ASML: Is a New Chinese Competitor a Major Threat? (NASDAQ: ASML)
Key Points
A new Chinese company is developing deep ultraviolet lithography machines for semiconductor fabrication.
It's starting small with just five machines this year and 20 in 2027.
Can ASML maintain its technology lead?
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An unnamed Chinese company has started manufacturing a key piece of semiconductor fabrication equipment, according to a report that came out earlier this week from The Information. While the news negatively impacted shares of ASML (NASDAQ: ASML), the only company producing the kind of equipment reported, the truth is the market is likely overreacting to the threat.
The scale and technology of the unidentified company are far behind those of ASML, and the massive demand for chip manufacturing equipment can support the modest increase in supply from China.
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How does the new competition stack up against ASML?
The unnamed Chinese company is planning to ship 5 immersion deep ultraviolet lithography (DUV) machines this year and 20 units in 2027. This is an older technology introduced by ASML about 20 years ago for etching chip patterns onto silicon wafers. Despite its age, it's still widely used today, particularly in semiconductors that don't require leading-edge capabilities, including memory chips.
ASML expects to ship 130 DUV units this year. What's more, it's increasing its capacity 30% for 2027 and expects another 30% increase in 2028. That would ultimately bring its production capacity to approximately 220 units per year. That's an indication of the tremendous demand for chip manufacturing equipment due to soaring demand for AI compute capacity.
That is to say, the new Chinese company's production capacity shouldn't have any impact on ASML's near-term unit shipments. Another unknown factor that could limit the new competitor's ability to cut into ASML sales is how reliable its products are. If the new manufacturer's machines produce more errors than ASML's machines (which is very likely in the early years), semiconductor manufacturers will prefer ASML's machines at an extreme premium, particularly in a market with short supply.
The biggest impact the new competition could have on ASML is in China, where it's already limited in what machines it can sell. The Chinese company could gain domestic market share, but geopolitical challenges and limited engineering capabilities could prevent it from making gains outside of China. ASML seems to have ample demand elsewhere in the world to support very strong growth over the coming years.
The long-term threat is more meaningful. China is certainly capable of making rapid technological advancements, especially when it can build on capabilities developed outside the country. We've seen Chinese companies build some of the best electric vehicles in the world and develop some of the most advanced large language models. ASML has a 20-year head start, but a Chinese competitor could catch up. However, until more concrete developments surface, the new competition isn't a significant threat to ASML's earnings growth for the foreseeable future.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML. The Motley Fool has a disclosure policy.
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