What is the impact of the Netherlands' revocation of ASML's lithography machine export license to China on my semiconductor industry?

Executive Summary:

On the second day of the new year, the Dutch government revoked ASML's license to export some chip manufacturing equipment to China. As early as the beginning of 2023, the United States, the Netherlands, and Japan, the three most important countries in the lithography machine industry chain, reached an agreement to ban the sale of mid-to-high-end lithography machines in some countries. Following the United States' ban on the sale of lithography machines to China, isn't the Netherlands afraid of lifting a stone to shoot itself in the foot? What impact will the ban on the sale of some ASML's mid-to-high-end lithography equipment have on China's chip industry?

On the second day of the new year, the Dutch government revoked ASML's license to export some chip manufacturing equipment to China.

On October 2, the second day of the New Year, AFP reported that ASML, a global microprocessor manufacturing giant and Dutch semiconductor giant ASML, issued an announcement saying that under the pressure exerted by the United States on this strategic industry, the Dutch government revoked the company's license to export some chip manufacturing equipment to China, and the company's advanced chip manufacturing equipment has been banned from being exported to China. The move will have an impact on a small number of ASML's customers in China.

U.S. officials contacted the Dutch government after Chinese imports of ASML's lithography machines surged more than 10-fold in October-November, AFP reported. A Dutch diplomatic spokesman said the export licence was assessed on a case-by-case basis based on Dutch national security.

Lithography means that the wafer is placed into the lithography machine, and the light is projected onto the wafer through the reticle, and the optical system of the lithography machine shrinks the designed circuit pattern on the reticle and focuses the photoresist on the wafer. When light hits the photoresist, a chemical change is created that prints the pattern on the reticle onto the photoresist coating. Therefore, photolithography is crucial in the chip manufacturing process. The lithography machine is also known as the crown jewel of semiconductors.

2. As early as the beginning of 2023, the United States, the Netherlands, and Japan, the three most important countries in the lithography machine industry chain, reached an agreement to ban the sale of mid-to-high-end lithography machines in some countries.

At the beginning of 2023, the United States, together with the Netherlands and Japan, reached an agreement to impose export restrictions on advanced chip-making equipment, aiming to prevent Eastern countries from obtaining the most advanced chips that can be used in weapons manufacturing and high-tech products.

On June 30, 2023, the Dutch government issued new regulations on export control of semiconductor equipment in accordance with the intention reached with the United States and Japan at the beginning of the year, which stipulated that ASML needed to apply for an export license from the Dutch government before it could sell the most advanced immersion DUV system (i.e., TWINSCAN NXT:2000i and subsequent immersion lithography systems).

The U.S. Department of Commerce issued a final rule on semiconductor export controls to China on October 17, further tightening export restrictions on artificial intelligence-related chips and semiconductor manufacturing equipment to China.

China's imports soared for the second month in a row after the Commerce Department expanded its export control rules against China in October. In the section on lithography systems, the U.S. repealed the de minimis rule applicable to certain deep ultraviolet (DUV) tools, which set a higher standard than the Dutch government's export rules, which went into effect in September.

However, it should be noted that:

First, the export control of the United States, Japan and the Netherlands is not for all immersion DUV lithography systems, but only for deposition equipment and immersion lithography systems. It can also be seen from ASML's statement that the new U.S. regulations also restrict specific models of mid-to-high-end DUV immersion lithography machines.

Second, if any product of a non-U.S. company contains at least 25 percent U.S.-origin technology, Washington is given long-arm jurisdiction over that product by the rules.

Third, ASML CEO Peter Wennink said that the latest restrictions are not aimed at the vast majority of Chinese customers. Because these customers are involved in mature or traditional semiconductor manufacturing that is outside the scope of the embargo, that is, semiconductor manufacturing of 28nm and above.

3. Following the United States' ban on the sale of lithography machines to me, is the Netherlands not afraid to lift a stone to shoot itself in the foot?

Founded in 1984 as an innovation leader in the global semiconductor industry, ASML provides hardware, software and services for panoramic lithography solutions to help chipmakers engrave patterns on silicon wafers in batches. At the same time, ASML is also the only lithography machine manufacturer in the world that uses extreme ultraviolet light (EUV), and all chip manufacturing plants in the world must purchase ASML's equipment.

In fiscal 2022, ASML's global net sales amounted to €21.2 billion.

According to the latest financial report released by ASML on October 18, 2023, in the first three quarters of 2023, ASML's global sales reached 20.3 billion euros, and the revenue from China was about 5.3 billion euros, accounting for about 26%. Gross margin is between 50% and 51%. Sales for the full year are expected to reach more than 27 billion euros, an increase of 30 percent.

At that time, ASML also said at the earnings conference that although the global semiconductor industry as a whole was at the bottom of the cycle, up to that time, ASML was still in a state of insufficient production capacity, because ASML still had unproduced orders of 35 billion euros at that time, equivalent to its annual production capacity. Overall, ASML's lithography equipment is in short supply.

The new export control policy, according to ASML's disclosure in China, will only have an impact of 10%-15% on sales in China, affecting sales by about 7-1 billion euros. This is equivalent to 2.6%-3.7% of ASML's annual sales revenue as a whole.

So Dutch ASML AG ASML said the export restrictions would not have a material impact on the company's financial prospects. ASML shares closed down 2.8% on the Amsterdam Stock Exchange on the 2nd amid the rise in the Dutch stock market composite index (AEX).

4. What is the impact of banning the sale of some ASML's mid-to-high-end lithography equipment in China on China's chip industry?

According to Wang Wenbin, spokesman for the Ministry of Foreign Affairs of the mainland, the ban on the sale of some mid-to-high-end lithography machines to China seriously violates international trade rules, seriously damages the global semiconductor industry pattern, and has serious consequences for the security and stability of the international industrial chain and supply chain. In fact, it will have a certain impact on our chip industry chain and supply chain.

First, because the ban on deposition equipment and immersion lithography systems is mainly reflected in high-end chip manufacturing.

From the perspective of equipment value, the banned equipment accounts for 10%-15% of the total demand for lithography equipment in the country. The impact of this piece must be very large, because it is unique and irreplaceable. The accumulation of online rumors or something, as well as the online rumors that Huawei has overcome difficulties or something, are all fallacies to confuse the public. Otherwise, logically speaking, there is no need for the spokesperson of the Ministry of Foreign Affairs to criticize the decision of the United States and the Netherlands to ban sales.

Second, we are worried about the expansion of the scope of the ban in the Netherlands, and we have also imported a batch of lithography equipment in advance.

On December 22, 2023, the South China Morning Post reported that mainland imports of Dutch chip-making equipment surged tenfold in November after the United States tightened restrictions.

In November, China imported a total of 42 lithography systems worth $816.8 million. Among them, 16 key chip manufacturing lithography systems were imported from the Netherlands, worth $762.7 million, a year-on-year increase of 10 times. Another 15 are from Japan. Japan is home to the headquarters of industry heavyweights Canon and Nikon. Together, the Netherlands and Japan accounted for almost all of the mainland's imports of lithography machines last month. In October, the mainland imported 21 lithography systems worth $672.5 million.

The average unit price of our Dutch equipment imported in November was 46% higher than in October, suggesting that Chinese companies are continuing to acquire more advanced Dutch lithography systems, despite the U.S. efforts to thwart China's efforts.

Third, the installed capacity of ASML lithography equipment owned by the mainland is close to 1,400 units, which can fully meet the production of low-end chips.

We imported our first ASML machine in 1988, and by the end of 2023, we have imported a total of 1,400 ASML lithography machines and metrology machines. Therefore, in fact, we have no problem at all in the production capacity of low-end chips.

Fourth, China's lithography machine equipment accounts for less than 5% of China's production, and there is still a certain impact from the perspective of development.

The mainland government has also been pushing for years on the agenda of technological self-reliance, but as of 2021, less than 5% of the lithography systems used in China's semiconductor fabs were made in China, according to data provided by state-backed CanSemi at an industry forum in August 2023. This means that more than 95% of products must still rely on ASML, Canon, and Nikon for upgrades, post-maintenance, and repairs.

[Author: Xu Sanlang]