China’s Workaround of Chip Export Controls Poses Strategic Challenge for ASML

ASML USN070592100

Recent reports confirm a significant development for ASML Holding NV: Chinese semiconductor manufacturers are successfully circumventing Western export restrictions by retrofitting older lithography systems. This practice, confirmed over the weekend, reveals that Dutch-made machines continue to operate in China's advanced production lines despite license revocations. Concurrently, rumors are emerging about a Chinese-developed prototype for extreme ultraviolet (EUV) lithography, presenting a potential direct challenge to ASML's long-held technological supremacy.

The core of the issue involves ASML's 2050i and 2100i model lithography tools, which were delivered to China prior to the license suspension in September 2024. Chinese chipmakers are now upgrading this existing equipment for use in more sophisticated manufacturing processes. The logic for these manufacturers is straightforward: why pursue new machinery that may be undeliverable when current assets can be modified to meet requirements?

This situation represents a twofold concern for ASML. First, the intended impact of export controls appears less restrictive than policymakers intended. Second, the company faces a potential decline in future orders from a key market, as Chinese clients extend the lifecycle of their installed base through upgrades.

The strategic landscape grows even more complex with market intelligence suggesting the existence of a Chinese EUV prototype, allegedly created through reverse engineering. Should China achieve the capability to produce its own EUV systems, the foundational technological leadership ASML has built over decades would be fundamentally contested.

Financial Resilience Amidst Strategic Headwinds

Despite these challenges, ASML's equity performance remains strong. The stock recently closed near $1,056, reflecting an approximate 50 percent gain since the start of the year. However, shares have been consolidating after reaching an all-time high of $1,141 in early December.

Solid fundamental results underpin this valuation. For the third quarter of 2025, ASML reported revenue of €7.5 billion and net profit of €2.1 billion. Company leadership maintains a full-year 2025 revenue growth target of around 15 percent.

The primary uncertainty lies in forecasts for 2026. Analysts currently project a slowdown to just 6 percent revenue growth, primarily due to an anticipated normalization of business in China. The now-confirmed retrofitting practices intensify worries that this deceleration could be more pronounced than previously modeled.

Divergent Views from the Analyst Community

Market experts are divided in their assessment. JPMorgan Chase recently increased its price target from $1,175 to $1,275, maintaining a "Buy" rating. The bank's thesis hinges on structural demand from artificial intelligence and cloud computing outweighing geopolitical risks. In contrast, Barclays holds a "Neutral" stance, citing valuation concerns and geopolitical volatility.

The current analyst consensus leans toward a "Moderate Buy" recommendation. This reflects the ongoing tension between near-term risks associated with China and the long-term growth potential in other global markets.

The Evolving Nature of Geopolitical Risk

The weekend's developments raise a pivotal strategic question: How effective are export controls when the underlying technology can be replicated or modified locally? For ASML, this introduces an additional risk dimension that extends beyond conventional market and competitive pressures. The political strategy to slow China's technological catch-up is showing limitations, placing ASML in a precarious position between competing geopolitical fronts.