​The Dutch government’s Ministry of Foreign Affairs published the details of the “Strategic Framework for Export Controls for the Semiconductor Industry” that were proposed on 12/1/2022.  The new controls go into effect on September 1 of this year.  The framework was put in place, according to the Dutch government, for the following reasons:

1. To prevent a situation in which Dutch goods contribute to undesirable end use, such as military deployment or weapons of mass destruction.
2. To prevent undesirable long-term strategic dependencies.
3. To preserve the Netherlands’ technological leadership position.

The rules require potential semiconductor exporters to apply for an export license, which will be evaluated on the basis of the above three strategic goals and an assessment will be made as to whether any of the goals may be jeopardized.  However these measures are highly specific to technologies in the semiconductor manufacturing cycle in which the Netherlands holds a unique, leading position, such as the most advanced deep ultraviolet (DUV) immersion lithography and deposition.
The specific products cited are:
EUV Pellets & Pellet production equipment – EUV pellets are small amounts of tin that are vaporized to create the EUV light that is of the correct wavelength and intensity for EUV lithography.
Lithography steppers with a minimum feature size of 45nm or less
ALD (Atomic Layer Deposition) tools using Aluminum precursors and Titanium Aluminum Carbide – These materials are gases that are exposed to the substrate and react to form a single atomic layer that does not react to the high intensity light used in lithography and is hard enough to allow for smaller features.
Epitaxy tools based on the deposition of Carbon-doped Silicon-Germanium – This is a process where the substrate is heated and source material is vaporized, which allows it to react with the substrate a form a thin layer of material on the substrate.  Doped Silicon Germanium is used to create transistor base layers that can operate at higher frequency that more typical silicon.
Void-free PVD (Plasma Vapor Deposition) tools that are able to operate in space less than 25nm – PVD tools used is small spaces can create voids or gaps in deposition films that allow etch material to damage other layers.  Void-free tools are designed to use higher power plasmas or dual plasma systems that clean the substrate before deposition.
All software or technology needed to operate or develop such tools.
These specifics are technical, the apply primarily to ASML (ASML), the sole producer of high NA (Numerical Aperture) EUV tools for semiconductor production.  High NA means the tool can collect and focus more light in a small area, which is necessary to produce product below 13nm.  Nikon (7731.JP) also produces EUV tools (<10% share) but focuses on low-NA for the production of product at 13nm or above.  The new regulations include DUV systems (also produced by Canon (7751.JP)), which would include ASML’s Twinscan NXT 2000 and similar new products, while ASML’s EUV systems are already under licensing restrictions.  ASML issued a press release indicating that the company did not expect the new measures to have an impact on the financial guidance that was released in November of last year, and that the company’s long-term scenarios are based on global industry demand and technology trends rather than detailed locations assumptions, meaning sales to China, and China was not named in any of the government documents. 
The Chinese embassy in the Netherlands responded to the newly documented rules as an ‘abuse of export control measures” that violate trade rules and the Chinese government will implement new laws on foreign relations on Saturday that “safeguard sovereignty and rejuvenate the nation”, allowing the Communist Party leadership to set foreign policy rather than the government, and holds anyone committing acts that are detrimental to Chinese national interests legally responsible.  Last month the Chinese government banned Boise, Idaho based Micron Technology (MU) from participating in critical infrastructure projects in China, such as telecom infrastructure, networks, and power grids, as they pose a serious network security risk.

​With the US pointing a double barrel shotgun at China’s semiconductor industry, the $280b CHIPS Act and an ever-increasing number of trade sanctions relative to semiconductor manufacturing, China has little choice but to respond, and leaks about the potential for the Chinese government to be readying a semiconductor investment package of its own are starting to circulate.  While details will likely be given early next year, thus far the supposition is that a $143b 5 year package containing subsidies and tax breaks will be announced, to offset the increasing pressure from the US. 
Current thinking is that the focus will be on China’s semiconductor equipment industry, where 20% equipment purchase subsidies will be offered, as China is already unable to purchase EUV tools from ASML (ASML), allowing them to move from more mature nodes to 7nm and below.  China’s largest semiconductor foundry SMIC (688981.CH) recently surprised the industry by announcing it had begun production at the 7nm node, without EUV, but it seems that their process, which uses DUV requires 4 passes against the EUV process, which requires one, and is therefore more costly to produce.  That said, the US government has been in negotiations with the Norwegian government over a potential ban on DUV tools to China, which would further constrict China’s ability to produce more advanced node silicon.
China’s typical brute force approach entering global markets is a bit less effective in the semiconductor space, where years of accumulated semiconductor process technology resides with Taiwanese, South Korean, and Japanese foundries, but the same was said in the display space when Chinese LCD panel producers began a government sponsored capacity expansion only a few years back, and are now the dominant force in the large panel LCD space.  While some might say that the display industry has already moved past LCD technology, making China’s dominance a moot point, it does go to show that their government funded expansion can be an industry mover, even if it comes a bit late, and while the semiconductor space is a bit more complex, the constant ‘poking’ by the US government will eventually result in China stepping up its desire to become more semiconductor independent and developing a more sophisticated semiconductor equipment industry of its own.  It might not be as technically advanced as tools from ASML, Canon (7751.JP), or Nikon (7731.JP), but if they get the job done, China will squeeze the more generic semiconductor market, as it has done in display and the LED market and will leave others to compete only at the top tier of the semiconductor market.  Sometimes the bear wins or at least does some significant damage…

​While the news is carrying shots of continuing protests in China over the country’s strict COVID lockdown policies, those lockdowns continue, and salary and bonus promises have been found to have strings attached that have angered Foxconn (2354.TT) workers who stayed on during the recent lockdown in Zhengzhou.  Back on 11-1-22 we estimated that the lockdowns would result in a shortfall of 11.2m iPhone 14 units, and while the most recent estimate from ‘industry sources’ put the shortfall for just the iPhone Pro, one of four iPhone 14 models, at close to 6m units, with the Pro Max expected to be the better seller of the two high end models.  Our estimate might be high, but its looking more like it could be close as the days wear on.
 

​As we have noted previously results from China’s 11/11 shopping holiday were tepid at best for the CE space, with some categories seeing considerable declines on a y/y basis.  Data from Strategy Analytics concerning smartphone sales during the holiday paint a bleak picture, with ~9m units sold, down ~35% y/y and lower than the 9.6m units sold in 2020.  On the ‘almost’ positive side, the retail value of those sales was up 10% y/y as the mix of higher-end devices was better than last year, but the overall value of smartphone sales during the holiday was down ~29% to $5.28b US.  Apple (AAPL) was the winner in terms of both unit volume and dollar value, selling 3.5m units, down ~27%, staying ahead of the overall market, and generated ~$3.5b in sales (~$1,000 avg. price), garnering a 39% share of units and a 68% share of revenue.  Xiaomi took 2nd place, selling ~2.8m units and generating ~$670m, while Honor (see above) generated a roughly 8% volume share, up slightly y/y.  TV sales during the shopping holiday were also rumored to have been weak this year but we have yet to see quantifiable data.

​As of today the US Department of Commerce, Bureau of Industry & Security, has implemented additional export control rules concerning semiconductors based on Gallium Oxide and diamond, and CAD software specifically designed for developing GAA (Gate-All-Around) FETs, along with certain technology associated with the production of gas turbine systems.  As we have noted previously, the US government has been in discussions with various government’s whose companies might be affected by this new ruling, particularly the government of the Netherlands, where EUV tool vendor ASML (ASML) is located.
The substance of the new rules are as follows:
GaO and diamond based  semiconductors are able to operate at higher temperatures and voltages as opposed to those based on Gallium Nitride or Silicon Carbide and are therefore more applicable to military applications.  Exports to countries that have been singled out by the US government as having aspirations in conflict with the US would now be required to be licensed. 
While there are no current devices using PGC (Pressure Gain Combustion), a process that increases combustion pressure while consuming the same amount of fuel as conventional gas turbine engines, the BIS has cited the large amount of research being done in the area.  Citing the use of this technology in missiles, rockets, and military engines, the new rule will require licensing for any technology utilizing PGC, when they might occur in the future. 
ECAD systems used to design IC layout and lithography artwork necessary for the production of semiconductor devices has already been included in the EAR rules however the new additions are explicit in that ECAD tools that are for the design of GAA devices, which is a process that is used for complex chip production at nodes below 5nm and allows for the reduction of gate control issues that increase as device size decreases.  The application of GAA technology allows for faster, more power efficient, and smaller devices, again with applications for the military being cited in the rules and the BIS is asking for comments from the semiconductor industry as to the scope of the new rule, asking for details as to a variety of design functions in order to make sure all of the possible GAA related CAD design software modules are covered.  In order to receive these external suggestions, the implementation of the GAA rule is delayed for 60 days and items that have been previously licensed and are on loading docks or enroute are able to proceed as long as they are received before November 14.
At least on the surface the new rules would not add to the limitations already placed on ASML, given that the government of the Netherlands has not allowed the export of EUV tools to Chinese entities at the behest of the US government, while still allowing export of DUV tools that are able to produce at larger nodes.  EDA software vendors face a more complex challenge as the new rules are still broad enough that EDA companies might find that their internal thoughts on the application of certain modules might differ with those of the government, triggering a conflict as to whether they can be sold to those entities that fall under EAR guidelines, which is likely what much of the public commentary concerning the new rules will encompass.  Depending on the government’s ultimate decisions, the rule on EDA restrictions can be narrow or broad, with key EDA design firms such as Synopsys (SNPS) and Cadence (CDNS) generating 16.8% and 13.2% of revenue from sales to China in the most recent quarter, the most focused on the change, although the specifics as to GAA design revenue regional sales are not specified.

​Peter Wennink, the CEO of ASML (ASML) has indicated that the company is continuing to struggle to meet customer demand and that delivery delays should be expected to continue.  ASML experience a fire in its Berlin facility that disrupted production of components for its DUV and EUV lithography tools and while the DUV component production has resumed, EUV component (wafer clamps) production was more severely affected, however that has been only a part of ASML’s troubles as the company’s supply chain of over 200 critical components is facing shortages of their own.  As each EUV tool is custom built to customer specifications, any supply disruptions can cause the whole build and test process to be delayed.
Given the number of new fabs announced over the last few months, the next two years should be the perfect environment for ASML to expand its business, and the company expects it will see more orders this year than last, but component constraints and a lack of qualified staffing are keeping the company from taking full advantage of its monopoly position in the lithography space.  An example was given as to Carl Zeiss (pvt), the supplier of lenses to ASML, who is unable to increase the number of lenses it supplies with existing tools.  ASML is pushing the company to build a new clean room line, but such a project will take many months to build and roughly 12 months to manufacture the lenses, leaving ASML short during what should be the company’s ‘finest hour’.  No matter what the demand is, the supply chain rules all….