ASML's 2026 Horizon: Can Growth Weather the geopolitical China Storm?
Dutch semiconductor equipment giant ASML
ASML's EUV systems rely on their own supply chain of thousands of specialized firms, often critical to the manufacturing process and operating under exclusive license agreements and constrained by the very complexity of their production (as is the case for Zeiss' mirrors, optical systems which require months to be polished)
The groundbreaking complexity of ASML equipment to manufacture the most advanced semiconductors has put the firm at the heart of the industry, an incontrovertible link to operate at the tip of the most demanding software developments, powered by artificial intelligence
The disruptive potential of AI-based technologies has raised American concern about China's 'military-civil fusion' strategy and undoubtedly for good reason : the American military-industrial complex, recognized by President Eisenhower in his 1961 farewell address, is no different
Recognizing the potential national security risks of dual technologies, compounded by highly advanced tech supply chains stretching the globe from the Netherlands (nerve center of ASML to Taiwan (headquarters of TSMC
CFIUS, the Committee on Foreign Investment in the United States, is a U.S. interagency committee with authority to review mergers, acquisitions, and takeovers that could result in foreign control of a U.S. business
The "reversal" exposes the U.S. national security risks of M&A activities within the global tech supply chain, between foreign owned entities and the risks of uniquely dominant foreign firms, operating under the legal umbrella of American allies
The forceful geopolitical pressure on those allies to constrain distribution of advanced equipment, led by successive U.S. Administrations, and applied in the Netherlands, as well as in Japan and in Taiwan, has been effective ....up to a point
How ASML will navigate global politics remain to be seen and, with strong financial support in the firm's R&D by American firms (such as Intel
Did the horse leave the barn after all ?
China's decade-long effort
China's efforts to bypass American roadblocks in access to advanced semiconductors are mistakenly related to the current geopolitical confrontation
In a 2019 note "Integrated Circuit - a Long March", we referred to the Chinese industrial strategy - “Guideline to Promote National IC Industry Development” - announced in 2014, a decade-long effort coming to fruition
The bittersweet questions raised two years ago in Semiconductors Manufacturing - Trust is in Short Supply are getting close to answers...
Whether the American game plan will succeed in the medium-term remains to be seen
- During the current year, and probably well into 2024 as well, Chinese manufacturing will have little choice but to abide by US export rules
- Further out, a hard push by Chinese leadership to catch-up in semiconductor manufacturing equipment to break through the bottleneck of Western and Japanese dominance appears preordained - by any means possible....
A recently published article of TechRepublic may be indicative of the power shift China is seeking
Chinese tech giant Huawei’s new CloudMatrix 384 supercomputer just outperformed NVIDIA’s platform on key metrics, delivering more than double the computing power in comparison
Huawei’s platform uses 384 domestically-produced Ascend 910C chips, each delivering enormous processing power, and boasts 3.6 times the memory capacity and 2.1 times the memory bandwidth of NVIDIA’s platform
And for TechRepublic
The news signals a fundamental power shift that could rewrite the global tech landscape:
Huawei’s breakthrough is sparking a global trend toward “sovereign AI” across Europe and the Middle East, creating massive new markets where both Huawei and NVIDIA are competing for influence —and where Huawei’s freedom from US export restrictions gives it an advantage.
Concluding,
Recent testing by China’s DeepSeek AI team revealed that Huawei’s Ascend 910C chips deliver 60% of NVIDIA H100’s performance with “unexpectedly good” results.
DeepSeek converted its systems from NVIDIA’s software to Huawei’s with just one line of code. If Huawei can close that remaining 40% performance gap while maintaining its cost and supply chain advantages, we’re looking at the birth of two separate AI universes
ASML, indispensable ...but for how long ?
ASML's Q2 2025 results were strong on the surface, with revenues hitting €7.7 billion, a 23% year-over-year increase, and net income reaching €2.3 billion. However, the headline numbers mask a significant shift in the company's revenue composition. Sales to China, which have been a major growth driver, are now under scrutiny. In the second quarter of 2025, system sales to China accounted for approximately 26% of the total, a notable decrease from the 47% seen in the third quarter of 2024. This reflects the impact of US-led export restrictions aimed at curbing China's technological ambitions.
These restrictions have effectively barred China from accessing ASML's most advanced Extreme Ultraviolet (EUV) lithography machines, which are indispensable for producing the next generation of chips for artificial intelligence (AI). While Chinese firms have ramped up purchases of less advanced Deep Ultraviolet (DUV) systems, the potential for even tighter controls from the Dutch government hangs over this revenue stream.
Beyond the Great Wall: AI and Global Subsidies Fueling Demand
Despite the headwinds in China, ASML's growth story is far from over. The company is benefiting from several powerful secular trends.
The primary engine of this growth is the relentless demand for AI. The development of sophisticated large language models and other AI applications requires massive computational power, which in turn necessitates cutting-edge chips manufactured using ASML's EUV technology. This is clearly reflected in the company's order books. Net bookings in Q2 2025 were a solid €5.5 billion, and a remarkable 84% of these new orders were for logic applications, the backbone of AI processing. Furthermore, EUV systems, the technology restricted from China, made up 48% of system sales in the quarter, underscoring the demand from other global players.
Adding to this momentum is a global push for semiconductor sovereignty. Governments in the United States, Europe, and Japan are pouring billions into building up their domestic chipmaking capabilities. These initiatives, such as the US CHIPS Act, will lead to the construction of new fabrication plants, all of which will need to be equipped with ASML's market-leading lithography systems.
The Road to 2026: A Picture of Caution
While the outlook for 2025 appears robust, with ASML forecasting a 15% increase in revenue for the full year, the view into 2026 is considerably more opaque. Management has adopted a cautious tone, signaling uncertainty about the growth trajectory for that year, a sentiment that has unsettled investors.
The company's Q3 2025 revenue guidance, projected between €7.4 billion and €7.9 billion, came in below analyst consensus, adding to the cautious sentiment. The substantial backlog, which stood at €33 billion after the second quarter, provides a cushion, but the conversion of these orders into revenue will depend on the capital expenditure plans of its major customers like TSMC, Samsung, and Intel.
An Investor's Crossroads
For investors, ASML presents a complex calculus. On one hand, its monopolistic position in the EUV market and its central role in the AI revolution provide a compelling long-term thesis. The company's aggressive share buyback program signals strong internal confidence in its future prospects.
On the other hand, the persistent geopolitical risks associated with China and the inherent cyclicality of the semiconductor industry cannot be ignored. The company's ability to navigate the delicate balance of supplying a critical global industry while adhering to shifting export controls will be paramount.
The coming year will be a crucial test. Investors will be watching closely to see if the surging demand for AI and the global build-out of chip fabs can indeed compensate for the constraints in the Chinese market, setting the stage for renewed growth in 2026 and beyond