China vs. USA – Inconsequential acceleration

Dutch restrictions do not make much difference.

• The Netherlands is moving far faster than anyone expected in increasing restrictions on exports to China but restrictions put in place by Japan mean that this action by the Netherlands is inconsequential.
• The Dutch government is planning on enacting restrictions as soon as the end of next week (June 30^th 2023) which is surprising given that most commentators were expecting restrictions to come into force in 2024.
• This is because ASML had indicated to the market that restrictions would have no impact on 2023 sales and that an act of parliament would be required to bring restrictions into force.
• This appears not to be the case and it looks like ASML will be impacted by increased restrictions for the entirety of H2 2023.
• These new restrictions take aim at machines that enable manufacturing at advanced, but not leading-edge nodes.
• From the USA’s perspective, this means 18nm – 10nm and it has lobbied successfully to get both Japan and Netherlands to increase their restrictions on the export of equipment to China.
• This reflects a change in the USA’s stance on China in 2022 from keeping it 2 generations behind to stopping its semiconductor manufacturing progress dead in its tracks somewhere around the 20nm node.
• This is a large part of the policy to contain China’s rise as a global technological power which is the key battleground in the ideological struggle being played out.
• I have long had doubts that this was purely about curtailing the use of technology in its military as military semiconductors are typically made on much older and mature nodes where exports to China are not being restricted.
• There have long been restrictions on leading edge as the USA has the power to unilaterally stop China from going below 10nm, but above that it needs the cooperation of The Netherlands and Japan especially.
• This is because the USA does not have unilateral control over the 18nm – 10nm nodes and by only using equipment from The Netherlands and Japan, it is possible to build commercially viable fabs at these node sizes.
• I suspect that The Netherlands have moved surprisingly quickly in order to prevent the Chinese from buying everything they can lay their hands on before the restrictions come into force.
• This is surprising as historically, European countries have taken a more mercantile approach to China exemplified by the fact that China is Germany’s biggest trading partner.
• Apart from the timing, the restrictions put in place by The Netherlands are unlikely to have much effect because of the recent actions of Japan.
• Japan is imposing export restrictions on 23 types of equipment used to make semiconductors but instead of limiting it just to China, it has flipped the entire industry on its head.
• Instead of being able to ship to anyone unless told not to, now the Japanese companies can’t ship to anyone unless they are allowed to.
• This effectively gives the Japanese Trade Ministry life and death power over its semiconductor equipment industry which I suspect in the long run will be detrimental to its health.
• Unlike the Department of Commerce, where the presumption is a denial of a license, I assume the Japanese Ministry of Trade will operate under the presumption of granting licenses.
• Any other mode of operation would be highly detrimental to its own industry.
• This represents a bigger step than RFM and Alavan Independent were expecting from Japan and will really hinder China’s ability to manufacture chips at non-leading edge nodes below 20nm.
• This means that even if China was able to get hold of ASML’s machines it would not be able to do much with them because ASML’s machines are just one stage in a long process.
• The rest of the process is dominated by machines made either in Japan or the USA and being cut off from both means that ASML’s machines will become very expensive paperweights.
• This reinforces RFM’s and Alavan Independent’s view that China is in real trouble when it comes to semiconductors which will hamper and slow its rise as a technological superpower.
• This combined with its sluggish economy means that a recovery in its technology sector looks far away meaning that the few (including me) that are left in the sector continue to face a long wait.