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January 25, 2023

ASML delivers bumper results but new US China sanctions could spell trouble

The Dutch tech giant is thriving despite US export controls on China's chipmakers. But that could be about to change.

By Matthew Gooding

ASML delivered a bumper set of financial results on Wednesday morning, with the manufacturer of chipmaking equipment beating market expectations and forecasting 25% sales growth for the year ahead. But escalating US-China semiconductor trade war could throw a spanner in the works, with one analyst saying Washington holds the ‘nuclear button’ which could disrupt the company’s future.

ASML delivered bumper financial results on Wednesday morning. (Photo by T. Schneider/Shutterstock)

Dutch business ASML reported revenue for the fourth quarter of 2022 of €6.4bn, up from €5.7bn in Q3. This meant the company’s total revenue for 2022 was €21.1bn, compared to €18.6bn in 2021. Net profit was down slightly for the year, at €5.6bn, compared to 2021’s €5.8bn.

The results were better than most analysts anticipated, and come at a time when many tech companies are struggling in the face of difficult economic conditions.

What is ASML and why does it make so much money?

ASML is the only company in the world capable of making the extreme ultraviolet (EUV) photolithography machines used in the manufacturing of semiconductors. As such, it supplies all the biggest names in the industry, from TSMC to Samsung to Intel.

Demand for these machines is high as many chipmakers have ambitious expansion plans, building new factories around the world to take advantage of subsidies on offer in the US and EU, both of which are keen to reduce their reliance on semiconductor manufacturers in South East Asia. The global chip shortage of 2021 highlighted this weakness in the chip supply chain.

In 2022, ASML sold 317 new lithography systems, compared to 296 in 2021, the results show, and the company expects demand to continue to grow in 2023 despite the global recession.

“We continue to see uncertainty in the market caused by inflation, rising interest rates, risk of recession and geopolitical developments related to export controls,” said CEO Peter Wennick. “However, our customers indicate that they expect the market to rebound in the second half of the year. Considering our order lead times and the strategic nature of lithography investments, demand for our systems therefore remains strong.”

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ASML and the US-China semiconductor war: trouble ahead?

ASML also sells machines to China, but has long been banned from exporting its most advanced systems to Beijing by US export controls designed to hobble China’s tech sector.

The US has ramped up these restrictions in recent months, but none of the new controls have impacted ASML as much as companies such as Nvidia and AMD, which have had to make significant changes to their operating models.

But this could be about to change as this week, US President Joe Biden and Dutch Prime Minister Mark Rutte reportedly discussed new restrictions which could stop ASML’s older deep ultraviolet (DUV) systems being shipped to Chinese clients.

Such a change could dent ASML’s revenue going forward, says Josep Bori, research director on the Thematic Intelligence team at GlobalData.

“ASML investors will be paying particular attention to the ongoing US-China trade dispute in 2023, as the company will continue to be constrained by the US’s export bans to China—both for EUV and DUV lithography tools—as non-compliance with the bans is not an option,” Bori said.

He adds that recent company statements “highlighted the uneven impact of the China export bans on ASML versus its US peers.” Bori continued: “This could lead some investors to believe ASML’s compliance with these bans is merely a matter of goodwill (and, ultimately, political pressure), and that it may be tempted to change position in 2023.”

ASML has a subsidiary Cymer, based in San Diego, which makes part of its EUV machines and puts the company within the US government’s jurisdiction. This means “Washington effectively holds the nuclear button,” Bori said. He explained: “The US has the power to significantly disrupt ASML’s EUV business if it does not comply [with] the export bans. Further, the impacts of such a scenario would not only affect ASML’s business in China—even if ‘de minimis rules’ may pose some complications.”

Bori added: “In the long term, GlobalData expects some manufacturing capacity to migrate from China to other regions, where ASML tools could be exported. However, short-term disruption is likely.

“The US export bans on chip technology transcends the semiconductor industry. In GlobalData’s view, this is about AI dominance, which underpins what many call the fifth industrial revolution, and, ultimately, about global economic leadership in the next few decades.”

Read more: China’s IT industry could grow rapidly despite US sanctions

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