 companies are expected to post an average revenue growth of just 6% in 2023, compared with an expected average growth of 15% this year.

Even the analysts' relatively pessimistic forecasts could prove optimistic, as most of them were made before the U.S. government announced its latest restrictions. Of particular concern is the impact on capital spending if chipmakers withdraw spending plans because of concerns about demand and the inability to sell equipment or chip products in China. In a report Tuesday, Citigroup's Atif Malik lowered its target for industry-wide wafer equipment spending next year by 10 percent to $72 billion. The drop in equipment spending is bad news for equipment makers such as Asmac, Applied Materials and Panlin Group, which are also bearing the brunt of the new U.S. export controls.

In this regard, the results announced Thursday by Taiwan Semiconductor Manufacturing Co. will be closely watched: the chip-making giant is expected to spend about $21.5 billion in capital expenditures in the second half of this year alone. But TSMC is also vulnerable to the rapidly softening personal computer and smartphone markets, with Apple Inc. as one of its biggest customers. In the current storm, even the most powerful chip companies may also face some difficulties.

Shares of major Asian chipmakers fall, dragged down by U.S. export restrictions to China

Shares of major Asian semiconductor makers fell Tuesday as investors expressed concern about the broad impact on the industry of new U.S. measures to limit exports of chips and related equipment to China.

Taiwan Semiconductor Manufacturing Co., the world's largest chip foundry, fell 8.3 percent Tuesday to its lowest closing price in more than two years. TSMC has chip manufacturing plants in China, including one in the eastern city of Nanjing.

TSMC's decline dragged the Taiwan Stock Exchange-weighted index down more than 4 percent. United Microelectronics Co., 2303.TW (UMC), another chipmaker in Taiwan, fell 7 percent. The Taiwan Stock Exchange warned on Tuesday about recent market volatility, citing reasons including increased geopolitical risk.

Shares of Samsung Electronics, the world's largest memory chip maker with chip facilities in Xi'an and Suzhou, China, fell 3.9 percent at one point in early trading Tuesday and closed down 1.4 percent. Shares of Hynix Semiconductor, another South Korean memory chip maker with production bases in China, fell 3.5 percent at one point on Tuesday and closed down 1 percent.

Tuesday was the first trading day in Taiwan, South Korea and Japan markets after the U.S. announced the above-mentioned chip restrictions on Friday.

The U.S. Department of Commerce's new regulations mainly target U.S. companies and their exports of advanced chips and chip manufacturing equipment to China, the relevant chips and equipment is considered to have a key role for the Chinese government to achieve its technology goals.

But non-Chinese chip makers also operate chip manufacturing facilities in China. Industry executives and analysts say the U.S. restrictions could create disruptions outside of China and hit sales and business for chipmakers or chip manufacturing equipment makers in South Korea, Taiwan and Japan.

For example, the new rules would allow the U.S. to block exports of foreign-made chips made with U.S. technology. That means TSMC's sales of advanced chips to Chinese customers from its factories in other regions could be restricted, according to research firm Tiburon Technology (TrendForce). TSMC did not respond to a request for comment.

Meanwhile, the U.S. Commerce Department said it will review export applications to China from facilities operated by non-Chinese companies on a case-by-case basis. That means for non-Chinese companies like Hynix Semiconductor that operate plants in China, any additional equipment needed to produce more advanced chips in China would require U.S. approval, Tiburon said. Hynix Semiconductor operates a memory chip manufacturing plant in the southeastern Chinese city of Wuxi. This Wuxi plant accounts for about 13 percent of total global DRAM production capacity, according to Tiburon Technology estimates.

Nevertheless, South Korea's Ministry of Industry, Trade and Resources said on Saturday that the new U.S. restrictions are not expected to "cause significant disruptions to the supply flow of chip manufacturing equipment for Korean companies operating in China," including Samsung Electronics and Hynix Semiconductor.

The ministry said the U.S. has been in close consultation with South Korea in planning its latest export restrictions and has chosen to adopt a special licensing process for equipment supplied to South Korean chipmakers to ensure that production at those manufacturers' China plants is not affected.

Samsung Electronics will not comment on the new U.S. regulations. A spokesman for Hynix Semiconductor said the company will work to obtain U.S. licenses for its China plants and work with the South Korean government to do so.

South Korea, like Japan and Taiwan, is a close partner of the United States. All three parties also have sizeable semiconductor business interests in the U.S. and mainland China.

Many large U.S. companies are major customers of chip makers such as Samsung and TSMC. At the same time, China is the largest trading partner of Japan, South Korea and Taiwan, as well as an important production base for Samsung, Hynix Semiconductor and TSMC.

Although the United States has called on South Korea, Japan and Taiwan to jointly form a semiconductor supply chain alliance, the so-called "chip quadrilateral alliance," but so far, the proposal has not been fully launched. China has expressed opposition to such an alliance.

Affected by the U.S. chip restrictions may not only semiconductor manufacturers. In Japan, one of the world's largest chip equipment manufacturer Tokyo Electron (Tokyo Electron Ltd., 8035.TO) shares also fell about 5.5% on Tuesday.

In August, Tokyo Electron executive Hiroshi Kawamoto expressed concern about possible U.S. restrictions on the sale of semiconductor equipment to China, Kawamoto said, "It's conceivable that our Chinese customers will not be able to produce their products, so it's an extremely worrisome and concerning development for us. " The Chinese market accounts for more than 25 percent of Tokyo Electron's business, he said.

Two days later, the company's public relations department sent an e-mail saying Kawamoto's statement could be misleading. The e-mail said it is Tokyo Electron's policy not to comment on government regulatory requirements.

Still, for some memory chip makers grappling with sharp downward pressure on demand, the U.S. chip restrictions may help ease competitive pressure. The current general expectation is that this decline in demand momentum will continue into next year.

Sanjeev Rana, a technology analyst at Hong Kong brokerage CITIC Lyon Securities (CLSA) in Seoul, said the U.S. chip restrictions will slow the development of China's memory chip manufacturing industry, which may benefit Samsung and Hynix Semiconductor.