ASML Still Cooperating With China. Now the Company Faces Export Restrictions
Hello everyone! My name is Dasha, I work at MTS and I like to follow the news in the IT world. Today I want to continue the topic of lithographers and China.
Several months ago, ASML (a Dutch company, the largest manufacturer and supplier of lithographic equipment in the world) was forced to stop shipping modern lithographs to China under pressure from the United States. But the cooperation did not stop completely. Now ASML is under threat of export restrictions from the United States. A similar situation has developed with the Japanese company Tokyo Electron – this is another supplier of equipment for the production of chips, which also continues to work with China. What is happening and what problems may arise for both companies? We discuss under the cut.
What are the restrictions?
It recently became known that the United States threaten sanctions against both ASML and Tokyo Electron. The main reason is the reluctance of both companies to completely stop cooperating with China. Over the years of work in China, Western suppliers of lithographs have acquired many clients. They buy equipment for billions of US dollars – no business would voluntarily give up such an opportunity.
ASML also services the equipment it sells, and not for free either. The company receives about 16% of its revenue from service. If it stops working with China entirely, it will lose a significant share of its income.
The US has the ability to influence foreign tech companies thanks to the rule FDPR (Foreign Direct Product Rule) It gives the United States control over the distribution of products from foreign companies if these products use American technology.
After the US filed claims against ASML and Tokyo Electron, their shares fell by 11% and 7.5%, respectively. In monetary terms, this is $46.7 billion in market capitalization for ASML. At the same time, shares of American lithography equipment makers Applied Materials Inc., Lam Research Corp. and KLA Corp. fell. The first one fell by 7.8%, which was the biggest decline since 2023.
Sanctions don't work well
The US introduced strict restrictions on the sale of modern chips and manufacturing equipment to China back in 2022. Since then, new ones have been added to the main list of export sanctions. But the Chinese are trying to get around the restrictions.
Companies from the PRC have acquired a lot of lithographic equipment. They are still doing so, despite export restrictions. China's partners do not want to lose trusted customers and, of course, a solid share of profits, so they try to maintain relations with the country. In addition, the PRC is upgrading the purchased obsolete equipment (it is not subject to sanctions) to produce more modern chips. We have already described the strategies that help develop the chip development and production industry and the most pressing problems in the post “The Curse of Lithographers: What Prevents China's Electronics from Actively Developing.”
China's electronics development and manufacturing industry is gradually developing despite the sanctions. The US sees that the restrictions are not having the desired effect and is trying to increase pressure not on China, but on China's Western partners.
Other ASML issues
Following the introduction of export restrictions and a ban on ASML providing service for its customers' equipment in China, ASML management began to consider changing jurisdiction. The Dutch government, understanding the importance of keeping ASML within the country, offered favorable terms for the business. In March 2024, Dutch officials announced that they were ready to allocate €2.5 billion to optimize infrastructure in the Eindhoven region as a guarantee for ASML. Minister of Economy Miki Adriaansens confirmed that the funds would be used to improve living conditions, education, transport links, and electricity grids in Eindhoven, the country's emerging technology hub where ASML is based. More government hinted to reduce taxes: “By taking these measures, we assume that ASML will continue to invest and will maintain its tax and effective headquarters in the Netherlands.”
Another problem for ASML is the lack of demand for the latest equipment. Without China, the list of key partners has shrunk significantly. The largest is the contract chip manufacturer TSMC (Taiwan). And now it has refused the new ASML scanners with a high digital aperture (High-NA). The reason is that they cost twice as much as the previous generation systems. The Dutch company spent a lot of money on developing the new product, and if there are no buyers, it may have serious financial problems.
In summary, ASML's reluctance to abandon its partnership with China seems entirely logical. It will probably continue to cooperate, albeit through intermediaries, one way or another. Threats from the US may have some effect, but it is unlikely to be significant.
