Asmi crumbles!

Recent developments in the semiconductor industry have sent shockwaves through global markets, highlighting both the vulnerabilities and the strategic shifts occurring within this crucial sector. The swift plummet of ASML's stock following its third-quarter earnings report serves as a stark reminder of how interconnected yet volatile this industry can be. ASML, known as the world's largest producer of photolithography equipment, saw its shares decline by an astonishing 16.26% in just one day after the announcement, resulting in a staggering loss of approximately $55 billion in market value. This pattern continued into the next day, with another drop of 6.42% and a further loss of around $18 billion. Over the course of just two days, ASML’s value dwindled by an overwhelming $73 billion, marking the largest drop in nearly 26 years. The stock market reaction begs the question: what lies behind these alarming figures? Detailed analysis of ASML's earnings suggests that, on the surface, its performance does not appear particularly alarming. The company reported revenue of €19 billion for the first three quarters, indicating a year-on-year decline of 6.5%. Further breakdown reveals third-quarter earnings of €7.47 billion, with a net profit of €2.08 billion and respectable gross and net profit margins of 50.8% and 28%, respectively. However, the real concern is embedded in the order figures. ASML's order intake in the third quarter was a mere €2.63 billion, which constitutes near half of market expectations. This discrepancy implies that, while current performance holds up well, the anticipation of declining orders leading into 2024 poses a significant threat. ASML’s management expressed expectations of modest growth, forecasting net sales to range between €30 billion and €35 billion by 2025, which is below what the market had predicted. Additionally, projected gross profit margins were similarly low, ranging between 51% and 53%. In context, ASML’s decreasing orders hold significant implications not just for the company itself, but for the entire global chip market. ASML stands as the largest technology company in Europe and the foremost manufacturer of photolithography machines worldwide. Its clientele encompasses major corporations such as TSMC, Intel, Samsung, Micron, and SK Hynix. The company's sales volume often serves as an essential barometer for investment trends and market health within the chip manufacturing landscape. The stark drop in orders can be interpreted through two lenses: a cooling global semiconductor market or potential geopolitical tensions affecting demand, specifically in China. Reports from the Semiconductor Industry Association indicate a modest growth projection of 3.4% for global semiconductor manufacturing equipment sales in 2024, amounting to approximately $109 billion, with anticipated growth of around 17% for 2025. This suggests the semiconductor industry continues to grow, driven in part by the rapid evolution of AI technologies. Unfortunately, it appears that the more pressing issue may indeed be linked to significantly reduced purchases by Chinese companies. Notably, in 2023, ASML documented revenues of €7.25 billion from mainland China, a staggering 148.69% increase year on year, accounting for 26.3% of its revenue. However, official statements from ASML predict this share will drop to about 20% by 2025, indicating a significant reduction in Chinese orders. The implications here are profound: a strategic pivot towards domestic production capabilities is gaining momentum in China. Since 2018, when SMIC inked a deal with ASML for eleven extreme ultraviolet lithography machines, tensions escalated following U.S. sanctions, leading to what many term a "chip war." However, despite such geopolitical challenges, SMIC's expansion strategies remained undeterred, with an emphasis on legitimizing production through mature processes to capture market share. These developments signal a broader trend towards semiconductor equipment localization and self-sufficiency in China. Consider the Kirin 9000s developed by Huawei, utilizing advanced 7nm processes, marking a significant step forward for the Chinese semiconductor industry and a milestone in equipment localization efforts. Examining the financial landscape of other Chinese entities reveals a robust growth trajectory. For instance, Northern Huachuan anticipates revenues between RMB 18.83 billion and RMB 21.68 billion for anticipated growth of 29% to 48.6%, with a net profit forecast ranging from RMB 4.13 billion to RMB 4.75 billion. Meanwhile, Weir shares are eyeing net profits that could skyrocket by as much as 837.8%. The broader trends also reflect stark contrasts between global and Chinese-specific statistics. While global semiconductor equipment shipment growth was at 4% in Q2, China registered an astounding growth rate of 62%. Over the years, the shift in semiconductor capacity has been significant: from a mere 2% in 2000 to an estimated 17% in 2020, with projections suggesting an advance to 26% by 2026. It is undeniable that while China still faces challenges in securing advanced production capabilities, the push for domestic alternatives continues unabated, particularly in light of the current geopolitical climate inhibiting free trade in technology. The decline in ASML orders may reflect a complex interplay of factors, including strategic stockpiling by domestic Chinese firms, alluding to a theater of technological independence that is rapidly evolving. In summation, the landscape of the semiconductor industry is undergoing a significant transformation. The era characterized by dependence on key manufacturers like ASML is being intricately disrupted by both external pressures and internal ambitions towards self-reliance in technology. As such, one could argue that we are at the precipice of a new chapter in semiconductor manufacturing, one defined by resilience and strategic pivoting rather than mere reliance on traditional global leaders. In conclusion, this fatigue of certainty surrounding ASML serves as both a warning and a signal—a reminder that amidst the ebb and flow of market demands, transitions in technology, policy, and consumer behavior are leading the industry towards a future fraught with both challenges and promising opportunities.