ASML Sees Semiconductor Upturn Ahead, But China Export Restrictions Are A Risk

Even as the chip industry lifts itself out of the current deep downcycle, ASML is worried geopolitical developments outside its control could still have an unforeseen impact on business.

The Dutch manufacturer, currently the world's only supplier of extreme ultraviolet (EUV) photolithography equipment, says it saw continued demand for systems during 2023, and 2024 is shaping up to be a year of transition.

In ASML's latest annual report, CEO Peter Wennink says the biz grew sales by 30 percent during 2023 to €27.6 billion ($29.5 billion), and finished the year with a backlog of €39 billion ($41.7 billion) in orders. ASML also shipped the first modules of its most advanced High numerical aperture EUV EXE:5000 system.

"This stellar performance has been achieved against a backdrop of what turned out to be a real downturn in the semiconductor industry instead of the mild and short-term correction that many had forecast," he says in the report.

Current expectations are for ASML's net sales in 2024 to be broadly in line with those transacted in 2023, allowing the company to prepare for 2025 and 2026, which Wennink believes will be stronger years.

The semiconductor industry is currently working through the bottom of a downcycle, and demand for both advanced and mature semiconductors is increasing, driven by trends such as the green energy transition and AI.

A significant number of new semiconductor fabrication plants are being constructed around the globe, Wennink highlights in report, and he expects the semiconductor industry to double sometime during the next decade.

Many countries and regions are pushing for "technological sovereignty" to ensure security of supply and technological leadership in semiconductors, with developments such as the US CHIPS Act and the EU's European Chips Act delivering a burst in construction of new manufacturing facilities.

However, continued economic uncertainty also means that customers in some market segments have remained cautious, so the arrival and ramp-up of the expected recovery remain unclear.

List of restricted customers and the scope of the restrictions can change...

Geopolitics could still impact ASML's business, ASML warns in the annual report. The Dutch government announced new export controls on semiconductor equipment last year that came into effect in September. These focused on chip manufacturing tech such as ASML's most advanced deposition and immersion lithography systems.

The US government then updated its export controls with restrictions on sending even some mature lithography kit to customers in certain countries, including China.

These left ASML having to apply for Dutch export licenses for its most advanced DUV and EUV gear, plus US licenses for some mature systems destined for China. It is up to those governments whether or not to grant the required export licenses and to inform ASML of any further conditions that may be imposed.

The list of restricted customers and the scope of the restrictions are subject to change, ASML says. Customers in China represented 26.3 percent of its total net sales for 2023, so any further restrictions could whack its bottom line.

ASML continues to work with governments to help them understand the potential impact of current and future regulatory measures, the report says. Some of ASML's facilities, supply chain and customers are located in Taiwan, and the country has "a unique international political status".

Changes in relations between Taiwan and China, Taiwanese government policies and other factors could limit ASML's ability to service its Taiwanese customers, the report states. Taiwan represented another 29.3 percent of ASML's business in 2023.

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ASML is targeting 600 DUV and 90 EUV tools for 2025-2026, says CFO Roger Dassen, and the company plans to work more closely with suppliers to help prepare capacity.

"For the first time in our history, during 2024 we will pre-build and create our own inventory in order to prepare for the surge of demand that we expect in 2025," Dassen says in the report.

For Wennink, however, this is his final annual report. Having seen the company through some recent rollercoaster years, he is be stepping back as president and CEO at the company's 2024 AGM, to be succeeded by current chief business officer Christophe Fouquet. ®