The U.S.’s stringent new controls over exports of chips to China have left companies throughout the semiconductor supply chain scrambling to adapt. Yet one industry giant that is central to the chipmaking process appears relatively unperturbed.

ASML, a multi-billion dollar Dutch company whose highly-prized lithography machines are vital to making the chips that power everything from mobile phones to weapons systems, says it expects only a “fairly limited” impact from the Biden administration’s latest rules. 

Although the company already does not sell its most advanced, extreme ultraviolet machines (EUVs ) to China, under pressure from Washington, the latest restrictions won’t prevent it from exporting one of its other core products — deep ultraviolet machines (DUVs), which form the transistors on microchips.

While the U.S. government has discussed measures to restrict DUV exports, “there have not been any new decisions made,” says Ryan Young, a U.S. media spokesperson for ASML. “So for now, we continue to ship DUV to China [and] that’s why we feel a limited direct impact.”

That a company like ASML is still able to do substantial business with China, despite the latest export controls, illustrates the tricky course the U.S. government is currently having to steer. Washington is attempting to take effective unilateral action to stymie China’s progress in chip development, without alienating allies like the Netherlands. In effect, that still means allowing China to continue with less advanced chip manufacturing — the kind that ASML’s deep ultraviolet equipment enables.

“When you look at the impact of the rules, they will be fairly targeted on advanced chip production. It is not intended as a kick out punch for the Chinese chip industry,” says Emily Kilcrease, a fellow at the Center for a New American Security and former deputy assistant U.S. Trade Representative. She adds, however, that while the U.S.’s aim previously was to always keep the Chinese two steps back in semiconductor capabilities, now it’s seeking to prevent them from advancing at all.

“They are not going to move those thresholds as the industry advances,” she says. “Over the long term, the impacts [on China] will get worse. That is one of the big shifts.”

The Netherlands is reconsidering its China policy [to reduce its economic dependence], which has an impact on doing business with China. But the debate in the Netherlands is not as focused on leakage of technology to China.

Henk Volberda, a business school professor at the University of Amsterdam

For now, that means China will remain a key market for ASML, which made 15 percent of its sales in the world’s second largest economy last year, according to filings, up from 11.6 percent in 2019. It is hard to overstate the Dutch company’s importance in chip supply chains: It is the only firm in the world that can produce EUV lithography machines, which are critical to making chips smaller and more powerful. The firm, which was spun out of Philips, the Dutch technology giant, in the 1980s, has grown to become the Netherlands’ most valuable company with a market value of $200 billion. 

“It is a company we are all very proud of,” says Henk Volberda, a business school professor at the University of Amsterdam. 

And while the European Union’s relations with China have deteriorated in recent years — it now describes the country as a ‘systemic rival’ — its tone is still less hawkish than that prevailing in the U.S., with several countries within the bloc keen to keep commercial ties on track.  

“The Netherlands is reconsidering its China policy [to reduce its economic dependence], which has an impact on doing business with China,” says Volberda. “But the debate in the Netherlands is not as focused on leakage of technology to China.” 

The combined effect of ASML’s importance in chip supply chains with Europe’s so-far less aggressive stance has been to limit how far the U.S. can go in restricting China’s chip sector. Over the summer, there were media reports that the U.S. was attempting to convince the Dutch government to block the export of less advanced DUV machines to China, but the Netherlands has yet to make such a move. This week, Bloomberg reported that senior U.S. officials were traveling to the Netherlands this month for further discussions. 

Though the U.S. leads in chip design and software tools, “We are not the only game in town,” says Sarah Bauerle Danzman, an associate professor at Indiana University Bloomington. “This, again, goes back to a truism in export controls for tech: it is very rare for export controls to be as effective without being multilaterally applied.” 

Of course, the U.S. government could still decide to expand its existing restrictions on chip-related exports to effectively include DUV machines. One way to do that would be to designate the components in DUV technology as export controlled, and then determine that 25 percent of the components in the ASML tools come from the U.S. — the minimum threshold that would likely be required to bring these products under the scope of U.S. export controls, which major international companies like ASML usually seek to comply with.

“Just because ASML says that they do not meet the 25 percent threshold, does not mean the U.S. government will agree with that finding or won’t apply a different standard to block sales,” says Gregory C. Allen, a senior fellow at the Center for Strategic and International Studies and former Defense Department official. “That determination is yet to be made and the U.S. government will likely keep revising these rules until they achieve the intended effects.” ASML has large R&D centers in Connecticut and California, and the company has acquired several key U.S. firms, like San Diego-based Cymer, which develops lasers for lithography technology.

The Commerce Department’s Bureau of Industry and Security (BIS), which issued the latest export controls, said in a statement to The Wire that they cannot comment on “company-specific actions”, but “we expect all companies to comply with export controls”.

The still-present threat that U.S. restrictions could become tougher also leaves ASML in a delicate position, despite its apparent calmness about the controls imposed last month. 

Companies like ASML have tried to play Switzerland, and to play neutral… But we are definitely not in Kansas anymore.

Rogier Creemers, an assistant professor at Leiden University in the Netherlands

ASML has sought to reassure investors recently by pointing to the strength of its other markets: “Demand outside of China is still such that we would get compensation for that in the current environment from other customers,” ASML’s Chief Financial Officer Roger Dassen told analysts on an earnings call in October.

Yet markets are clearly jittery about the potential effect of the U.S.’s efforts against China’s chip sector on ASML. In the week after the Biden administration announced its new measures on October 7 — which prohibited companies without a specific license from exporting equipment, software or technology to China required to produce advanced chips — ASML’s shares dropped by 18 percent, only recovering when the company made reassuring statements about the impact. 

The new rules also barred U.S. citizens from aiding Chinese companies in certain advanced chip functions; immediately after the announcement, ASML told its U.S. employees to stop working with Chinese customers. 

“Companies like ASML have tried to play Switzerland, and to play neutral,” says Rogier Creemers, an assistant professor at Leiden University in the Netherlands. “But we are definitely not in Kansas anymore.”

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