A gigantic white cupboard – the size of a city bus – containing thousands of small inventions. The cost of this EUV machine: about 150 million euros each. A technological marvel that turned ASML from Veldhoven into a leading player in a geopolitical power game.
ASML sold 54 of these EUV machines last year, the most advanced variant of its lithography devices that produce computer chips. The United States has been trying for two years to block supplies of the lithography machines to China, hoping to slow the country’s economic and military progress.
Last weekend it was leaked via the Bloomberg news agency that the Netherlands, Japan and the United States have broadly reached an agreement on what these export restrictions will look like. Japan and the Netherlands are the only two countries that produce lithography machines.
1 What exactly has been agreed between the United States and the Netherlands?
Earlier this month, Prime Minister Mark Rutte and Minister of Foreign Affairs Wopke Hoekstra (CDA) visited US President Joe Biden. With ASML at the top of the agenda of the appointment, which lasted an hour. Last Friday, that consultation was continued in Washington by officials of the Dutch Minister for Foreign Trade Liesje Schreinemacher (VVD).
What exactly was discussed between the Netherlands and the US is anyone’s guess. Rutte emphasized on Friday afternoon during the press conference after the Council of Ministers that the government is “extremely reluctant” to communicate about the issue, which affects national security.
Sources from Bloomberg leaked that ASML’s current export restrictions will be further expanded. ASML is currently not allowed to supply the latest EUV machines to China, but this is still allowed for the so-called DUV machines. These devices allow China to make a wide variety of chips. The DUV machines are crucial to China’s chip production.
It is also unclear what exactly ASML will receive from America for ceasing exports to China. Minister Schreinemacher said on Friday that the Netherlands did not intend to simply agree to what the Americans want. “We don’t sign at the cross.” Negotiations on the precise details of the agreement are expected to continue for months.
2 Why are ASML’s machines so important?
Smartphones, data centers, new 5G technology: it all requires smarter and faster computer chips. ASML is the global market leader in the production of lithography machines that produce these chips. The sale of EUV and DUV machines earned ASML almost 15 billion euros last year, about two-thirds of its annual turnover.
The majority of the world’s chip production – 92 percent – is in the hands of Taiwanese chip manufacturer TSMC in factories that rely on ASML’s machines. Meanwhile, billions are being invested in new economic programs in both the United States and Europe to get their own chip industry off the ground. With these incentive programs, the demand for ASML machines will only increase further.
For example, the European Commission announced last year that it would invest 45 billion euros in the European chip sector. The US government did the same with the ‘Chips and Science Act’, a program worth 53 billion dollars (48.6 billion euros). The money will be used, among other things, to fund the construction of new chip factories, which should ensure that Europe and the US become less dependent on the production of chips in Asia.
3Can’t China just work around this?
China is currently six to ten years behind in chip technology. With the help of government programs, China is rapidly trying to catch up.
That’s not easy. ASML’s EUV machines consist of hundreds of thousands of parts, all coming from highly specialized suppliers with whom ASML has concluded exclusivity contracts. For example, ASML uses optical systems from the German lens manufacturer Zeiss. The largest lens in the EUV machine has a diameter of one meter and is ground precisely to the atom.
This is how ASML’s technology works: ‘The magic machine that China and the US are fighting over’
In short, the lithography machines are not devices that you simply unscrew and copy, but “the end of a chain”, as ASML CEO Peter Wennink described it last week during the publication of the annual figures. A place where all kinds of individual parts and inventions come together. For that reason, says Wennink, there is no fear at ASML that the machines will just be copied by a Chinese competitor.
Nevertheless, Wennink is also convinced that China will eventually participate seriously. “If they don’t get our machines, China will develop them itself,” Wennink recently told Bloomberg. “It will take time, but eventually they will get there.” To remain a world leader, ASML invests heavily in innovation. ASML will invest almost one billion euros in this in the coming quarter.
4Should ASML be concerned now that it is losing China as a market?
That seems to work in the short term. China accounts for a relatively small portion of ASML’s turnover. Last quarter, 9 percent of ASML’s sales went to China, up from 15 percent a quarter earlier.
Those who order an EUV machine now have to wait about eighteen months before ASML can deliver the machine. The company still has 40 billion euros in orders outstanding, it said last week. These are sometimes postponed, but the company has never experienced a customer canceling an order.
So there is enough demand – and that seems to be a good solution for ASML to absorb the loss of China. “If China disappears, there will still be enough customers in line,” said ASML’s chief financial officer Roger Dassen last week. “But in the long term, an important market will disappear.”
And with the lack of clarity about what exactly the Netherlands and the United States have agreed on, it is difficult to estimate the exact damage. Opposite The Financial Times investor associations Eumedion and VEB announced last weekend that they want more openness from the Dutch government about the restrictions imposed on ASML. According to the associations, the current secrecy means that investors cannot properly assess the exact extent of the problems for ASML.
So far, investors’ concerns have been pretty good. ASML’s share price has remained stoically stable in recent months under all the geopolitical pressure. On Monday, the share price fell by about 3 percent.