The United States is implementing unusual measures to restrict the sale of chip-making machinery to China, despite Chinese companies rushing to accumulate such equipment.
These are sleek, white boxes, approximately the size of large cargo vans, and they have become a focal point in the ongoing technology conflict between the United States and China.
As the United States seeks to slow down China’s advancement in technologies that could enhance its military capabilities, the highly intricate lithography machines used to print circuitry on computer chips have emerged as a critical bottleneck.
These machines play a pivotal role in China’s endeavor to establish its chip manufacturing industry. However, China currently lacks the technology to produce them in their most advanced iterations. This week, U.S. authorities have taken measures to impede China’s progress in this direction by prohibiting companies worldwide from exporting certain types of chip-making machines to China without obtaining a special license from the U.S. government.
This action could deal a substantial setback to China’s ambitions in chip manufacturing and represents a unique exercise of American regulatory authority. U.S. officials have asserted their ability to regulate equipment manufactured outside the United States, provided it contains even a single American-made component.
This decision grants U.S. authorities increased influence over companies based in the Netherlands and Japan, where some of the most advanced chip machinery is produced. Specifically, U.S. regulations will now prevent the shipment of certain machines employing deep ultraviolet (DUV) technology, primarily developed by the Dutch firm ASML, which holds a dominant position in the lithography market.
Vera Kranenburg, a researcher specializing in China at the Clingendael Institute, a Dutch think tank, noted that although ASML has indicated its intention to comply with the regulations, the company has already been grappling with earlier restrictions that prevented it from exporting a more advanced lithography machine to China.
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“They are naturally unhappy with the export controls,” she remarked.
After being thrust into geopolitics once again, ASML has been cautious in its response, stating in a recent announcement that it adheres to all the laws and regulations in the countries where it operates. Peter Wennink, the CEO, mentioned that the company would be unable to ship certain tools to just a few Chinese chip factories, resulting in lost sales in 2024 compared to 2023.
In a statement, Dutch foreign trade minister Liesje Schreinemacher stated that the Netherlands shares U.S. security concerns and maintains continuous information exchange with the United States but emphasized that each country makes its own decisions regarding export restrictions. She also pointed out the more lenient restrictions introduced by the Dutch government in June.
A spokesperson for the U.S. Department of Commerce declined to provide any comments.
ASML’s technology has played a pivotal role in advancing global computing power. The increasing precision of their machines, each costing hundreds of millions of dollars and consisting of tens of thousands of components, has enabled the miniaturization of chip circuitry, allowing for more computing power in smaller silicon chips.
This technology has given the United States and its allies a significant advantage over China. While Beijing invests heavily in the semiconductor industry, Chinese chip-making equipment lags behind that of ASML and other key machine suppliers, such as Applied Materials and Lam Research in the United States, and Tokyo Electron and Canon in Japan.
However, U.S. efforts to leverage this technological advantage against China are causing strain within alliances. European government officials increasingly agree with the United States about China’s geopolitical and economic threat but are cautious about restricting their own companies’ access to the lucrative Chinese tech market.
Dutch technology, in particular, has been under pressure from the United States for several years. In 2019, the Trump administration convinced the Dutch to block the export of ASML’s cutting-edge machines that use extreme ultraviolet technology to China.
After months of diplomatic pressure from the Biden administration, the governments of the Netherlands and Japan agreed in January to independently restrict sales of some deep ultraviolet lithography machines and other advanced chip-making equipment to China.
The United States and its allies perceived the sales of deep ultraviolet lithography machines as less of a national security risk. The chips they produce are not as advanced as those created with the most cutting-edge machines that power the latest smartphones, supercomputers, and AI models.
This position was tested when a Chinese firm used ASML’s deep ultraviolet lithography technology, along with other advanced machines, to surpass a technological barrier that U.S. officials had hoped to prevent China from reaching.
In August, the Chinese telecom giant Huawei unexpectedly released a new smartphone containing a Chinese-made chip with transistor dimensions rated at seven nanometers, just a couple of technology generations behind the latest chips made in Taiwan. Analysts have concluded that China’s Semiconductor Manufacturing International Corporation made the chip using Dutch deep ultraviolet lithography machinery.
Gregory C. Allen, a technology expert at the Center for Strategic and International Studies, a Washington think tank, noted that the new export control rules had been in development before the Huawei announcement but had emphasized the urgency of updated controls.
Mr. Allen explained that the controls wouldn’t immediately halt China’s most advanced chip manufacturers since they had already stockpiled a significant amount of advanced machinery. However, they would “dramatically restrict” their ability to produce the most advanced semiconductors, like seven-nanometer chips.
For the time being, ASML continues to do significant business with China. In its recent earnings report, ASML mentioned that sales to China accounted for 46% of its global total in the third quarter, well above historical levels.
Analysts at TD Cowen estimated that ASML’s China sales would reach 5.5 billion euros (about $5.8 billion) this year, more than double the total from the previous year. Next year, the new export controls could reduce the company’s China revenues by 10 to 15%, according to their projections.
Roger Dassen, ASML’s CFO, stated during the earnings call that most of the orders being fulfilled in the current year were placed in 2022 or even earlier and were primarily for machines producing slightly older chip types. He emphasized that all shipments were well within the bounds of export regulations.
For machines facing new U.S. restrictions, ASML will no longer be able to supply replacement parts or assist with servicing those systems, which is likely to lead to manufacturing issues for Chinese companies.
These costly machines rely on regular software and maintenance support to continue chip production, as highlighted by Joanne Chiao, a semiconductor analyst at TrendForce, a market research firm.
ASML is not the only equipment supplier affected by the latest restrictions. Other advanced machines necessary for producing cutting-edge chips, such as those from U.S. companies Applied Materials and Lam Research, are also subject to the new restrictions.
Lam reported a 48% increase in revenue from China in its first fiscal quarter as companies stockpiled machines for both mature and advanced chip production. The company had previously estimated that restrictions on sales to China would reduce revenue by $2 billion this year, and they indicated that the expanded rules issued this week wouldn’t materially change that estimate.
An Applied Materials spokesperson stated that the company is still assessing the potential impact of the new rules.
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