Automation, digitalisation, and now artificial intelligence are driving one of the biggest long-term structural trends in the world today: the rise in demand for semiconductors. These trends are driving an unprecedented boom in chip production.
ASML, the Dutch company that’s a leader in making advanced chipmaking equipment, reported its second-quarter results last week, and these were strong results, showing that their clients are thriving as demand for semiconductors picks up. Increased demand for ASML’s machinery to fabricate chips translated into very strong orders and revenues which beat market expectations.
However, ASML’s stock still declined after the announcement, and it was a significant move, dropping over 10% in one day. The fall was not due to anything reported in the numbers, it was due to investor worries about possible new US government restrictions on selling semiconductor equipment to China.
This fear spread to others in the sector, with Tokyo Electron, a Japanese equipment maker, falling 7%, and TSMC dropping 2% after Donald Trump suggested Taiwan should pay the US for defence.
ASML is already banned from exporting its most advanced technology to China, but China still made up nearly half of ASML’s second-quarter equipment sales, a significant jump from the usual 15-20%. Chinese companies are buying older machines to boost domestic production of less advanced chips. While this share should decrease as global demand rises, it’s still a big chunk of its business.
The share price move was overblown, in our view. It’s unclear what specific actions might come from any trade review in the US. Meanwhile, all of ASML’s future growth expectations are driven by its advanced lithography machines, which it doesn’t sell in China anyway. Tougher Chinese export regulations might slow this growth a bit, but they likely won’t stop it.
Other parts of the supply chain might suffer more from these global tensions. It’s not just high-end equipment makers like ASML and Tokyo Electron at risk; manufacturers of less advanced chips, such as Infineon and STMicroelectronics, might face more competition in China as local producers ramp up their own production in response to political pressures.
Looking back at history, industries on the cutting edge of technology often find themselves caught up in geopolitical issues. This was true for the British textile industry in the 19th century and the US aerospace industry during the Cold War. These industries thrived on innovation but had to constantly navigate the shifting political landscape. ASML’s situation is no different.
So, while ASML and the broader semiconductor industry are set for growth, they must keep an eye on geopolitical developments. Balancing technological advances with strategic foresight will be key to navigating these uncertain times and seizing the opportunities ahead.
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