By Josh Horwitz

SHANGHAI (Reuters) – U.S. chip toolmaker KLA Corp will cease offering some supplies and services from Wednesday to China-based customers including South Korea’s SK Hynix in compliance with recent U.S. regulations, a source familiar with the situation said on Tuesday.

The move underscores huge business headwinds facing chipmakers and chip equipment makers around the world, as the Biden administration published a sweeping set of export controls on Friday aimed at slowing China’s progress in advanced chip manufacturing.

China is KLA’s largest geographic market, bringing in $2.66 billion in sales, or nearly 30% of its total revenue in the last fiscal year that ended in June, according to the company’s financial filings.

Under new U.S. regulations released on Friday, companies looking to supply Chinese chipmakers with advanced manufacturing equipment must first obtain a licence from the U.S. Department of Commerce.

The source, who declined to be identified due to the sensitivity of the matter, said staff in China received an email from KLA’s legal department stating that effective 11:59 p.m. local time (1559 GMT) on Tuesday, the company shall stop sales and service to “advanced fabs” in China for technology of NAND chips with 128 layers or more, and DRAM chips 18nm and below, and advanced logic chips.

“Our top management team has told us to relax for a couple of months,” the source who was briefed on the matter told Reuters.

KLA did not immediately respond to a request for comment outside of working hours.

The source added that the company would also cease supplying China chip plants owned by Intel and SK Hynix, the world’s second-largest memory chipmaker.

Reuters previously reported that foreign companies with fabs in China looking to receive advanced chip manufacturing equipment would have their licence applications reviewed on a case-by-case basis, while applications to supply Chinese fabs would be reviewed with through a “presumption of denial” standard.

SK Hynix reiterated its stance that it would seek a license under new U.S. export control rules for equipment to keep operating its factories in China. Intel did not immediately respond to a request for comment.

China’s two leading memory chipmakers – Yangtze Memory Technologies Co Ltd (YMTC), Changxin Memory Technologies Inc (CXMT) – and contract chipmaker Semiconductor Manufacturing International Corp (SMIC) are among the major customers affected by the U.S. export control.

None of the three fabs immediately responded to Reuters’ requests for comment.

Another source at an overseas chip equipment company told Reuters that all of the major suppliers to fabs were working round-the-clock to assess the long-term impact of the regulations.

“We are all overreacting at first, while the legal teams work out the details for every piece of software and equipment that could be affected.”

Shares in KLA tumbled nearly 5% on Monday, hit by the latest U.S. export control measures.

Along with Lam Research Corp and Applied Materials Inc, KLA is among top U.S. toolmakers now required to halt shipments to wholly Chinese-owned factories producing advanced chips.

(Additional reporting by Joyce Lee in Seoul; Editing by Miyoung Kim and Jacqueline Wong)

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