ASML's China Business In Crosshairs Of Dutch Government: Semiconductors At Center Of East-West Tensions

The Netherlands' recently elected prime minister is expected to block ASML Holding NV ASML from assisting Chinese companies with repair and maintenance services.

Dutch company ASML is a top player in the semiconductor industry, and the only supplier of extreme ultraviolet lithography machines, which are required to manufacture the world's most powerful chips.

The move is expected to vastly affect China's ability to produce advanced semiconductors and could also hurt ASML's business, as it would deter Chinese companies from purchasing new ASML machines.

ASML stock traded higher earlier in the day Thursday, potentially in sympathy with NVIDIA Corp‘s quarterly results, which broadly boosted the chips and AI sectors. ASML stock ultimately ended the session slightly negative at $887.71.

What Happened: The government of Dick Schoof, who came into power in The Netherlands in July, will apparently not renew ASML's licenses to repair and maintain their products in China. This includes providing spare parts as well as having ASML employees stationed at Chinese companies, Bloomberg reported.

Semiconductor production lines are extremely complex and require fixed personnel to provide maintenance service. ASML has 10,000 customer support employees on staff, including service engineers and applications specialists, some of whom are permanently placed at foreign manufacturing companies.

So far, Chinese companies have not been able to purchase extreme ultraviolet lithography machines from ASML. The new rule would involve the servicing of ASML's deep ultraviolet lithography, which are second-in-line in the company's product roster and are held by Chinese tech companies like Huawei.

The latest EUV machine from ASML runs about $380 million, and the company has sold it to Taiwan Semiconductor Mfg. Co. Ltd. TSM and Intel Corp INTC, among others.

Read also: Semiconductor ETFs Rally Despite Nvidia Dip: 10 Chipmakers Defy The AI Darling’s Drop

Impact On ASML: China remains ASML's largest market, and has been so for the last four consecutive quarters, Bloomberg reports. Exports to the country represented 49% of the company's sales in the second quarter of this year.

While the company's exclusive product offer has allowed it to remain present in China's market despite export controls, new restrictions will further incentivize China to develop the technology it needs to manufacture advanced chips with fully local technology.

Chinese tech giant Huawei recently announced its latest chip series are in line with Nvidia's high-level A100 chips in some tests.

US Pressure Abroad Is Working: China is already under intense pressure from the U.S. to slow down its semiconductor industry. The Biden administration has released a battery of measures aimed at hampering China's growth in the sector and boosting the U.S. domestic industry.

The moves have been framed within the context of national security, as semiconductors are key parts in advanced military equipment and in the development of high-end artificial intelligence, among other applications that could influence the geopolitical power balance.

In 2022, Biden threatened to revoke citizen privileges to U.S. persons working with Chinese semiconductor companies, causing an exodus of American tech workers from the Asian nation.

Just last month, the government enacted an executive order restricting U.S. investment in Chinese high-tech sectors including semiconductors.

The moves are in line with other measures aimed at boosting the American domestic chip industry, including tax breaks and billion-dollar funding packages.

Recently, the Biden administration issued a new rule expanding U.S. powers to bar tech exports into China from countries such as Japan, the Netherlands and South Korea when U.S. technology is involved.

The U.S. used this rule to influence Schoof's upcoming decision, Bloomberg reported, as the Biden administration pushes to steer its allies against Chinese technological growth.

A spokesperson from China's Ministry of Commerce said this week that U.S. actions undermine "international trade order and rules" and disrupt the "security and stability of global industrial and supply chains."

While the Chinese government has invested more than the U.S. in boosting its domestic semiconductor industry, the country still lags behind in developing its own technology to become independent from foreign suppliers, many of whom are based in countries that align with U.S. political interests.

The largest semiconductor ETFs can be affected by geopolitical moves. These include VanEck Semiconductor ETF SMH, iShares Semiconductor ETF SOXX and Direxion Daily Semiconductor Bull 3X Shares SOXL.

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