How trade conflicts are affecting ASML, a major supplier of lithographs

What are the difficulties?

The main difficulty is the trade conflict between the United States and China. Sanctions imposed by the United States against China have imposed restrictions on the supply of critical equipment, and this has caused orders for ASML products to almost halve. Sanctions have been imposed on China since 2019, but until now the Dutch company has managed to do business with businesses from this country. Recently the sanctions have been strengthened.

And this is a problem, especially considering that about 49% of all company sales in June 2024 were from China. Now this figure has dropped to 20%. Restrictions on the supply of equipment needed to make microchips are holding back the development of key industries in China and at the same time hampering ASML's revenue growth.

In the third quarter of 2024, ASML's net order volume was only 2.6 billion euros – significantly lower than 5.6 billion euros in the second quarter. Of these, 1.4 billion are sales of lithographs. Not bad, but even this positive result could not compensate for the pessimistic forecasts of analysts and investors for the future.

Publication financial report October 15, 2024 caused a collapse in ASML shares by 16%. These events also affected other chip makers such as Nvidia, Advanced Micro Devices (AMD) and Broadcom, whose shares also fell due to the overall negative trend.

The main reason for the sharp decline was the Chinese market, which used to be key for ASML. The company predicts a decrease in income from working with partners from China in the next few months immediately by 48%. The introduction of US sanctions on the supply of lithography equipment made it difficult to export to China, and this led to significant losses for the company. This trend is expected to continue in 2025 if the sanctions situation does not change.

Recent problems of ASML in the Netherlands: increasing pressure from within

US sanctions are not the only obstacle ASML faces. In the Netherlands itself, the company is under pressure from the government, which tightened export control rules. The authorities obliged ASML to obtain licenses for sales to other countries even of those lithography machines that are intended for less advanced technological processes, such as DUV lithography (deep ultraviolet). The Chinese were actively purchasing them.

The Dutch government's intention to tighten controls on equipment exports has caused concern among investors. Of course, everyone understands that this step was taken as part of an overall strategy to limit China's access to advanced technologies that can be used not only for civilian but also for military purposes. But the management of ASML and investors are not happy about all this.

The new rules make it very difficult to export to China and other countries, and this is also putting pressure on the company. Now ASML not only faces restrictions from the US, but is also forced to comply with stricter regulations at home. This increases transaction costs and leads to delays in order fulfillment.

Analysts about the future: what awaits ASML in 2025

ASML Chief Financial Officer Roger Dassin expressed cautious optimism regarding the company's future, saying that despite the current tensions, the Chinese market could still contribute up to 20% of ASML's total revenue in 2025. But many analysts are skeptical about such forecasts.

Bernstein Analysts indicate due to weakening demand and disappointing equipment sales results that fell short of expectations. Cantor has also expressed concern about the company's future, saying ASML's pessimistic forecasts, if realized, could have a negative impact on the financial performance of the entire semiconductor industry. However, they note that the artificial intelligence segment remains stable and even shows growth, which may partially compensate for losses in other segments.

China vs sanctions: how the country is looking for ways to become independent from ASML

Despite tough sanctions from the United States, China is actively trying to reduce its dependence on Western technologies and develop its own analogues. In April 2024, Chinese companies purchased equipment worth 2 billion euros from ASML, which became a temporary salvation for the Dutch corporation. But this jump in sales did not change the overall picture: with a complete ban on the export of advanced technologies to China approaching, ASML risks losing a significant part of its market.

In response to the sanctions, China began accelerating the development of its own lithography equipment. Chinese engineers have created an argon fluoride-based scanner that is capable of producing chips using the 65-nm process technology. Although the technology still lags significantly behind ASML's peers, which can produce chips with resolutions up to 7nm, China is making significant strides towards reducing its dependence on Western suppliers.

However, China's own developments are not able to fully replace ASML products in the near future. Chinese companies are now focused on creating chips using older processes while continuing to purchase lithography machines that are not subject to US export controls. With further tightening of sanctions, even these purchases may be at risk.

But if the Chinese manage to develop a completely (or almost completely) autonomous electronics industry, then ASML and other Western companies will have really serious problems. After all, no other country has such a huge number of buyers of modern equipment for the production of chips and the microcircuits themselves, as in China.

What's the result?

Despite all the challenges, ASML still holds a key role in the global microchip supply chain. Forecasts for 2025 remain cautious, and much depends on how trade relations between the US, China and Europe develop. Analysts continue to monitor the situation, assessing the possible consequences for the entire semiconductor industry. So we wait.