Dependence on foreign lithography equipment emerges as a growing liability for Chinese chipmakers in the face of tightening export controls led by the United States.
To hedge against rising geopolitical and supply chain risks, Washington and Beijing have used industrial policies in recent years to beef up domestic semiconductor manufacturing. Although front-end manufacturing (or “fabrication”) is an integral part of chip production and receives most of the industry’s media coverage, it must be emphasized that the global semiconductor value chain consists of around 300 different inputs supplied for dozens of countries. A less prominent but very crucial supply chain entry is the lithography equipment used for chip manufacturing.
Lithography, the process of printing integrated circuit patterns onto silicon wafers, also turns out to be a notable weakness for China’s chip industry, which remains largely uncompetitive in semiconductor manufacturing equipment (SME) sectors. and electronic design automation (EDA). To curb the advance of Beijing’s semiconductors, Washington is currently increasing extraterritorial restrictions on all inputs containing significant technology of US origin, such as lithography equipment, through the Foreign Direct Products Regulation.
At a Bureau of Industry and Security (BIS) conference in late June, US Commerce Secretary Gina Raimondo declared that Washington could “shut down” any Chinese semiconductor company that sold to Russia, since “almost all chips in the world and in China are made with American equipment and software.” Many Washington policy analysts have also identified the SME and EDA as weak spots in the Chinese chip industry. In January 2021, the Center for Security and Emerging Technologies (CSET) published a report arguing that China’s weaknesses in semiconductor manufacturing equipment (SME), EDA software, chip design intellectual property, and advanced materials presented “a political opportunity” for Washington that could be exploited with export and investment controls.
Since 2020, Washington has targeted China’s weakness in lithography by banning the sale of advanced extreme ultraviolet (EUV) machines and is currently considering a “factory by factoryEquipment ban that will specifically target Chinese factories producing at or below the 14-nanometer processing node. This new export control strategy seeks to contain the technological advance of China’s semiconductor industry without slowing down the supply of older commodity chips that are essential for the production of automotive and consumer electronics.
Washington’s multilateral export control strategy, or what the Chinese Foreign Ministry terms “Coercive diplomacy” and “technological terrorism” pose a serious threat to the Chinese chip industry, which lacks viable alternatives for domestic SMEs and EDAs. China’s leading lithography manufacturer, Shanghai Micro Electronics Equipment Co. (SMEE), currently mass produce at the 90-nanometer processing node and has developed 14-nanometer machines with suboptimal throughput rates.
While these results are remarkable for an industry newcomer, SMEE still remains several generations behind the Netherlands-based world leader in lithography, Advanced Semiconductor Materials Lithography (ASML), which produces machines capable of etching circuits for chips. advanced below 7 nanometers. Given the immense technical knowledge and capex barriers to competing in the lithography industry, Beijing’s best option is to continue buying from ASML.
During his visit to the Netherlands in late May, US Undersecretary of Commerce Don Graves held down Dutch officials will restrict ASML from selling immersion lithography machines, which are an advanced type of deep ultraviolet (DUV) technology, to China. DUV is an older technology than EUV, but it remains central to the 28-nanometer production line, which is now the mainstay of Chinese chip leaders like Semiconductor Manufacturing International Corp. (SMIC). In addition to lithography giant ASML, Washington is also pressuring Japan’s Nikon and Canon to curb DUV exports to China.
Even with restrictions on EUV sales, Chinese chipmakers have been able to make significant strides by reusing older DUV equipment through multi-patterning, which is a technique also used by global manufacturing leaders Taiwan Semiconductor Manufacturing Co. ( TSMC) and Samsung. For example, SMIC achieves produce certain specialty chips at the 7 nanometer level, albeit with limited commercial yields, using older DUV equipment purchased from ASML. However, the Chinese semiconductor industry’s ability to continue moving up the advanced manufacturing ladder will be severely handicapped if Washington successfully expands export and investment controls to cover mature technologies such as DUV immersion lithography equipment.
Washington’s proposed new restrictions targeting the Chinese chip industry have faced strong pushback from equipment suppliers, including ASML, who argue that mature systems such as DUV equipment should not be banned for the same reasons. of national security than EUV and other cutting-edge technologies. ASML and other equipment providers also have strong financial incentives to maintain access to the Chinese market. In 2021, China-based chip facilities bought ASML’s 81 DUV, or ArFi, immersion lithography machines accounted for 14.7 percent ($2.7 billion in sales) of the company’s total revenue. If DUV sales to Chinese consumers are blocked, ASML can lose about $2 billion in revenue, according to semiconductor consultancy ICWise.
Going forward, these economic realities will increasingly complicate various national security goals related to chips, such as expanding export controls and promoting self-sufficiency.