China threatens the Netherlands and Japan with retaliation in the chip war

Chinese state media and politicians threatened the Netherlands and Japan with retaliation and urged them not to comply with Washington's demands for stricter chip export controls against China.

The Global Times, a mouthpiece of the Chinese Communist Party, writes in a commentary that if the Dutch government follows Washington's instruction and stops carrying out maintenance work on China's high-end deep ultraviolet (DUV) lithography equipment, Beijing will take appropriate countermeasures, such as “imposing trade restrictions or looking for alternative suppliers, as well as reassessing cooperation with the Netherlands in more global areas.”

The comments come after Bloomberg reported on August 29 that Dutch Prime Minister Dick Schoof is unlikely to renew certain ASML licenses for service and supply of spare parts in China when they expire at the end of this year.

Citing people familiar with the matter, the report said the Dutch government's decision, which relates to ASML's state-of-the-art DUV lithography machines, came under pressure from the United States.

It said the Biden administration was considering using the U.S. Foreign Direct Product Rule (FDPR) to prohibit other countries from exporting products made with U.S. technology to China.

“We are having discussions, good discussions, and we are also paying very close attention to ASML's economic interests. These have to be weighed against other risks, and the economic interests are extremely important,” Schoof told Reuters on August 30.

“ASML is a very important, innovative industry for the Netherlands and should not suffer under any circumstances, as this would damage ASML’s global position,” he said.

The Netherlands is not the only supplier country feeling increasing pressure. Another Bloomberg report on Monday said some senior Chinese officials had told Japanese companies that China would retaliate if Tokyo tightened its controls on chip exports.

The report said Toyota Motor executives had privately told Japanese officials that they were concerned that Beijing might cut off Japan's access to critical minerals essential to auto production. It added that the US has so far refrained from using the FDPR against its allies, preferring to reach a diplomatic solution with them.

Covering the curbs

As of January 1 of this year, the Dutch government will no longer grant licenses for the supply of ASML's most advanced DUV immersion lithography systems (NXT: 2000i, NXT:2050i and NXT:2100i and subsequent systems) to China.

However, Chinese chipmakers can still buy these machines from third countries, while ASML must provide them with maintenance services and spare parts.

At the end of July, media reports said the Biden administration would expand the scope of its FDPR, which was first introduced in 1959 to control trade in US technologies, by the end of August.

They said Washington could use the FDPR to prevent China from sourcing high-end high-bandwidth memory (HBM) chips from South Korea and chip manufacturing equipment from the Netherlands and Japan through locations such as Israel, Singapore, Malaysia and Taiwan. So far, the US has not announced these restrictions.

Since last year, Washington has been pushing the Dutch government to limit the maintenance services ASML offers to Chinese customers. The restriction will likely affect fewer than five modern DUV lithography machines in China.

Chinese state media and commentators said the impact of the restriction on China's chip industry would be huge, as the affected machines are crucial for producing 7-nanometer chips.

“If ASML stops providing maintenance and spare parts to China, some DUV lithography machines may have to stop working starting next year,” said Jiefu, an IT columnist from Chongqing, in an article published on Monday. “The first to break will be the machines that use multiple exposure to make high-end chips.”

He says it will be a lose-lose situation for both the Chinese semiconductor industry and ASML.

“This is a strategic move by Washington to further provoke China and curb its development,” said a Global Times commentary on September 1. “It will exacerbate the growing rift in China-US and China-Netherlands relations and increase global geopolitical instability.”

The article added that Amsterdam is currently weighing the economic interests involved in ASML's decision to restrict exports to China. Such efforts to strike a balance suggest that the US containment policy towards China has reached its limits.

Dale Jieh Wen-chieh, Taiwan's former ambassador to New Zealand, says in a Taiwan TV program broadcast on YouTube that the US can force ASML to stop repairing high-end DUV lithography in China because it has the ultraviolet technology ASML needs, and the Americans can ask Germany to limit exports of Zeiss lenses to the Netherlands.

Jieh believes it is unlikely that Shanghai-based Semiconductor Manufacturing International Corp (SMIC), which reportedly produces 7nm chips for Huawei Technologies using multiple-equipment processes, will be able to circumvent the U.S. restrictions in the next few years.

However, one commentator from Hunan says there is no need to worry too much, as Chinese chipmakers will eventually find a way to get the parts they need and get high-end DUV lithography in order, just as Russia can continue to buy US chips through various unofficial channels.

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