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Trade war

Exclusive: ASML chip tool delivery to China delayed amid US ire

Dutch company caught in crossfire of Sino-US feud for tech supremacy

Dutch company ASML, Europe's largest producer of specialized chipmaking machines, derives about 16% of its system sales from the U.S., and 19% of its sales from China. (Nikkei Montage)

TAIPEI -- ASML, Europe's largest manufacturer of specialized chipmaking machines, has fallen prey to Washington's desire to curb Beijing's technological ascent and delayed shipment of a crucial tool needed to develop China's semiconductor industry, the Nikkei Asian Review has learned.

ASML's move comes as the U.S. carefully scrutinizes all major companies in Chinese tech supply chains, such as Taiwan Semiconductor Manufacturing Co., the world's largest chipmaker, which supplies chips to Huawei, the Chinese tech company that the U.S. has accused of spying.

China's biggest maker of computer chips, Semiconductor Manufacturing International Corp., placed the order with ASML in April last year for its cutting-edge machine, which is needed to produce the latest, most powerful chips. But that shipment is now "pending later notice," three people close to the situation said.

As the world's sole supplier of the so-called extreme ultraviolet lithography chip tool, or EUV, the delayed shipment is a blow to Beijing's aspirations to achieve self-sufficient, technological supremacy. However, ASML's use of the word "delay" suggests that eventual shipment has not been ruled out.

"ASML has decided for now to hold back delivery of the EUV equipment as it does not want to make the U.S. government upset that it ships the most advanced chip tool to China" right now, said one of the sources with knowledge of ASML's thinking.

"But at the same time it [ASML] does not want to make China and its Chinese customers feel bad [about the delay] as that is its fastest-growing [tech] market," the source added. The delivery was previously scheduled for the end of 2019 with installation completed by mid-2020, the person said.

It is not clear whether the delayed shipment to China's SMIC by ASML, which has a production plant in the U.S., was due to direct or indirect pressure from American authorities, or because ASML was also seeking a renewed export permit from the Dutch government.

The company said that "a request for the renewal/extension of the export license for EUV to China is currently being processed by the Dutch government. Pending this process we cannot ship EUV to China."

The Dutch company's delicate position is mirrored by other companies in global tech supply chains, such as TSMC, which find themselves sandwiched between the competing geopolitical and commercial interests of their largest customers, which are often based in China or the U.S.

Around 16% of ASML's annual system sales of 8.3 billion euros ($9.2 billion) come from U.S. companies, such as Intel and Micron, which use its equipment to produce ever-smaller circuits on the most advanced computer chips and therefore need it to maintain technological leadership.

One-fifth of the components that ASML needs to build its machines are also made at its U.S. plant in Connecticut, one source said.

Against that, 19% of sales last year came from China, which is a faster-growing market, not least from clients such as Beijing-backed SMIC.

"All chip-related companies -- not only U.S. ones but also non-U.S. -- have become ever more cautious about shipping products to China and rogue states," said Chris Hung, a senior tech analyst at Market Intelligence & Consulting Institute. "After all, a lot of intellectual property, materials, and basic sciences are still controlled by the U.S."

SMIC declined to comment about the delayed shipment and said only that the project was still at the "paperwork stage." ASML said it did not comment on specific customer orders.

The European group, which is the world's most valuable chip equipment maker with a market capitalization of 104 billion euros, has become the latest global technology company to get caught in the geopolitical crossfire of Washington's tech feud with China.

As China's biggest contract chip manufacturer, SMIC is central to Beijing's desires to achieve technological self-reliance, especially in the manufacture of the advanced semiconductors needed to power artificial intelligence, 5G networks, advanced robotics and autonomous driving.

SMIC has long struggled to make meaningful profits -- even though it counts Huawei's chip arm HiSilicon among its clients. Indeed, without Chinese state backing it might not have been able to afford the approximately 150 million euro cost of an ASML EUV machine and its related service contracts, given SMIC's profits of only $134 million last year.

But SMIC has become more aggressive in its chip plans under co-CEO Liang Mong-song, a veteran former executive from Samsung and TSMC. The company placed the order for ASML's machine last year shortly after Washington banned on security grounds the use of U.S. technology by ZTE, China's second-biggest telecom equipment maker.

At the time, despite Beijing's backing for SMIC and the ZTE ban, ASML said that it would treat all of its customers equally, including Chinese clients such as SMIC, as Nikkei Asian Review reported in May.

ASML also made clear that its near-unique EUV machine is subject to the so-called Wassenaar Arrangement -- a multinational export control protocol designed to stop the spread of advanced technologies that can be used for military ends -- but that it had an exemption from the Dutch and European authorities to sell the machine to Chinese customers. The permit appears to have now expired.

Permits take eight weeks to approve or reject, according to Dutch regulations.

"ASML just follows the law," the company said.

Analysts suggested that an additional reason for the delay might be because its U.S. operations mean that ASML could fall under U.S. jurisdiction in some cases.

"Companies are required to follow the export-related laws and regulations in the countries where they operate, and failure to do so could result in legal or regulatory penalties under the laws and regulations of the country with jurisdiction over the company," said Ross Darrell Feingold, a lawyer and political risk consultant with long experience in Asia.

TSMC, which uses ASML technology to make cutting-edge processor chips for Apple, has also reportedly faced pressure to curb its tech sales to China.

According to the Financial Times, Washington has repeatedly pressed Taipei this year to restrict TSMC from selling chips to Huawei. Although Huawei is on a U.S. technology blacklist, TSMC has continued to manufacture chips for Huawei, its second-biggest customer, saying that its supplies comply with regulations.

TSMC has repeatedly denied that it has faced any pressure, although it confirmed last week that the Pentagon had contacted some of its U.S. customers to say that they could be vetted for using chips in equipment that has military uses if those components are not made locally in the U.S.

This report has been updated with additional comments from ASML.

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