Investors worry China may catch up to ASML chipmaking machines

In short: ASML still dominates the machines used to make advanced computer chips, but China is gradually narrowing the gap and investors are reacting.

What's going on

ASML, a Dutch company, makes the most important machines used to produce the smallest and fastest computer chips. These machines do “lithography,” which is like using an extremely precise stencil and light to draw tiny circuits onto a chip.

ASML’s shares fell about 8% last week after worries that China is moving closer to making its own versions of these tools. The Financial Times notes that ASML’s monopoly is not in immediate danger. A report cited by the article says China is about one technology generation behind in “deep ultraviolet” (DUV) machines, and DUV machines are likely about a decade behind ASML’s newer “extreme ultraviolet” (EUV) machines.

The gap matters because lithography requires extreme accuracy, measured at the scale of atoms. It is not an area where “good enough” works. ASML also benefits from learning by doing, because it ships hundreds of machines each year and uses performance data to keep improving them.

At the same time, trade restrictions are pushing China to try harder. The US forbids ASML from shipping its EUV machines to China. China has money, engineers, and long-term government plans to support local alternatives.

What to watch

ASML could eventually lose a large part of its China business, which was nearly a third of its sales last year, according to the article. Investors are also betting heavily on ASML’s long-term future, with the FT’s Lex column estimating that more than 60% of ASML’s value depends on cash it generates after 2035.

Source: Financial Times