ASML Shrugs Off China Chip Curbs Amid Strong Demand Elsewhere
Comment of the Day

November 11 2022

Commentary by Eoin Treacy

ASML Shrugs Off China Chip Curbs Amid Strong Demand Elsewhere

This article for Bloomberg may be of interest to subscribers. Here is a section:

ASML hasn’t been able to sell its most advanced extreme ultraviolet lithography machines to China as the Dutch government refused to give it a license to do so, but the company has been able to sell its other machinery to the country. The Dutch company sees the total indirect impact from the new US measures to be about 5% of its backlog, it said on a call with investors in October. 

Meanwhile, major governments around the world have come up with subsidies and incentives to expand chip production capacities at home to avoid another round of semiconductor shortages that shaved off hundreds of billions from their economies during the pandemic. 

Even though the global chip industry is now facing a severe downturn, countries including the US and Japan have not slowed their pace in readying new plants to prepare for the next boom cycle. Taiwan Semiconductor Manufacturing Co. is even considering adding another advanced facility next to a $12 billion dollar plant that’s under construction in the US state of Arizona. 

Efforts by governments to build chip plants at home have just started and will accelerate, Wennink said Friday. “The drive for technological sovereignty is going to be very important driver for our business going forward.”

Eoin Treacy's view

The one thing everyone learned during the pandemic is the global supply chain is lot more fragile than previously believed. That is truer of the semiconductor sector than anything else and not least because many countries gave up domestic manufacturing capacity in favour of cheaper overseas production. Reversing that trend is both expensive and time consuming.
It also virtually ensures there will be significant oversupply of chips in the years ahead because production will be duplicated in several countries. ASML confirmed support in the region of the 1000-day MA in October and pushed back above the 2000-day MA this week. This suggests a medium-term low has been found. However, the 2019-2021 surge is unlikely to be repeated. It is much likely that a lengthy period of ranging will ensue between €400 and €800.
The Philadelphia Semiconductors Index has unwound its overextension relative to the 200-day MA but has yet to break the yearlong sequence of lower rally highs.
The First Trust Cloud Computing ETF rebounded this week but will need to follow through on the upside next week to signal a failed downside break.

The clear message from these trends is ASML has a clear competitive advantage from its dominance of the advanced machinery sector. The wider sector is rebounding but less so, because the competitive advantage is less compelling. Cloud computing is more about service provision and is relying on demand to recover on the assumption the sector can deliver cost savings that overwhelm inflationary pressures which is much more uncertain.

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