Thread by @pstAsiatech

Recent announcements from the Dutch government and tool giant ASML suggest some forward movement on a so-called “trilateral agreement” that would see some alignment from the Netherland and Japan on the #October7ExportControls. What is going on here? A thread.🧵

Last week media reports suggested that the Dutch government was moving forward with some new controls on semiconductor manufacturing equipment. reuters.com/technology/dut…

A letter from Dutch Trade Minister Liesje Schreinemacher to parliament noted that “Because the Netherlands considers it necessary on national security grounds to get this technology into oversight with the greatest of speed, the Cabinet will introduce a national control list.”

Schreinemacher earlier this year in Davos indicated the Dutch government would fight for open trade and to prevent protectionism. scmp.com/tech/article/3…

In new letter she said the Dutch government had decided on measures "as carefully and precisely as possible ... to avoid unnecessary disruption of value chains…It is for companies of importance to know what they are facing and to have time to adjust to new rules.”

The letter did not mention either China or ASML. ASML issued a statement noting that firm expects to have to apply for licenses to export the most advanced segment of its DUV machines, but this would not impact its 2023 financial outlook.

The ASML statement noted: In this regard, it is important to consider 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 systems. asml.com/en/news/press-…

Schreinemacher later said she had not yet decided whether to permit servicing and replacement parts for existing machines for the new tools that will be added to an export control lists. ft.com/content/2454c0…

She noted that: “The Chinese have asked us before . . . to not disturb value chains much when it comes to chips. And, of course, servicing is an important part when you have a machine. We do take those concerns very seriously.”

Chinese foreign ministry spokesperson Mao Ning said the Dutch rules would "limit normal economic and trade exchanges between Chinese and Dutch companies".

After China expressed concern about any new Dutch restrictions, the Dutch Trade Minister also noted that: "I saw the response. I think it's understandable. The Chinese have a big interest in this," reuters.com/world/dutch-tr…

The critical issue, as I have noted in previous threads, is to what degree the Dutch, and Japanese rules not yet announced, align with the 7 October controls, particularly the end use controls and domestic persons controls.

On this point, Schreienemacher noted that "The Biden administration did their thing on Oct. 7 and we are doing what we are doing based on our own assessments."

For its part, Japan indicated that the government has made no final decision on new export control restrictions. bloomberg.com/news/articles/…

“We will consider appropriate measures in light of developments in the Netherlands,” Japanese Trade Minister Yasutoshi Nishimura noted. Our understanding is that the Dutch announcement does not target a specific country.”

What is going on here? In October, Undersecretary Alan Estevez stressed that “we expect to have a deal in the near-term”. Commerce Secretary Raimondo later noted a deal could take 6-9 months. cnas.org/publications/t…

Media reporting in January suggested there was a deal, but there have been no public announcements of a deal, the Dutch letter did not mention China or ASML, and the Japanese government still has not made any announcement about a deal.

As noted in earlier thread, one goal of getting an agreement is to level playing field, as US tool makers, subject to all key elements of the 7 October controls, have already announced major losses in 2023 of $5 billion, which has translated into layoffs, impacted R&D budgets.

In fact US officials now prefer to talk about “leveling the playing field” rather than pitching the participation of the Japanese and Dutch governments as a “trilateral agreement”...

...which was the original term used. This reflects the fact that there is no real agreement on a set of controls, rather, there are intense negotiations on how to avoid continuing to disadvantage US tool makers, who are global leaders.

In addition, Dutch and Japanese firms operating in China are concerned about potential retaliation from the Beijing if their governments are seen as participating in a multilateral agreement aimed only at China.

Hence the reluctance to mention China specifically in the letter to the Dutch parliament. Japan is not likely to name China either in any new controls.

Without agreement on end use controls, domestic person controls, and the potential to have more Chinese semiconductor manufacturers put on the Entity List, which Dutch and Japanese companies are not bound by..

...US tool makers will continue to lose both market share in China, and substantial revenue beyond the huge losses of 2023, particularly if more Chinese companies they supply face restrictions.

One key issue: @ many Chinese facilities, there is mixed production + R&D for both advanced + legacy nodes. It remains unclear if there is any clear licensing process to allow tool shipments to legacy facilities not controlled by 7 October end use thresholds.

Eroding US toolmaker revenue from legacy nodes in China would add even more weight to already considerable collateral damage from 7 October controls.

US tool makers, already reeling from the broader industry downturn, will continue to see revenue shrink, putting their global R&D budgets and global leadership under further pressure.

Finally, big beneficiaries are Chinese tool makers incl Naura + AMEC, which continue to seize market share. US toolmakers face serious trifecta: massive revenue loss, continued market share erosion w/o any “trilateral agreement” + stepped up competition from Chinese toolmakers.