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Investors in the semiconductor industry get revved up about automation, digitalisation and — especially — artificial intelligence. On top of a cyclical recovery, such structural sources of demand are expected to mean an unprecedented chip boom. But geopolitical risk can throw a spanner into even the most powerful engine.
This is the predicament ASML finds itself in. Second-quarter results highlighted the strengths of the Dutch manufacturer of advanced chipmaking equipment. Its clients are thriving as demand for semiconductors recovers. See, for instance, TSMC, whose market value rose to more than $1tn earlier this month. Increasing utilisation of ASML’s machinery translates into higher orders which, at €5.6bn, outpaced consensus expectations. While third-quarter sales look softer, the order book underpins strong growth next year.
Yet ASML’s stock fell more than 10 per cent on Wednesday as investors fretted over reports that the US may consider tougher restrictions on what semiconductor equipment can be sold to China. Those geopolitical fears knocked others in the sector, too. Tokyo Electron, a Japanese equipment manufacturer, fell 7 per cent. TSMC was down 2 per cent as presidential candidate Donald Trump said he thought Taiwan should pay the US for defence.
It is not hard to see why this mood music might cause investors angst. While ASML is already barred from exporting its most advanced kit to China, the country still accounted for almost half of its second-quarter equipment sales of €4.8bn. That is up from historical levels of perhaps 15 to 20 per cent as Chinese clients hoover up older machines to beef up domestic production of less advanced chips. It should fall as demand in the rest of the world picks up. But these are still eye-catchingly large numbers.
Nonetheless, such concerns should not short-circuit ASML’s outlook. For one, it is not clear what activities, precisely, would be affected by any review of trade rules. On top of that, ASML’s long-term growth story is predicated on its advanced lithography machines, which it does not sell in China. The group, which is set to make €28.7bn of revenues this year on Bernstein estimates, expects to as much as double them to €60bn by 2030. Tightening Chinese export regulations might dent, rather than derail, its forecasts.
If anything, other parts of the supply chain may ultimately suffer more from these global tensions. It is not just high-end equipment manufacturers such as ASML and Tokyo Electron that will be hurt by trade tensions. Makers of less advanced chips — such as Infineon and STMicroelectronics — will face greater competition in China as local producers respond to political calls to expand their production.
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