The US Is Killing the Most Valuable Tech Firm in Europe
And the Europeans are helping them do it. The Dutch government repeatedly goes along with demands from Washington that ASML, the most advanced chip making machinery company in the world, “de-risk” from China. The European energy crisis, fomented by Washington, simultaneously exacerbates power supply issues for industry in the Netherlands. And now the US is starting to unveil billion-dollar research centers that will aid ASML competitors across the Atlantic.
Trade Restrictions Hammer ASML
Shares of the Netherlands-based chip equipment maker plunged 16 percent in October —the company’s worst showing in a quarter century— and haven’t recovered. While stock prices aren’t the best gauge of company value, in this case it’s instructive as the reason for the drops is almost entirely tied to the effect of US restrictions on exports of its advanced chip manufacturing tools to China is expected to have on its sales.
“We all read newspapers, right? We all see that there is speculation around export control,” said ASML CFO Roger Dassen on an October call with analysts. “That is a driver for us to take a more cautious view on the China sales.”
ASML is the only company in the world that currently produces the extreme ultraviolet lithography (EUV) machines that can make cutting edge 5nm and 3nm chips. ASML has never sold its most advanced EUV machines to Chinese customers. Formal restrictions were put in place in 2019 to make sure the company couldn’t.
Yet Chinese companies are still able to get the deep ultra violet lithography (DUV) machines, ASML’s second-tier lithography systems that are needed to make chip circuitry. That access, however, is expected to be cut off soon. So China-based customers have been stockpiling ASML’s less advanced machines for months to get ahead of restrictions.
The Dutch government early this year started slowing the issuance of licenses for ASML to provide maintenance services to certain lithography machines in China.
In September, the Netherlands expanded export restrictions on ASML equipment. And now at Washington’s gentle request, the Dutch government reportedly plans to completely halt the company from maintaining the DUV lithography machines it has sold to China so far and forbid the selling of spare parts for the machines. There are reports that ASML has implemented “kill switches” in its EUV machines just in case the Chinese were able to get their hands on one in, say, Taiwan.
That’s not all. Last year the president of the Eindhoven University of Technology, a key source of ASML’s engineers, was questioned by the US ambassador to the Netherlands about the “large number” of Chinese students at the school. This pressure comes at the same time that ASML is so worried about its ability to find skilled employees that it is considering moving operations out of the country.
Beijing is understandably not happy about any of this. The Netherlands is going along with the restrictions despite Beijing’s warnings that it could respond by cutting ASML off “permanently” from the Chinese market. Here’s China’s Global Times:
If ASML loses the Chinese market, it will suffer significant economic losses. This loss could potentially lead to a decrease in ASML’s global market share and a shift in the balance of power in the semiconductor industry.
Reducing ASML’s presence in the Chinese market would also weaken its competitiveness in global research capabilities, potentially causing the Netherlands to lose its market-leading position in specific high-tech fields.
If the Dutch government made the decision to follow the US’ order, it will severely affect China-Netherlands relations in multiple fields. China is unlikely to stand idly by. It is expected to take corresponding counter-measures, such as imposing trade restrictions or seeking alternative suppliers, and reevaluating its cooperation with the Netherlands in more global areas…For those companies that follow the US in containing China, it will be challenging to return once they lose the Chinese market.
ASML currently holds a near-monopoly in the EUV market, with no significant direct competitors, but the Global Times also promised to out-innovate the company. Money certainly won’t be an issue as Asia FInancial points out:
Beijing is pouring tens of billions of dollars into its semiconductor industry as part of its vow to develop ‘new productive forces’ that will carry through its economy in future. The funding has meant that even though major chip firms like Semiconductor Manufacturing International Corporation (SMIC) and Huawei face low yields and significant costs in producing advanced chips with older DUV machines, they have still been successful at making significant headway.
According to an analysis by a Tokyo-based firm, China’s current chip capabilities are only three years behind Taiwan’s TSMC — the world’s leading contract chipmaker. Last year, ASML also raised the alarm about risks to its business from new chip curbs due to “new competitors with substantial financial resources, as well as from competitors driven by the ambition of self-sufficiency in the geopolitical context.”
Dutch Prime Minister Dick Schoof said last week he was still assessing the consequences of new China-targeted curbs on ASML.
As Schoof assesses the situation, the future is looking increasingly gloomy for Europe’s brightest tech firm. Here’s CNBC with a quick rundown of concerns:
Analysts at Bank of America said the firm faces a “sharp decline in China revenues.” They added that ASML’s forecast of China accounting for around 20% of its revenue in 2025, implies a 48% revenue decline year-over-year — more severe than the 3% they had anticipated.
Abishur Prakash, founder of Toronto-based advisory firm The Geopolitical Business, said that demand from China for ASML’s machines is likely to drop significantly as the firm is “severely restricted by export controls.”
“Like Intel, for whom China is the largest market, ASML is deeply reliant on China,” Prakash told CNBC via email. “For ASML, it is watching what is taking place with China as a potential restriction on business.”
“As the chip world is cut from China, ASML could see demand for its equipment drop — from China and elsewhere,” Prakash added.
Should ASML decide its China sales are too important for the company and that the restrictions are self-defeating, the US is prepared to step in with its foreign direct product rule. Here’s the Export Compliance Training Institute with the details on what that is:
How can the United States claim export control jurisdiction over an item that isn’t made in the United States, doesn’t contain any U.S.-origin content, and is traded between parties in other nations without ever touching U.S. territory?
That’s the idea behind the Foreign Direct Product Rule (FDPR), which was introduced in 1959 to place controls on the transfer of certain items made abroad with the benefit of U.S. technologies.
Stated as simply as possible, the FDPR allows the Department of Commerce’s Bureau of Industry and Security (BIS) to regulate the reexport and transfer of foreign-made items if their production involves certain technology, software or equipment. It does this by defining that technology, software and equipment as subject to the Export Administration Regulation.
Energy Crisis Hurts ASML
Lost in all the talk of the obvious fallout from the trade restrictions are quieter mentions of another factor damaging ASML: energy.
There are problems with electricity grid congestion that are affecting industrial power supplies in The Netherlands. One big reason behind the extreme gridlock is the energy war against Russia, which has caused a rapid increase in electricity demand. In 2022, the Dutch heat pump market passed one million installed units, with 57% year-over-year growth, as the country imposed a national ban on natural gas connections in new construction.
Additionally, the Netherlands is one of the hardest hit countries in Europe by the energy crisis:
There is no quick fix. From ABN AMRO:
Ultimately, these higher gas prices also affect industrial business results. The figure on the right above shows that the cost of energy and also the purchase of raw and auxiliary materials have been important determinants of the trend in the producer price index over the past two years. The sharp rise in the overall industrial producer price index in the Netherlands has been fuelled mainly by sharp price increases in raw material and energy-intensive industries, such as petroleum, chemicals, wood and building materials and basic metals. As energy, as well as other raw and auxiliary materials are important inputs for many industry subsectors, higher energy and raw material prices have undermined Dutch competitiveness. What is more, the uncertainties and risks in the global gas market will continue for some time. So, to become less vulnerable to the volatility of the gas market and further reduce import dependency, it remains important to further rationalise industrial gas consumption.
Again, this highlights the fallout from the decision on the part of the EU to reject cheap and reliable Russian pipeline gas. A minor disadvantage in energy costs turned into a critical liability, which increasingly has its companies looking to the subsidy-filled shores of the US for relocation or expansion.
The Dutch government allocated 2.5 billion euros to help shore up some of these competitive issues earlier this year, but that was less than half of what was needed, according to Jeroen Dijsselbloem, mayor of Eindhoven where ASML is based.
US Pours Subsidies into ASML Competition
Washington is funding a billion dollar research center for next generation EUV process technology, which is a direct challenge to ASML.
Announced on Friday, the American EUV Accelerator will be hosted at the Albany NanoTech Complex as the first CHIPS for America R&D flagship facility. The center will focus on extreme ultraviolet lithography, the most advanced and difficult step in chipmaking. Involved as one of the biggest beneficiaries of the largesse is US company Applied Materials which competes directly with ASML.
Billions more are expected for similar centers as the Albany location is just one of three the US is planning. The New York research facility will be using ASML machinery according to the Times Union:
NY CREATES, which operates Albany NanoTech, is installing a new ASML EUV machine called the EXE: 5200 High NA EUV scanner. It will be located in the new NanoFab Reflection building and will be one of just two in the world located at public research facilities.
A year ago, Gov. Kathy Hochul announced $1 billion in state funding to construct the new building and purchase the EUV scanner as part of a larger $10 billion EUV consortium that will include IBM and Micron, the memory chip company that’s planning a $100 billion manufacturing campus outside of Syracuse.
Meanwhile, Europe starts a trade war with China over subsidies. And the US is pressuring Brussels to start using sanctions against Beijing. Here’s the Brookings Institution:
Regardless of who wins the presidential elections, the EU is sure to face American expectations that it will implement economic sanctions against China, including new export controls, investment controls, and tariffs, to safeguard critical technologies and to curb China’s aggressive economic practices. The EU must define its economic security strategy, balancing member states’ interests with the need for a united front against China’s aggressive policies.
Brookings bemoans the fact that Germany is still reluctant to go along with an economic war against China and offers the following advice:
A full decoupling from China could incur severe costs for the German economy. Yet, a recent study suggests that losses could mirror those experienced during the global financial crisis and the COVID-19 pandemic—in that they would likely decrease after the first year and would be manageable overall.
Considering that Germany’s economy has grown 0.19 percent since the pre-pandemic fourth quarter of 2019, some might call that cold comfort. Nevertheless the Germans will likely come around after some more convincing.
If we recall back in 2022 after the passage of the US Inflation Reduction Act with its billions in subsidies for electric cars, batteries and renewable energy products and consumers who buy such American-made products, some in Europe were loudly complaining and threatening tariffs or subsidies of their own.
As EU trade chief Valdis Dombrovskis said at the time, however, there is “the danger of conflating the Inflation Reduction Act with our broader relationship with the United States.”
And so European officials quickly caved and decided to blame China and Russia instead.