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US authorities are reportedly urging the Dutch government to prevent a national tech champion from shipping critical equipment to Chinese customers.

Iain Morris

July 6, 2022

6 Min Read
ASML risks being sucked into US chips war on China

Most smartphone addicts have never heard of ASML, but the obscure Dutch company is as vital to the hi-tech industry as the Tasmanian poppy is to Big Pharma. Its lithography machines are the robot scribes of the semiconductor fab, etching the mazy lines of electronic circuitry that turn blank silicon wafers into advanced chips. At the cutting edge of what the industry calls extreme ultraviolet (EUV) lithography, ASML has no rivals.

Its monopoly status in such a critical market has catapulted ASML into the middle of the trade war between China and the US. The Dutch government has already denied ASML an export license for the sale of EUV equipment to SMIC, China's best-known semiconductor foundry. Its legal justification was provided by the Wassenaar Arrangement, a deal between 42 countries with democratically elected governments to restrict the sale of technologies with dual civil and military uses.

Figure 1: ASML's share price on the Nasdaq ($) (Source: Google Finance) (Source: Google Finance)

But the US reportedly wants an even more sweeping embargo. According to a Bloomberg story this week, it is leaning on Dutch authorities to block ASML's sales to China of older and more widely used products that fall under the category of deep ultraviolet (DUV) lithography. The outcome of that could be crippling for both China and ASML, whose share price on the Nasdaq fell almost 4% on July 5, the day the news broke.

Determined to have semiconductor self-reliance, China is still forced to spend billions on the DUV lithography equipment that only ASML and a couple of other non-Chinese companies can make. Last year, customers in China accounted for €2.74 billion (US$2.8 billion) of ASML's revenues, around 15% of the total. And the amount has risen sharply from about €1.4 billion ($1.4 billion) in 2019, when it represented about 12% of the total.

DUV shockwaves

A DUV ban would send shockwaves through a global semiconductor market already reeling in the aftermath of the pandemic. Lockdowns supported by government largesse meant countries were effectively printing money while little was being produced. The resulting imbalance between demand and supply has led to rocketing inflation and shortages of important goods, including the semiconductors needed for all manner of electronic gadgetry. Apple, a major consumer of chips, has estimated the full cost of supply chain disruption could hit $8 billion, equal to about 2.2% of last year's revenues.

While EUV equipment is needed for the most advanced chips, whose transistors can be measured in just a few nanometers (billionths of a meter), DUV tools support the manufacture of semiconductors more commonly found in everyday electronic items. The skew is apparent in ASML's financial updates. Last year, it sold just 42 EUV systems but as many as 267 DUV ones. In this market, Canon and Nikon, two Japanese manufacturers, provide alternatives to ASML. But if the US is urging the Netherlands to restrict DUV sales, it seems unlikely to ignore Japan, which also participates in the Wassenaar Arrangement.

The good news for ASML is that demand for lithography equipment has surged outside China, too. Overall sales soared one third last year, to roughly €18.6 billion ($19 billion). Numerous countries are now pursuing "technological sovereignty," said Peter Wennink, ASML's CEO, on a call with analysts in April. Noting that demand levels currently exceed ASML's capacity, he is considering investments that would allow ASML to ship as many as 600 DUV and 90 EUV systems in 2025. Announced at an investor day in 2021, the current target for that year is 375 DUV and 70 EUV systems.

Economic woes

But even before this week's news about China, some analysts sounded uneasy. Adithya Metuku of Credit Suisse is one who has flagged "concerns around the recession" and what a future slump in demand could mean for ASML and its plans. Although it hit financial targets for its recent first quarter, sales fell about a fifth year-on-year, to roughly €3.5 billion ($3.6 billion), and costs were up sharply. ASML's net income almost halved, to €695 million ($709 million). The order book is strong and ASML is guiding for sales growth of 20% this year, but executives acknowledge costs are also increasing.

"We're not immune to rising costs," said Roger Dassen, ASML's chief financial officer. "There is pressure on labor costs as the global job market for engineers is tight and there is competition for talent. Costs related to components in the supply chain are also increasing due to higher material costs, including additional fees to secure parts. Transportation costs have increased due to rising fuel costs and changing flight routes."

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The budget for capital expenditure has also been rising dramatically. After spending €901 million ($919 million) last year, ASML expects to invest €1.6 billion ($1.6 billion) in 2022. Meanwhile, wider concerns related to the economy, spiraling inflation and the possibility of a nasty recession have hit the stock. ASML's share price peaked at about $833 on the Nasdaq last August, up 123% over the previous year. Since then, it has fallen back to around $432.

Dependency on a few key customers in a handful of countries is arguably the biggest worry. South Korea and Taiwan – home to Samsung and TSMC respectively – generated nearly $13.6 billion ($13.9 billion) in sales for ASML last year, compared with $8.9 billion ($9.1 billion) in 2020. When a few chipmakers thrive, so typically does ASML. But a recession, combined with a semiconductor glut that some commentators foresee, would spell trouble.

As for China, a DUV blockade would make the government even more determined to build local expertise. Analysts, however, think China is years away from acquiring the skills and capabilities of ASML. Denied access, China's rulers might look even more aggressively at Taiwan, already equipped with the world's most advanced foundry equipment. A war there really would cleave the industry apart.

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— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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