Semiconductor manufacturing equipment: Japanese makers weigh up cost of export controls

Blockades often rely on the co-operation of allies. The US has every reason to want Japan and the Netherlands to join its ban on exporting advanced semiconductor machinery to China. But governments are reluctant to undermine their tech champions. Expect close scrutiny of the fine print once an agreement is concluded.

The Netherlands is expected to expand restrictions on ASML, its largest chip equipment maker, which would prevent it from selling some of its advanced machines with extreme lithography technology — crucial to making the latest chips. Japan could set similar limits on local makers Nikon and Tokyo Electron.

For ASML, the damage would be shortlived. It has no competitors and a long waiting list for deliveries. Any sales lost to China would quickly be made up elsewhere, to companies such as Intel and TSMC, which are building capacity.

This year, ASML’s net sales are expected to grow more than 25 per cent, even faster than last year’s 13 per cent. China accounts for only about 15 per cent of total sales.

But China is much more important to lower-tech chip equipment makers such as Nikon and Tokyo Electron, accounting for more than a quarter of total sales for the latter. Local chipmakers use gear running on older standards that Japanese makers provide.

Tokyo Electron has already downgraded its full-year earnings forecast. In November, it said that consolidated net profit for the year to March was expected to drop 8 per cent. That was a sharp reversal from the previous guidance of a 20 per cent increase.

ASML’s shares are up a quarter this year and trade at 33 times forward earnings, a more than 40 per cent premium to its Japanese peers.

That gap should widen further this year. A slump in the chip industry looms, as demand for consumer products drops. Meanwhile, raw materials prices and spending on research and development — which companies must maintain to keep up with rapidly changing technology — remain high. Expect lower dividends and share price upside.