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Investors within the semiconductor industry are captivated with automation, digitization and, above all, artificial intelligence. In addition to an economic recovery, such structural sources of demand are more likely to mean an unprecedented chip boom. But geopolitical risks can thwart even the strongest engine.
That's the predicament ASML finds itself in. Second-quarter results underlined the strengths of the Dutch manufacturer of advanced chipmaking equipment. Its customers are thriving as demand for semiconductors recovers. See for instance: TSMC, whose market value rose to over $1 trillion Earlier this month, ASML's increasing machine utilization led to higher orders, which exceeded consensus expectations at EUR 5.6 billion. Although third-quarter sales were weaker, order books support strong growth next 12 months.
Nevertheless, ASML shares fell greater than 10 percent on Wednesday as investors were concerned about reports that the U.S. consider stricter restrictions about what semiconductor equipment will be sold to China. Those geopolitical fears have also rattled others within the industry. Tokyo Electron, a Japanese equipment maker, lost 7 percent. TSMC lost 2 percent after presidential candidate Donald Trump said he believes Taiwan should pay the U.S. for defense.
It's not hard to see why this sentiment is making investors nervous. Although ASML is already barred from exporting its most advanced kits to China, the country still accounted for nearly half of the corporate's €4.8 billion in equipment sales within the second quarter. That's up from historical levels of perhaps 15 to twenty percent, as Chinese customers buy up older machines to spice up domestic production of less advanced chips. The figure is more likely to fall as demand picks up in the remaining of the world. But those are still strikingly high numbers.
Such concerns shouldn’t, nevertheless, affect ASML's prospects. For one thing, it just isn’t clear exactly which activities could be affected by a review of trade rules. Moreover, ASML's long-term growth story is predicated on its sophisticated lithography machines, which it doesn’t sell in China. The group, which Bernstein estimates can have sales of €28.7 billion this 12 months, expects to double that to €60 billion by 2030. A tightening of Chinese export regulations could hurt reasonably than destroy the forecasts.
If anything, other parts of the provision chain may ultimately suffer more from these global tensions. It's not only high-end device makers like ASML and Tokyo Electron that will likely be hurt by trade tensions. Makers of less advanced chips – like Infineon and STMicroelectronics – will face stronger competition in China as local producers reply to political demands and expand production.
