At Glance
- China's tech growth faces challenges from new U.S. chip restrictions, with ASML at the center of the semiconductor market dispute.
- Despite a potential 10-15% drop in shipments to China, ASML predicts sustained demand; regulatory curbs might push China towards self-reliance.
- China's Belt and Road tech initiative could offset some ASML restrictions, hinting at new global tech partnerships amidst U.S.-China rivalry.
China and the Semiconductor Arena
Is China's unwavering commitment to technological innovation at risk given the latest U.S. chip curbs?
In the heart of the semiconductor market, Dutch semiconductor ASML occupies a commanding position, holding dominion over DUV lithography machines— indispensable instruments for chipmaking.
Their significance was underlined when ASML’s sales to China witnessed an unprecedented surge between July and September, a rush by Chinese chipmakers to secure equipment ahead of potential export controls from the U.S. or the Netherlands.
CEO's Insights on Export Restrictions
The leader of the prominent Dutch semiconductor equipment manufacturer, ASML Holding, shed light on the evolving landscape of export controls. On Wednesday, he disclosed that another of their products has come under the ambit of the recent US export restrictions.
In the aftermath of the announcement of the company's Q3 results, CEO Peter Wennink weighed in on the issue. He stated his anticipation for sustained demand from Chinese semiconductor manufacturers, even amidst the expanding list of export constraints, a result of both the US and Dutch governmental policies.
Further clarifying the implications of the new regulations, Wennink highlighted,
"one additional ASML product not covered by Dutch export licensing rules introduced this year can now be restricted under the new US export rules announced on Tuesday."
Market Dynamics and Predictions
Delving deeper into the product specifics, the focus shifts to ASML's 1980Di tool, a versatile piece of equipment instrumental in the production of a wide gamut of computer chips. These span from the avant-garde ones to the mid-tier and even the older generation chips.
ASML's market influence is undeniable. They are the frontrunners in the lithography equipment segment, catering to titans of the chip-making industry like Taiwan Semiconductor Manufacturing Co, Samsung Electronics, and Intel Corp.
Notably, Mainland China carves out a substantial portion of their market, only superseded by Taiwan and South Korea.
The surge in sales can be traced back to China's audacious pursuit of technological preeminence. A pertinent query that arises in this context is the potential repercussions of these fresh export regulations.
Will they serve as a roadblock in the intensifying Sino-U.S. tech rivalry? And could they potentially throttle China's upward technological trajectory?
The surge in Q3 sales to China mirrors the preemptive measures taken by Chinese clientele, bracing themselves for any eventualities due to the impending chip restrictions. This proactive approach is evident in the whopping 46 per cent of ASML's total sales from China in the recent quarter.
These numbers come in contrast to dwindling demands from other quarters and the clamour among Chinese clients to arm themselves with necessary equipment before the Dutch restrictions come into full force.
Wennink offered a prognosis on the sales trajectory, opining,
“I don’t think we will see a peak this year, I think there will be a significant amount of demand coming out of China for mature technology.”
Augmenting this sentiment, he mentioned that the new set of export regulations might dent approximately 15 percent of ASML’s sales in the Chinese market.
The Bigger Picture
China's Technological Ambitions are not to be underestimated. The rapid increase in sales comes in the wake of China's ambitious stride towards becoming a technological behemoth. But, how might the new restrictions impact the budding Sino-U.S. technological competition? And more importantly, could these restrictions effectively stymie China's technological growth?
Although a 10% to 15% drop in shipments to China is anticipated due to the revised U.S. curbs, ASML remains bullish about demand stemming from China.
“It’s … fair to recognize that most of the shipments that happened in this quarter are based on [orders] that we already had in 2022 and even the year before,” noted ASML Chief Financial Officer Roger Dassen.
A significant revelation, highlighting that while the momentum is in China's favour currently, there could be disruptions in the horizon.
However, another vital question arises here: As China ventures deeper into green energy and the digital transformation, will its booming semiconductor needs collide head-on with these new curbs?
Given China's voracious appetite for semiconductors, especially low- to middle-end chips, ASML believes most of their needs will remain untouched by export restrictions.
“The square inches of silicon that is needed to support that [transition] are massive,” observed Wennink, hinting at China's inexhaustible demand.
While the Chinese juggernaut shows no signs of slowing down, it remains intertwined with international regulations. A case in point is the Dutch export control rules unveiled in June, barring ASML from exporting certain DUV systems to China, pivotal for chipmaking. Such systems, albeit not ASML's most avant-garde tools, would have bolstered China's chipmaking prowess, as evidenced by SMIC utilizing 7-nanometer technology grounded on DUV lithography to aid Huawei in regaining some 5G mobile chipmaking capacity.
The Road Ahead
Could these regulatory shackles inadvertently encourage China to build its own technology infrastructure, thereby nullifying the very intent of these curbs?
Notably, no Chinese company is currently equipped to craft a machine paralleling the 1980Di's capabilities, emphasizing the country's reliance on ASML.
Yet, as Donnie Teng from Nomura Securities emphasized, the newest regulations will “definitely impact China’s expansion plans for mature 28-nm chips and create more uncertainties” for China's semiconductor sector.
How will China navigate this labyrinth of restrictions?
To answer this, we can look at China's recent Belt and Road technological hubs initiative launched by President Xi Jinping.
Aimed at fortifying China's tech infrastructure over the next decade, the initiative seeks to establish scientific and technological cooperation with partnering nations. With such an initiative in place, China might offset some constraints posed by the ASML restrictions. In essence, the U.S.-China geopolitical rivalry could catalyse novel partnerships for China, bridging the technological chasm.
The road forward, while curbs like the one on ASML pose immediate challenges, China's steadfast commitment to technological evolution, complemented by its Belt and Road technological hubs initiative, suggests that such restrictions might ultimately have a limited, superfluous effect.
The overarching query remains: Will the escalating U.S.-China technological contest spur innovative collaborations, reshaping the global technological landscape? Only time will elucidate the contours of this dynamic interplay.
