Summary:

In this episode, we explore the potential consequences of the Dutch government's export controls on ASML, the sole manufacturer of EUV lithography machines, which are essential for producing the most advanced semiconductor chips. While these controls were intended to hinder China's progress in the chip industry, they have significantly impacted ASML's revenue, leading to concerns that they may be counterproductive. We highlight the intricate relationship between technology, politics, and economics in the global chip market, where the quest for dominance is intertwined with geopolitical considerations.

Questions to consider as you read/listen:

What are the political and economic implications of the US CHIPS Act and its impact on global semiconductor manufacturing?

How does the current geopolitical landscape influence the future of semiconductor production and the global technology race?

What are the potential consequences of the Dutch government's export controls on ASML's lithography equipment for both China and the global semiconductor industry?

Long format:

Is a key part of the goal of the CHIPS act showing cracks?

Maybe.

Here’s why:

BACKGROUND

Oversimplified, the US CHIPS Act was passed specifically with one main goal in mind, the wrestle back from the world our domestic ability to make start of the art semiconductor chips that will be a major part of the future economy and the key component of AI. This is part of the US’s decoupling and reshoring aims to reduce and return to America manufacturing and reduce our reliance on speed out supply chains (read as get us out of dependence of China).

It has long been my position that the person who wins the chip battle and the one who wins the race for AI will be the top of the global value chain.

Concurrent with the passage of the CHIPS Act which sought to fund the decoupling and restoring by a combination of unprecedentedly large direct taxpayer infusions of cash and also even larger tax credits, the US Commerce Department issued an exceptionally broad set of prohibitions on exports to China of semiconductor chips and other high-tech equipment.

The US was all in to trying to ban (or really delay) the tech that is necessary for chip design, fabrication and use from China.

This is where it gets interesting. The single most vulnerable point of pressure to forever stop China from getting to the top of the chip race is in lithography.

LITHOGRAPHY

Very much oversimplified, Lithography is a process that transfers circuit patterns onto a silicon wafer to create semiconductor devices like microchips and integrated circuits. The lithography process requires precise alignment and high-resolution lenses to create intricate circuit patterns. Different types of lithography systems are used for different layers of the wafer.

In semiconductor manufacturing, lithography is like high-precision "printing" for tiny circuits on a silicon wafer, which will eventually become a chip. Here's how it works in basic terms:

Coating: First, the silicon wafer is coated with a light-sensitive material called photoresist.

Patterning: A laser or light source shines through a "mask" or "reticle" that has the desired circuit pattern. This projects the pattern onto the wafer, similar to how a slide projector displays an image on a wall.

Developing: The light changes the chemical structure of the photoresist where it hits, so after exposure, the wafer is developed to reveal the pattern in the photoresist layer.

Etching: Finally, the exposed or protected areas (depending on the type of photoresist) are etched away, leaving a precise, tiny pattern on the silicon wafer.

This process is repeated multiple times, adding layers until the full circuit structure is built up, with each layer helping to create the complex paths and components that make the chip work.

ASML

There is only one company in the world that makes the highest level of lithography devices that must be used to make the state of the art semiconductor chips: ASML.

ASML (ASML Holding N.V.) is a Dutch multinational corporation that designs and manufactures lithography machines used to make computer chips:

ASML is a leading supplier of lithography technology to the semiconductor industry. Their machines use light to expose circuit patterns onto a semiconductor wafer, a process called photolithography. This allows chipmakers to increase the number of transistors on a silicon area, which results in faster, more powerful, and more energy efficient chips.

What they make

ASML's products include:

Extreme ultraviolet (EUV) lithography systems: ASML is the only company that makes EUV lithography machines, which are used to print the most advanced microchips. EUV lithography uses a short wavelength of light to print complex designs on microchips. ASML's EUV systems include the EXE systems, which have a numerical aperture (NA) of 0.55 and provide higher contrast.

DUV lithography systems: ASML also makes DUV lithography systems.

Refurbished systems: ASML refurbishes classic lithography systems, such as the PAS 5500 and TWINSCAN

You can only make 5nm chips or lower with EUV machines. You cannot use DUV machines other than get under 7nm. Commercially China makes 7nm chips right now. The state of the art is 3nm chips. However Rapidus (Japan) has announced that their 2nm commercial scale fab center is about 80% and that they will be tooling for 1.4nm chips shortly thereafter.

Again, it must be emphasized that currently only ASML makes EUV lithography systems.

The Dutch government January 2024 seemed to agree banning ASML from doing a lot of its preferred business in China.

The solution to stopping or delaying China in the chip war was simple. ASML doesn’t sell to China. Pats on the back and roll out the Mission Accomplished sign right?

October 15, 2024 CHANGES EVERYTHING

ASML accidentally released its third-quarter results a day early in error. And it wasn’t pretty. The company said it expects 2025 net sales of 30 billion euros and 35 billion euros ($32.7 billion and $38.1 billion), in the lower half of a range it had previously provided. Net bookings for the September quarter were 2.6 billion euros ($2.83 billion), the company said — well below the 5.6 billion euro LSEG consensus estimate. ASML’s share plunge saw the critical semiconductor firm lose 49.2 billion euros ($53.6 billion) in market capitalization in a single day. A lot of analysts blamed the Dutch export ban for the ASML stock drop and loss in valuation.

OUTCOME

According to news reports today (October 29, 2024) the Netherlands are rethinking the wisdom of export controls on China given that their best source of future relevancy in the semiconductor world took a very big hit.

Will money beat out politics? Time will tell.

Sources:

https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/press-releases/3158-2022-10-07-bis-press-release-advanced-computing-and-semiconductor-manufacturing-controls-final/file

https://www.bis.doc.gov/index.php/about-bis/newsroom/2082

https://www.asml.com/en/company/about-asml#:~:text=ASML%20is%20one%20of%20the,essential%20component%20in%20chip%20manufacturing

https://www.cnbc.com/2022/03/23/inside-asml-the-company-advanced-chipmakers-use-for-euv-lithography.html

https://www.asml.com/en/products/euv-lithography-systems

https://www.asml.com/en/news/stories/2022/busting-asml-myths#:~:text=ASML%20is%20the%20only%20company,cargo%20planes%20and%2020%20trucks.&text=ASML%20system%20integration%20engineers%20work%20on%20an%20EUV%20lithography%20system

https://ttconsultants.com/advancing-microchip-technology-the-role-of-extreme-ultraviolet-lithography-euvl/

https://finance.yahoo.com/news/china-hit-hard-dutch-export-093000191.html#:~:text=ASML%20is%20barred%20from%20shipping,due%20to%20a%20heavy%20backlog.&text=Copyright%20(c)%202024.,All%20rights%20reserved

https://www.forbes.com/sites/siladityaray/2024/01/02/dutch-government-blocks-exports-of-asmls-chip-making-machines-to-china/#:~:text=Tangent,former%20President%20Donald%20Trump's%20administration

https://finance.yahoo.com/news/china-hit-hard-dutch-export-093000191.html#:~:text=ASML%20is%20barred%20from%20shipping,due%20to%20a%20heavy%20backlog.&text=Copyright%20(c)%202024.,All%20rights%20reserved

https://www.scmp.com/tech/tech-war/article/3278535/china-hit-hard-new-dutch-export-controls-asml-chip-making-equipment#:~:text=New%20restrictions%20announced%20by%20the,many%20semiconductor%20plants%20in%20China&text=Mainland%20semiconductor%20factories%20could%20face,citing%20a%20Dutch%20government%20statement

https://thediplomat.com/2024/10/the-fab-4-allies-are-pushing-back-on-us-export-controls-on-china/

https://www.theregister.com/2024/10/21/asml_setbacks/#:~:text=Despite%20its%20critical%20role%20in,in%20years%20%E2%80%93%20click%20to%20enlarge

Get full access to GeopoliticsUnplugged Substack at geopoliticsunplugged.substack.com/subscribe

EP49: Is a key part of the goal of the CHIPS act showing cracks? 12:51 Share

Geopolitics Unplugged

Shownotes Transcript

EP49: Is a key part of the goal of the CHIPS act showing cracks?