Can China build its own ASML?

The company itself acknowledges that its lithography empire rests not only on its own know-how but on the support of thousands of suppliers.

“This is a huge amount of competence, and different people work on different parts of the tool,” ASML’s CEO Christophe Fouquet, told Nikkei Asia. “Most of the time the people, for example, who worked on the light source don’t know at all how the optic [system] is working, because these are very different domains of competence.”

Fouquet described the development as “basically bringing together a huge amount of knowledge. … It’s extremely difficult for anyone to be able to reproduce an EUV in just a few years.”

Andreas Erdmann, head of computational lithography and optics at top German research center Fraunhofer IISB, said this complexity is a hurdle for would-be challengers. “If you are building lithography machines, it’s not only good optics you need,” he told Nikkei Asia. “You will need mechanics, electronics, chemistry, mathematics and computation. Everything has to work together and integrate perfectly. That’s why so few players can do that in the world.”

There being “so few players,” as Erdmann puts it, is something of a mixed blessing for the Dutch company.

As the primary player in a critical field, it has been caught in the crossfire of the U.S.-China tech rivalry. Washington has imposed increasingly strict export controls aimed at restricting ASML from shipping advanced tools to China and has pressured the Dutch government to issue similar rules. The latest U.S. regulations bar ASML from exporting any immersion DUV machines or more advanced systems to China without a license.

Its U.S.-listed shares are down over 20% over the past year amid macroeconomic headwinds and geopolitical uncertainties.

“ASML often felt it was particularly targeted by the U.S. because of its outstanding market position,” a Dutch diplomat familiar with the U.S.-Netherlands talks on export control rules told Nikkei Asia.

What would have been China’s first EUV machine shipment — from ASML to SMIC in 2019 — was blocked due to U.S. pressure, Nikkei Asia first reported. A former U.S. Commerce Department official said export controls, especially on access to cutting-edge lithography tools, have been effective in slowing China’s progress in advanced chip manufacturing.

“To build cutting-edge chips at scale, you simply need EUV machines,” the former official said.

These political tensions have turned China, a key market, into one of ASML’s most determined competitors, even if the road to success turns out to be a long one.

China’s Shanghai Micro Electronics Equipment (SMEE), for example, was set up 23 years ago and has developed lithography tools capable of producing 90-nm chips, suitable for use in home appliances, some consumer electronics and cars that require less computing power. The company aims to introduce lithography systems for 65-nm and 28-nm-grade production, but adoption of its machines by Chinese chipmaking clients remains limited.

“I visited a chipmaking client and saw SMEE’s lithography machine and I asked how it was,” an executive with a Chinese chip equipment maker said. “My client told me it’s been in place in the facility for a year but still doesn’t work properly.”

And this for tech that is far less advanced than EUV lithography machines.

Huawei, itself long subject to U.S. blacklisting, has stepped in as a key supporter of China’s chipmaking equipment sector.

The company has built a massive R&D hub in Shanghai, and is recruiting talent from global chip leaders like TSMC, ASML, Applied Materials and KLA. It is also supporting SiCarrier, a Shenzhen-based chip tool maker founded in 2021, in the development of a wide range of chipmaking tools, aiming to lower dependence on foreign players. Huawei has also hired optics and simulation experts overseas for its research institutes in Germany, a source familiar with the matter said.

Little-known Shanghai Yuliangsheng Technology, meanwhile, has emerged as a lithography challenger thanks to support from Huawei and SiCarrier, Nikkei Asia has learned. The company, also known as UEAscend, is also receiving technical help and staff from SMEE and several top research institutes, sources said.

Huawei, SiCarrier and Yuliangsheng are working together to develop China’s first immersion DUV lithography machines in hopes of rivaling global leaders like ASML and Nikon, two people with knowledge of the matter said.

The trio’s ultimate mission is to develop a homegrown EUV lithography machine and build an independent ecosystem free from U.S. restrictions, they said. The central and local governments are also throwing their weight behind such efforts.

Huawei, SMIC, YMTC, CXMT, SMEE and SiCarrier did not respond to requests for comment.

The sense of urgency is growing. SMIC, for example, still relies on foreign tools it acquired before export controls to produce advanced chips, such as those at the 7-nm grade, for Huawei and other Chinese chip developers. A breakthrough in lithography and other equipment would help China gradually increase its output of these state-of-the-art chips.

To support this push, China launched the third phase of its National Integrated Circuit Industry Investment Fund — known as the Big Fund — in May 2024, with 344 billion yuan ($48 billion) in government backing. This phase focuses on strengthening the lithography supply chain and is expected to attract 1.38 trillion yuan in private investment, according to government data. Local governments from Beijing to Shanghai and Shenzhen have also introduced policies to back domestic suppliers of critical EUV components, including photoresists, lithography tools, mirrors, lenses, lasers and light sources.

Lithography expert Lin Burn-Jeng, a former senior TSMC executive and current dean of the College of Semiconductor Research at National Tsing Hua University in Taiwan, said becoming competitive in lithography requires more than money.

“You need support from chipmakers, along with accumulated experience and technology. In particular, building competitive lithography machines demands extraordinary precision engineering, down to just a few nanometers,” Lin said.

Mitsunobu Koshiba, former chairman of Japanese photoresist maker JSR, described ASML’s machines as the “most complicated tool on this planet” and not something that every country can hope to produce.

Motivation is another key ingredient to success, one that, ironically, Washington has provided. U.S. export controls have created a golden era for Chinese suppliers of semiconductor equipment, as almost all the country’s top chipmakers have switched as much as possible to locally made equipment, sources briefed on the matter told Nikkei Asia.

“To be honest, most domestically built equipment still can’t match the performance of leading international solutions,” said one Chinese chip equipment executive. “But at this stage, chipmakers have no choice. They need to use them as a baseline and keep giving them a chance, even if it means risking impacts on production quality.”