Chips/ASML: Dutch ban leaves China unequivocally unequipped

When two superpowers fall out, lesser powers pick a side. The Netherlands is the latest to do so, as world tech bifurcates between the US and China. The Dutch government has mooted national security restrictions on chip technology exports. That aligns it with the US, whose anti-Chinese stance has momentum in the west.

The proposals did not name ASML. They did not need to. Everyone knows the Dutch company is the world’s largest advanced chip equipment supplier. The dependence of Chinese manufacturers on ASML increased in October when the US banned exports of its own advanced kit. 

The Dutch curbs would require companies to apply for licences to export their technologies. These would include “DUV” or deep ultraviolet lithography systems, which create tiny patterns essential to the early stages of chipmaking.

ASML machines dominate world chipmaking. China accounts for 15 per cent of its sales. But top-line damage would be shortlived. The company has an order backlog of more than a year. Lost demand from China will be replaced quickly as global chipmakers start construction of new plants in coming months. This year, ASML’s net sales are expected to grow at double the pace of 2022. 

The Dutch ban would have dire consequences for Chinese chip businesses, though. Their chances of making the most advanced chips without ASML machines are minimal. Even installed ASML equipment at Chinese groups such as Semiconductor Manufacturing International Corporation may become less useful. ASML has sold them more than €8bn worth of machinery in a decade. If Dutch restrictions preclude servicing and support, Chinese customers would take a further hit.

SMIC shares have moved little in the past year despite US curbs. A 60 per cent drop from a 2020 peak priced in much of the damage early on. But shares still trade at 23 times forward earnings, 50 per cent higher than Taiwan’s TSMC. Expect that steep premium to ebb in parallel with residual western support for Chinese tech.