Almost a year after the Netherlands introduced export controls on advanced semiconductor equipment — urged on by Washington — the country’s most important chip company is doing more business in China than ever.
ASML’s latest results, released last month, show China has been its single biggest customer for the last four quarters, with almost half of the company’s 11.5 billion euros ($12.5 billion) sales shipped there so far in 2024.
Eindhoven-based ASML is the world’s only producer of advanced lithography machines, a highly complex piece of equipment that allows semiconductor manufacturers to produce computer chips at a massive scale. Its dominant market position has placed the Netherlands at the center of U.S. efforts to deny China advanced chipmaking technology. At the urging of the U.S., the Dutch government has never allowed ASML to export its most advanced form of lithography machine to China — called extreme ultraviolet (EUV).
China’s emergence as ASML’s biggest customer could yet prove temporary, as it has partly been driven by a lack of orders from customers based elsewhere. Even so, investors are wary of its current success in China: ASML’s shares slumped 11 percent on the day its latest results came out, amid fears that Washington would push for more restrictive export policies, further disrupting the company’s business.
To date, the Dutch government has largely co-operated with the U.S. in its tech war against China. But ASML’s importance in providing jobs and economic growth at home could make the Hague reluctant to put further pressure on the company — particularly if Donald Trump, with his ‘America-first’ philosophy, returns to the White House later this year.
“If you prevent one country from receiving some kind of technology, then, in the view of ASML, you’re discriminating, which is against their strategy and their culture. And of course, the Dutch, they’re entrepreneurs, they just want to make money, and China is a huge market,” says Marc Hijink, author of FOCUS – The ASML Way – Inside the power struggle over the most complex machine on earth.
“From the Dutch point of view, there has to be something in return for not delivering these machines to China, and it’s not so clear what the U.S. has to offer in return if Donald Trump were to become president again,” Hijink adds.
Huawe’s Mate 60 Pro as seen on Huawei’s official website. Credit: Huawei
The U.S. government’s fears about China’s advances in chip technology heightened last year when Huawei unveiled its Mate 60 Pro smartphone, which boasted a seven-nanometer chip thought to be beyond China’s capabilities (chips are measured in nanometers, with the smallest seen as the most advanced).
Manufacturing such chips in large volumes is normally only possible with the kind of advanced lithography machines that ASML cannot sell to China.
Analysts say Huawei’s Chinese chip supplier Semiconductor Manufacturing International Corporation — better known as SMIC — was likely able to make such small chips using a technique called multi-patterning, which involves exposing a chip to a lithography machine multiple times. That process is costly and time-consuming, making it a doubtful long-term substitute for ASML’s most advanced machines.
Given the restrictions placed on ASML to date, it’s doubtful it will be able to export its top machines to China any time soon. In June 2023, the Dutch government introduced a license requirement for ASML to export its second-most advanced lithography machine — called deep ultraviolet (DUV) — which is capable of producing chips up to five nanometers (the most advanced chips in the world today are three nanometers).
Six months later, ASML announced that the Dutch government had partially revoked its license to export some models of its DUV machines, which had affected “a small number of customers in China.”
How, then, is ASML continuing to make money from China? To start with, shipments of its older systems — typically used to produce so-called ‘legacy’ chips larger than seven nanometers — are not restricted. Additionally, ASML continues to provide customer support for advanced DUV machines that Chinese companies bought before the new rules came into effect
What seems clear is that China will have limited production capacity vis-a-vis the rest of the world for leading edge fabrication for the foreseeable future.
John Lee, director of consultancy East West Futures
That is something U.S. officials have been pressuring their Dutch counterparts about.
“You need experts to handle these machines, so it would be like pulling the plug out of these machines,” says Hijink. “The Netherlands has always been reluctant about stopping servicing, because it would be a breach of contract.”
The Netherlands’ new prime minister — its former intelligence chief Dick Schoof — has reaffirmed its commitment to the NATO alliance and is likely to pursue a foreign policy that maintains the country’s friendly relations with the United States.
However, the Hague has its own economic interests at stake that could complicate any further U.S. requests for tightening export restrictions.
In March, the Dutch government announced it will invest 2.5 billion euros ($2.7 billion) in supporting the chip industry in Eindhoven, adding that it expects the investment “will lead ASML to continue to invest and base its operations in the Netherlands.”
“The Dutch government still has some difficulty moving away from the traditional open and free globalized trade perspective it always had,” says Tjeerd Ritmeester, a senior economic security and diplomacy consultant in Eindhoven. “Recently, the Dutch government has started to intervene more and more in the economy by creating space for ASML and other tech companies to grow. For the Dutch, this is really new and something we haven’t seen for many years.”
The prospect of the return of Donald Trump to the U.S. presidency, with his reputation for being indifferent to European interests, raises the likelihood of thornier negotiations to come.
“Under a Trump administration, there’s a big chance that these kinds of requests will become more unpopular, and the Netherlands might try to do more to oppose them,” says Ritmeester, although he adds that other geopolitical realities may make it hard to resist. “The European Union and the Netherlands need the U.S. on multiple fronts, not just on China, but also when it comes to Ukraine.”
The Dutch Ministry of Foreign Affairs told The Wire that the Netherlands is always in close contact with various partners on export controls, but declined to comment specifically on any recent discussions with the U.S. government. ASML also declined to comment on any discussions with the U.S..
“Export control is a matter of national security; the Netherlands ultimately bases its policy on national security,” a Dutch foreign ministry spokesman told The Wire. “The Netherlands assesses license applications on a case-by-case basis, by means of a risk assessment. Many factors are taken into account, such as the goods, the end users and the intended end use.”
In July, Reuters reported that the U.S. Commerce Department is planning to exempt American allies, including the Netherlands, from a broader application of U.S. export controls of semiconductor equipment being sent to China that is scheduled to be introduced in August. The Commerce Department declined to confirm the Reuters report to The Wire.
A further relevant factor is whether export controls on ASML can, in the long run, limit China’s chipmaking capabilities in the way the U.S. desires, if Chinese companies continue to adapt.
SMIC, the Chinese semiconductor company responsible for Huawei’s seven-nanometer chip, has seen its gross margins shrink in recent quarters, which may be due to its lack of access to ASML’s advanced machines, according to cell phone market researcher Richard Windsor.
“What seems clear is that China will have limited production capacity vis-a-vis the rest of the world for leading edge fabrication for the foreseeable future,” says John Lee, director of consultancy East West Futures. “However, there are estimates out there suggesting that what China already has in place with advanced node fabs could support volume production that would go a significant way towards meeting immediate needs in the Chinese economy and, presumably, China’s defense industrial complex.”
Aaron Mc Nicholas is a staff writer at The Wire based in Washington DC. He was previously based in Hong Kong, where he worked at Bloomberg and at Storyful, a news agency dedicated to verifying newsworthy social media content. He earned a Master of Arts in Asian Studies at Georgetown University and a Bachelor of Arts in Journalism from Dublin City University in Ireland.
