A very specific insight from our OODA Network Stratigame – Scenario Planning for Global Computer Chip Supply Chain Disruption was the role the foreign production of Specialized Manufacturing Equipment (SME) built for the manufacturing of computer chips would play in the health of the computer chip supply chain for the U.S.  Of strategic concern:

1. 100% foreign production of SME built for semiconductor manufacturing  – on which all U.S. Chip Manufacturers are dependent.
2. The primacy of consumer good delivery during intermodal supply chain disruptions brought on by the pandemic would disrupt the shipment of SME to U.S. companies;  and
3. Component parts and subsystem availability would be impacted by pandemic supply chain shortages, causing a shortage of SME for semiconductor manufacturing.

ASML Holding, based in the Netherlands, is the sole provider of a vital technology used to manufacture computer chips:  The company is the largest supplier of photolithography systems and the only producer of extreme ultraviolet (EUV) lithography machines, which are used to etch circuits onto silicon wafers. The chips are later used by Apple, IBM, Samsung, and other tech giants. 

Since late 2021, we have covered ASML Holding’s Factory Fire in Berlin in January 2022 – which raised concern about supply chain shortages based on the impact of the fire on ASML’s manufacturing capabilities – and, in February 2023,  we provided an analysis of Semiconductor Supply Chain Espionage: Data Stolen from ASML’s Technical Repository for EUV Chip Machines.  

ASML Holding remains the vital tracking mechanism for indicators in the ongoing “Chip Wars” between China, the EU, the U.S., and Japan.

Following are our most recent OODA Loop News Briefs on ASML Holding, followed by a specific story on the market workaround ASML Holdings is considering with some of its hardware to continue to sell into the Chinese market.  We also provide further resources at the end of this post on the “Origins Story” of export controls which put ASML Holdings’ unique and vital EUV Chip Machines and Deep Ultraviolet Lithography (DUV) tool at the center of the global great power competition over semiconductor manufacturing, SME and component part supply chain availability. 

June 30, 2023

https://oodaloop.com/briefs/2023/06/30/asml-hit-with-new-dutch-limits-on-chip-gear-exports-to-china/

June 22, 2023

https://oodaloop.com/briefs/2023/06/22/asml-says-decoupling-chip-supply-chain-is-practically-impossible/

ASML May Release China-Specific Versions of Lithography Tools

• ASML is mulling the release of a special version of its deep ultraviolet lithography (DUV) tool that will comply with the latest U.S. export rules and that could be shipped to Chinese customers without a license, reports DigiTimes.
• The device would enable companies like SMIC and Hua Hong to make chips on 28nm-class nodes and thicker, but it will not allow them to use more advanced nodes.
• The lithography tool in question is the Twinscan NXT:1980Di, and currently this is the least advanced immersion scanner that TSMC still makes. The machine has 1.35 numerical aperture optics and is capable of <38 nm resolution, which is enough for 7nm-class and even more advanced nodes. In fact, this scanner — originally released in 2016 — it was used by TSMC to develop its 7nm-class process technology.
• Cutting down this device and increasing its minimum supported resolution to prevent SMIC and other Chinese chipmakers from creating sub-28nm process technology is theoretically possible.
• Keeping in mind that the lion’s share of SMIC’s revenue comes from production nodes that are thicker than 28nm, it is likely that Chinese companies would still be interested in procuring such tools.
• The latest export regulations mandate American firms and individuals to obtain licenses for exporting tools and technologies capable of manufacturing logic chips with non-planar transistors on 14nm/16nm nodes and below, 3D NAND with 128 layers or more, and DRAM memory chips of 18nm half-pitch or less.
• The latest Dutch export rules require ASML to obtain an export license to sell its Twinscan NXT:2000i scanners to Chinese companies.
• ASML has not officially created a limited version of the Twinscan NXT, but if the export regulations continue to restrict sales of advanced technologies to China, such a move seems likely.
• The same rules apply to non-American companies that export components from the U.S., which is the case with ASML and the Twinscan NXT:1980Di. (1)

The Backstory of the ASML Holding Chinese Market Export Controls Saga

Employees are seen working on the final assembly of ASML’s TWINSCAN NXE:3400B semiconductor lithography tool with its panels removed, in Veldhoven, Netherlands, in this picture taken April 4, 2019. Bart van Overbeeke Fotografie/ASML/Handout via REUTERS

March 2023

ASML, China customers haunted by uncertainty on new Dutch chip export rules

The Dutch government has not yet defined crucial aspects of new restrictions on chip-technology exports to China including whether ASML Holding NV (ASML.AS) can service chip-printing machines the company has already sold in the country.

“Those details still need to be worked out,” Dutch Trade Minister Liesje Schreinemacher told reporters on Thursday in Stockholm.

Schreinmacher’s remarks highlight that, while the plan announced by the Dutch on Wednesday puts the Netherlands in broad alignment with U.S. goals of undermining China’s ability to make cutting-edge chips, ASML and its Chinese customers still do not know exactly how it will affect their businesses.

The Dutch firm, Europe’s largest technology by market capitalization, had 14% of its sales in China in 2022 and has sold more than 8 billion euros ($8.46 billion) worth of chip lithography equipment in China over the past decade.

Companies that buy its machines enter into service agreements with ASML for ongoing maintenance. The “installed base” segment contributed about 25% of ASML’s worldwide revenue in 2022.

ASML itself has for now repeated its guidance for 2023 of flat sales in China of around 2.2 billion euros. That compares with 25% revenue growth overall, illustrating the likely impact of the restrictions.

An ASML spokesperson said on Thursday the company interprets the government’s remarks to mean that only a thin additional slice of its second-best product line will now be restricted in China, following a complete ban on its most advanced machines in 2019.

But there is an element of guesswork to that. “ASML is waiting for more information” the spokesperson said.

ING analyst Marc Hesselink calculated that the new Dutch rules could possibly affect products that account for 10% of ASML’s worldwide sales. However, that would be a worst-case scenario and the impact will likely be less.

That’s because ASML customers in China include South Korean chipmakers SK Hynix Inc (000660.KS) and Samsung Electronics Co Ltd (005930.KS), which will likely be granted licenses, as well as domestic Chinese companies like logic chipmaker SMIC and memory chip maker YMTC, which face U.S. export restrictions and may not be.

Schreinemacher said on Thursday the Dutch would grant licenses on a case-by-case basis and not follow instructions from Washington.

But Citi analyst Amit Harchandani said the Dutch restrictions appear comparable to those imposed on U.S. companies last year and ASML’s assessment of the impact is realistic.

For Chinese customers, the picture is less clear. “What we can say is that their ability to pursue leading-edge nodes development will be significantly curtailed,” Harchandani said.

Hesselink of ING predicted that most Chinese chip makers will now opt to focus on “trailing edge” or production of chips using slightly older technology. The Chinese may have a competitive advantage there, and ASML’s sales in China could even grow modestly.

Regardless, ASML will thrive outside China in the long run as chipmakers worldwide expand capacity, he said.

“The demand for ASML machines is not going to be impacted, it’s simply going to shift to a different region,” he said. (2)

Clues to the U.S.-Dutch-Japanese Semiconductor Export Controls Deal Are Hiding in Plain Sight

On October 7, 2022, the Biden administration upended more than two decades of U.S. trade policy toward China when it issued sweeping new regulations on U.S. exports to China of advanced artificial intelligence (AI) and semiconductor technology. These export controls were designed after consultation with key U.S. allies, but the United States originally implemented them unilaterally.  This was a major diplomatic gamble.

In the face of rapidly advancing Chinese AI and semiconductor capabilities, the United States wanted to move fast, so it was willing to take the risk of moving first alone. The United States has the strongest overall position in the global semiconductor industry, and it was by itself strong enough to reshape the Chinese semiconductor industry in the short term. Over the medium to long term, however, this move could have backfired disastrously if other countries, particularly Japan and the Netherlands, moved to fill the gaps in the Chinese market that the partial U.S. exit left.

For the full CSIS report, click here. 

April 2023

Japan and the Netherlands Announce Plans for New Export Controls on Semiconductor Equipment

This commentary serves as an update to a CSIS report, “Clues to the U.S.-Dutch-Japanese Semiconductor Export Controls Deal Are Hiding in Plain Sight,” which outlines details of the U.S.-Japan-Netherlands arrangement following the United States’ October 7 export controls. The Netherlands and Japan have both shared critical new details since publication of that report.

On October 7, 2022, the United States’ Bureau of Industry and Security (BIS) issued sweeping new controls on exports of advanced semiconductor manufacturing equipment technology to China. At the time of the announcement, the controls were unilateral. However, U.S. allies, particularly Japan and the Netherlands, are also key producers of the equipment used to fabricate advanced node semiconductors. Therefore, the long-term success of the policy depended on the United States securing Dutch and Japanese cooperation to control the types of semiconductor equipment that U.S. companies do not produce and to prevent Dutch and Japanese companies from backfilling the technologies that the United States is no longer willing to sell to China.

In January 2023, the United States, the Netherlands, and Japan reportedly reached a deal establishing advanced semiconductor equipment export controls. Two months later, Dutch and Japanese governments announced their intention to proceed with new export controls on a diverse suite of semiconductor technology that will cover China. In a decision likely intended to reduce the likelihood of Chinese retaliation, neither country explicitly named China as the target of the export controls, nor did they indicate that their actions were related to an agreement with the United States. This commentary summarizes and analyzes the recent Dutch and Japanese moves and China’s reaction so far.

For the full update from the CSIS, click here. 

China ‘greatest threat’ to Dutch economic security, Dutch Intelligence says

• China is the greatest threat to Dutch economic security, the Netherlands’ intelligence service said on Monday in an annual assessment of threats it said included commercial espionage and covert investments. 
• Citing Russia’s invasion of Ukraine, it also said Russia was a major threat to national security.
• While the Netherlands regards China as a major trading partner, its military ambitions are driving attempts to obtain Dutch and Western technologies, the agency known by its acronym AIVD, said in its 2022 annual report.
• “Chinese companies and knowledge institutions sometimes are valued partners for Dutch institutions. At the same time, the country forms the greatest threat to Dutch economic security,” the agency said.
• “China uses both legitimate investments, corporate takeovers and academic cooperation, as well as illegal (digital) espionage, insiders, covert investments and illegal export. Dutch companies, knowledge institutions and scientists are regularly victims of this,” the AIVD said.
• A prime target is the semiconductor equipment maker ASML (ASML.AS), based in the southern Dutch city of Veldhoven, which is the world’s dominant supplier of lithography machines used to make computer chips. China is ASML’s third-largest market.
• On March 8, the Netherlands’ government said it would introduce rules to restrict exports of semiconductor technology, broadly in line with U.S. regulation rolled out in October 2022 that was intended to hobble China’s ability to make its own semiconductors.
• The technical details of the policy are still unknown, but ASML said in March it expects a new licensing requirement for some of its advanced tools.
• The AIVD said in February Russia had spied on wind turbine farms and infrastructure in the Dutch North Sea with an eye to possible sabotage, and in 2022, the Dutch government expelled 17 Russian intelligence agencies. (3)

OODAcon 2023

https://oodaloop.com/archive/2023/02/21/ooda-almanac-2023-useful-observations-for-contemplating-the-future/

The OODA C-Suite Report: Operational Intelligence for Business Leaders

https://oodaloop.com/archive/2023/06/20/the-secondary-chip-and-hardware-markets-the-strategic-importance-of-legacy-chips/

https://oodaloop.com/archive/2023/02/21/semiconductor-supply-chain-espionage-data-stolen-from-asmls-technical-repository-for-euv-chip-machines/

https://oodaloop.com/archive/2022/01/05/the-asml-holdings-factory-fire-and-specialized-manufacturing-equipment-for-semiconductor-production/

https://oodaloop.com/archive/2023/06/23/the-june-2023-ooda-network-member-meeting-weighs-in-on-doing-business-in-china-and-hong-kong-planning-for-the-wrong-type-of-war-with-china-and-the-deeply-flawed-chips-and-science-act/

https://oodaloop.com/archive/2021/11/22/scenario-planning-for-global-computer-chip-supply-chain-disruption-results-of-an-ooda-stratigame/

https://oodaloop.com/archive/2023/04/08/five-more-reasons-japan-should-be-on-your-sensemaking-radar/

https://oodaloop.com/archive/2023/03/13/secure-global-and-domestic-it-supply-chains-and-the-future-of-emerging-technology-innovation/