Curtailing China Tech Ascent: In the ever-intensifying tech tug-of-war between the U.S. and China, the spotlight has now shifted to the intricate lithography machines that weave the neural pathways of computer chips. These machines are the lifeblood of China’s ambitions in chip manufacturing, but they’re missing the secret sauce to make them truly cutting-edge.
Recently, the U.S. pulled a bold move to hinder China’s progress by slapping restrictions on global companies itching to ship certain chip-making machines to the Middle Kingdom. This isn’t your run-of-the-mill regulation; it’s Uncle Sam flexing his muscles globally, asserting control over equipment produced beyond its borders. It’s a power move, to say the least.
Now, let’s talk specifics. The new rules have a crosshair on companies in the Netherlands and Japan, homes to some of the most advanced chip machinery. I’m talking about the kind of gear that uses deep ultraviolet (DUV) technology, primarily churned out by the Dutch powerhouse ASML, which pretty much rules the lithography realm.
While ASML has shown a willingness to play by the new rules, they’ve already been dealing with earlier regulations that barred them from shipping top-tier lithography machines to China. So, let’s just say they’re not exactly thrilled about these export controls.
ASML’s technology is like the secret sauce behind a tech revolution. Picture this: machines with tens of thousands of components, costing a pretty penny, allowing chips to shrink and become more potent. These machines are the backbone of the digital age, and they’ve given the U.S. and its allies a power card to play against China.
But this power play seems to be causing some diplomatic wrinkles. Europe is nodding along with the U.S. on the whole “China is a geopolitical and economic threat” thing, but they’re cautious about kneecapping their own companies in the process. China, after all, is a tech goldmine.
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This tussle, especially concerning Dutch tech, has been brewing for years. The U.S. managed to persuade the Dutch to block shipments of ASML’s top-notch machine, which uses extreme ultraviolet technology, to China in 2019. The latest chapter in this saga includes a January agreement between the Netherlands and Japan, pledging to independently slow down shipments of deep ultraviolet lithography machines and other advanced chip-making gear to China.
Up to this point, deep ultraviolet lithography machines were viewed as less of a national security threat, mostly because the chips they produced were less advanced than those cranked out by the cutting-edge machines, powering your brand-new smartphone and supercomputers. But this view was put to the test when a Chinese company, thanks to ASML’s deep ultraviolet lithography tech, hurdled over a technological barrier the U.S. had hoped to keep China from reaching.
Huawei, the tech giant, threw a curveball by releasing a smartphone with a Chinese-made chip that was just a couple of tech generations behind the latest chips from Taiwan. Analysts have their bets on China’s Semiconductor Manufacturing International Corporation for making this chip, using Dutch deep ultraviolet lithography machinery.
The backstory here is that the wheels were already in motion for these export controls before Huawei’s surprise. It merely added fuel to the fire. These controls won’t immediately knock out China’s top-tier chip-makers; they’ve stocked up on their equipment. However, they’re going to feel the pinch when it comes to producing the most advanced semiconductors, like those nifty seven-nanometer chips. It’s a waiting game now.
But back to ASML. Despite the hurdles and restrictions, they’re still raking in the business from China. Their recent earnings report painted a picture of surging sales to China, accounting for a whopping 46% of their global total, well above historical levels. Analysts are wagering that ASML’s China sales will hit 5.5 billion euros (that’s about $5.8 billion) this year, more than double last year’s haul. But here’s the catch: next year, the new export controls might trim down ASML’s China revenues by 10 to 15%, according to the pros at TD Cowen.
ASML’s CFO, Roger Dassen, chimed in to say that most of the orders ASML is wrapping up this year were placed back in 2022 or even earlier. These machines they’re sending are mostly aimed at making slightly older chips, so it’s not like they’re in violation of the export regulation limits.
But for the machines that have now landed on the U.S. restriction list, ASML can forget about supplying replacement parts or assisting with servicing. That means Chinese companies are bound to run into production hiccups at some point. These high-priced machines need a regular software and maintenance boost to keep the chip-making assembly line churning.
And ASML isn’t the only gear provider caught in this web. Other top-tier machines essential for the most advanced chips, like those from U.S. companies Applied Materials and Lam Research, are now in Uncle Sam’s restricted zone.
Lam, for one, reported a 48% jump in revenue from China in its first fiscal quarter, as companies went on a shopping spree, stockpiling machines for making both mature chips and cutting-edge products. The word is still out on how Applied Materials will fare, as they’re still figuring out the implications of these new rules.
In the grand scheme of the tech clash, it’s safe to say this is just another round in the fight for tech supremacy. It’s a game that’s shaping the future of the global tech arena, and it’s not over yet.