Netherlands' Export Controls: Impact on Global Semiconductor Industry

Recently, the Netherlands announced new rules that will restrict exports involved with semiconductor manufacturing equipment, such as those produced by ASML, after increasing pressure from the US. Why is the Netherlands so important to global semiconductor manufacturing, what exactly will the restrictions do, and does this demonstrate the power that the US has over the semiconductor market?

Why is the Netherlands so important to global semiconductor manufacturing?

When thinking about countries with the biggest influence in semiconductor manufacturing, most would think of the US, Japan, South Korea, and, probably the most important, Taiwan. But while these countries are responsible for producing most next-gen level hardware, all of these countries have one nation in common; The Netherlands. 

This tiny nation that sits between Belgium and Germany has a population of just 17.53 million and is responsible for just about every single high-end semiconductor manufactured today, making it arguably the most important country in the world for semiconductors. The reason for this importance comes down to one company, ASML, which, to date, is the only manufacturer in the world of extreme ultraviolet lithography machines needed to produce features in single nanometres. 

Considering how lucrative the semiconductor industry is, it’s perfectly understandable to wonder why no other company has decided to manufacture their own systems and compete with ASML. The answer to this comes down to the sheer complexity involved with single nanometre photolithography. Unlike traditional lithography, where a mask is placed in a beam of collimated light to expose specific areas of a wafer, the use of high-frequency photons combined with the tiny size of features makes it extremely challenging to create a reliable mask and pattern.

ASML has been able to achieve this with years of research and the use of unique in-house technologies, such as the use of tin drops targeted with CO2 lasers to produce EUV light. In fact, considering the numerous technical challenges involved, it may actually be impossible to create a EUV system without violating patents protecting ASML technologies, meaning that ASML would have a monopoly over the market for the next few decades.

To understand the complexity of the technology involved, let's delve a bit deeper into the workings of ASML's EUV systems. These systems use a process called extreme ultraviolet lithography, which involves the use of high-frequency photons to create intricate patterns on a silicon wafer. This process is incredibly complex and requires a high level of precision and control. The technology used to generate the EUV light is particularly unique; it involves firing a high-powered CO2 laser at tiny droplets of tin, which generates a plasma that emits EUV light³.

Overall, The Netherlands has full control over the manufacture of new semiconductor devices needed to produce cutting-edge devices, ranging from smartphones to military defence systems. 

New export controls introduced under increasing US pressure

Considering that ASML is the only company in the world to produce EUV systems, it comes as no surprise that the US has been doing everything it can to get the Dutch government to impose export restrictions that prevent countries such as Russia and China from getting access to these systems. By limiting the semiconductor abilities of nations at odds with the West, it is possible for the West to advance quicker, thereby giving the West a technological edge. This edge directly manifests itself into improved economies and improved defences, making it more challenging for hostile nations to escalate conflicts. 

However, the Dutch have been somewhat hesitant to introduce these export restrictions, having gone as far as granting an export license to ASML to ship EUV systems to China. Currently, China has access to older ASML systems, but the latest EUV machines are still out of reach due to pressure from the previous Trump administration. 

Now, the Dutch government has announced new export controls that, when in effect, will bar companies such as ASML from selling high-end semiconductor systems to countries that harm national interest (such as China). While the Dutch government denies that the introduction of the export controls comes from increasing pressure from the US, it is highly likely that the US is the cause of the restrictions.

According to the official statement from the Dutch government, the new export controls will come into effect on 1 September 2023. The controls will require national authorisation for the export of certain advanced semiconductor manufacturing equipment¹. This move has been taken on national security grounds, with the Dutch government acknowledging their unique, leading position in the semiconductor field¹.

“Because of the way certain chips can be used, they can make a key contribution to certain advanced military applications. The uncontrolled export of goods and technologies therefore potentially poses national security risk. The Netherlands bears an extra responsibility in this regard because this country has a unique, leading position in this field. Like the export control policy in general, this additional step is country-neutral.”

Liesje Schreinemacher, Minister for Foreign Trade and Development Co-operation

In response to the new export controls, the Chinese Embassy in the Netherlands expressed their opposition, stating, "This is an abuse of export control measures and seriously disrupted free trade and international trade rules. The Chinese side firmly opposes it."² They further called on the Dutch government to correct its actions, warning that the restrictions could harm not only Chinese companies but also Dutch companies and the global industrial and supply chains².

China views the export controls as an abuse of export control measures that disrupt free trade and international trade rules². The embassy has called on the Dutch government to correct its actions, stating that the restrictions will harm not only Chinese companies but also Dutch companies and the global industrial and supply chains².

A detailed view of a silicon wafer being produced at an advanced semiconductor foundry specializing in microchip manufacturing.

How does this demonstrate the power of the US over the semiconductor market?

When it comes to the semiconductor industry, it is clear that money talks, and the US, by far, has the most powerful economy on the planet. This means that it is in the financial interest of most companies and countries to follow US export rules, even if they don’t apply to them. In the case of ASML, if it chooses to ignore US export controls, it could be faced with numerous legal challenges in the US (where many of its customers are), financial challenges with regard to import tax and licensing, and could even lose patent protections over its designs. 

ASML has responded to the upcoming regulations, stating that they will need to apply for export licenses for the shipment of the most advanced immersion DUV systems. Despite these new controls, ASML does not expect these measures to have a material effect on their financial outlook for 2023 or their longer-term scenarios³.

ASML further clarified that the additional export controls do not pertain to all immersion lithography tools but only to what is called ‘most advanced’. Although ASML has not received any additional information about the exact definition of ‘most advanced’, ASML interprets this as ‘critical immersion’, which ASML defined in our Capital Markets Day as the TWINSCAN NXT:2000i and subsequent immersion systems³.

On the flip side, restricting China’s access to ASML systems may primarily impact ASML's profits, and there is very little that China can do to harm ASML. Even if China was able to reverse engineer an ASML system, it would struggle to sell these to other countries without risking becoming a pariah by the West. It is also possible (albeit unlikely) that the US government could reimburse ASML if it chooses to follow the export rules (as it would be unfair to expect ASML to hinder its growth and success when not a US company).

Overall, the US has demonstrated its might in the semiconductor industry ever since the first transistor was developed at Bell Lab, and the export controls being introduced by the Dutch government is just another sign of US influence over the industry. 

References

1. Government of the Netherlands. (2023). Government publishes additional export measures for advanced semiconductor manufacturing equipment.
2. Embassy of the People's Republic of China in the Kingdom of the Netherlands. (2023). Comments of the Spokesperson of the Chinese Embassy in the Netherlands on the Publishment of Additional Export Measures for Advanced Semiconductor Manufacturing Equipment by the Dutch Government.
3. ASML. (2023). Statement regarding additional export controls.