USA vs. China – The Netherlands

The Dutch are unlikely to go nearly as far.

• The Netherlands has said that it is going to place more restrictions on exports to China but I suspect that these will be slow in coming and be far less wide-reaching than the US would like.
• The Netherlands’ trade minister has written to the Dutch parliament outlining the new restrictions but unfortunately, the outline is very vague.
• The new restrictions will apply to “very high-specification” systems which to me means 18nm and below which is precisely in line with the restrictions put in place by the US Department of Commerce.
• However, these restrictions will also be “surgical” and executed via a system of export licenses which implies a very different approach to that taken by the USA.
• When one applies to the US Department of Commerce for an export license for a company on the entity list, the default position is to refuse whereas, to me, it looks like the Dutch are taking the opposite position.
• Furthermore, I take “surgical” to mean only those companies where a direct link to the military has been established which means that many Chinese companies will not be hit by the new restrictions.
• This demonstrates the difference between the approach of the two countries with the USA wanting to limit China’s rise as a technological power by any means necessary while the Netherlands appears to be only really concerned about the military.
• Whatever restrictions The Netherlands does put in place are going to be a while in coming as, unlike the USA, the restrictions need to be approved by parliament.
• This is why ASML has said that the restrictions will have no impact on its 2023 guidance despite around 15% of revenues coming from China.
• In fact, I suspect the reverse could be true.
• The Chinese will now know what is coming and so are likely to redouble their efforts to acquire advanced deep ultraviolet machines capable of 18nm and below meaning that ASML’s order book might even expand this year.
• There are also serious questions with regard to whether any of these restrictions will impact China’s ability to source semiconductor chips that will be used in military applications.
• This is because military chips need to be very tough and very reliable which is why they are often made on old processes or compound semiconductors where the process is very well established and technology widely available.
• Furthermore, if one does not care about yield, it does seem to be possible to make leading-edge chips using older equipment.
• This means that these restrictions may not affect the Chinese military very much but in terms of economic and technological development, their impact is substantial.
• I continue to think that semiconductors remain a real problem for China and that this is not an obstacle that it is going to be able to get around very easily.
• That being said, I still think that there will be a bounce in the Chinese economy in H2 2023 and that the rising tide will lift all boats and especially the beleaguered technology sector.
• Here, Alibaba offers the best return in my opinion, but the stock is likely to drift until there is hard evidence of a recovery.