ASML Warns That Excessive Export Controls Could Inflate Chip Costs

ASML Holding NV CEO Peter Wennink has warned that excessive control measures could lead to higher costs for chipmakers. This comes as the US asks allies from Japan to the Netherlands to help limit China’s access to critical semiconductor technologies.

‍
According to Bloomberg News, the Netherlands and Japan are close to joining a Biden administration-led effort to curb exports of semiconductor manufacturing equipment to China. This could potentially limit ASML's sales to Chinese customers, as the US seeks to undermine Beijing's ambition to build a self-sufficient supply chain.

‍
"If export controls are too restrictive, it could lead to reduced chip availability," Wennink told reporters at ASML headquarters in Veldhoven, the Netherlands on Wednesday after the company released its quarterly results. "This would also mean less efficient infrastructure and higher costs."

‍
ASML shares fell 1.8% to €604.9 ($657.16) at 1:10 p.m. in Amsterdam on Wednesday. This trimmed the recent rally that the shares had been on.
After ASML forecast better-than-expected first-quarter sales due to strong demand for its advanced chip-making machines, the company's stock price declined. This is despite the fact that export controls could threaten future growth.

‍
Wennink said that the borderless chip ecosystem will face hurdles and “it will not be as seamless going forward as it is today.” He added that while China will try to develop chip equipment domestically, the complex supply chain and know-how required to recreate advanced lithography machines will be a “massive challenge.”
Europe’s largest semiconductor equipment producer on Wednesday projected sales of €6.1 billion to €6.5 billion this quarter, which is higher than the average analyst estimate of €6.07 billion in a Bloomberg survey. This is good news for the company, as it indicates that demand for their products is strong.

‍
The semiconductor industry has been shaken up by the US government's efforts to restrict exports of cutting-edge technology to China, which could reduce overall demand. However, ASML has stated that demand for its most advanced products from other markets can make up for any revenue lost from China.
"We're businesspeople, not politicians," Wennink said in a transcript with the earnings release. "We just have to wait for the governments and politicians to keep talking and come to a reasonable solution."

‍
The company expects its sales to grow more than 25% in 2023 and gross margin to improve from the year before. This would be a significant improvement from the year before and would help the company to continue to grow. Wennink said that their customers are expecting the market to rebound in the second half. He added that considering their order lead times and the strategic nature of lithography investments, demand for their systems remains strong.

‍
Wennink has said that his company has "given up enough" with the pre-existing restrictions on the sales of its extreme ultraviolet lithography machines to China, in terms of possible new government restrictions on the sales of its chip-making machines. In the three months ended December, Dutch chip-gear maker ASML's sales were in line with analyst estimates at €6.4 billion. Net income came in at €1.8 billion, just ahead of analysts' forecast of €1.68 billion. The company continued to delay recognition for some deals in order to speed up delivery.

‍
ASML has said that it is targeting sales of up to €40 billion by 2025 and up to €60 billion by 2030. The company is one of the very few producers of the sophisticated lithography machines needed to make mid-grade semiconductors, and is the manufacturer of a unique piece of equipment needed to make the most cutting-edge chips.
"There may be some concerns about gross margins, but we expect the revenue beat to outweigh them," Barclays analyst Simon Coles said in a note to clients.

‍
Jefferies analyst Janardan Menon said in a separate note that ASML is well positioned for continued strong growth and margin improvement over the next several years. He expects the company to continue to outperform its peers and deliver strong shareholder returns.