To hedge against growing geopolitical and supply chain risks, Washington and Beijing have utilized industrial policies in recent years to bolster domestic semiconductor manufacturing. Although front-end manufacturing (or “fabrication”) is integral to chip production and receives most of the industry’s media coverage, it should be emphasized that the global semiconductor value chain consists of around 300 different inputs supplied by dozens of countries. One less prominent but highly crucial supply chain input is the lithography equipment used for chip manufacturing.
Lithography – the process of printing integrated circuit patterns onto silicon wafers – also happens to be a notable weakness for the Chinese chip industry, which remains largely noncompetitive in the semiconductor manufacturing equipment (SME) and electronic design automation (EDA) sectors. To slow Beijing’s semiconductor advancement, Washington is currently ramping up extraterritorial restrictions on all inputs containing significant U.S.-origin technology, such as lithography equipment, through the Foreign Direct Product Rule.
At a Bureau of Industry and Security (BIS) conference in late June, U.S. Commerce Secretary Gina Raimondo declared that Washington could “shut down” any Chinese semiconductor company caught selling to Russia since “almost every chip in the world and in China is made using U.S equipment and software.” Many Washington policy analysts have also identified SME and EDA as the Chinese chip industry’s soft spots. In January 2021, the Center for Security and Emerging Technology (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 policy 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 ultra-violet (EUV) machines and is currently considering a more comprehensive “factory-by-factory” equipment ban that will specifically target Chinese fabs producing at or below the 14-nanometer processing node. This new export control strategy seeks to contain the technological advancement of China’s semiconductor industry without slowing the supply of older commodity chips that are essential for automotive and consumer electronics production.
Washington’s multilateral export control strategy, or what the Chinese Foreign Ministry terms “coercive diplomacy” and “technological terrorism,” poses a serious threat to the Chinese chip industry, which lacks viable domestic SME and EDA alternatives. China’s leading lithography maker, Shanghai Micro Electronics Equipment Co. (SMEE), currently mass produces at the 90 nanometer processing node and has developed 14 nanometer machines with suboptimal yield rates.
While these results are remarkable for an industry latecomer, SMEE still remains several generations behind the Netherlands’-based global lithography leader, Advanced Semiconductor Materials Lithography (ASML), which produces machines capable of etching circuits for advanced chips below 7 nanometers. Given the immense technical knowledge and capital expenditure barriers to competing in the lithography industry, Beijing’s best option is to continue purchasing from ASML.
During his visit to the Netherlands in late May, U.S. Deputy Commerce Secretary Don Graves lobbied Dutch officials to restrict ASML from selling immersion lithography machines, which are an advanced type of deep ultra-violet (DUV) technology, to China. DUV is an older technology than EUV but remains critical for the 28-nanometer production line, which is currently the mainstay for Chinese chip leaders such as Semiconductor Manufacturing International Corp. (SMIC). In addition to lithography giant ASML, Washington is also putting pressure on Japan’s Nikon and Canon to curb China-bound DUV exports.
Even with the restrictions on EUV sales, Chinese chipmakers have been able make significant advancements by repurposing older DUV equipment through multi-patterning, which is a technique also used by global fabrication leaders Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung. For instance, SMIC manages to produce certain specialty chips at the 7-nanometer level, albeit at limited commercial yields, using older DUV equipment purchased from ASML. However, the Chinese semiconductor industry’s ability to continue climbing up the advanced manufacturing ladder will be severely incapacitated 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 on the same national security grounds as EUV and other cutting-edge technologies. ASML and other equipment vendors also have strong economic incentives to maintain China market access. In 2021, Chinese-based chip facilities bought 81 DUV, or ArFi, immersion lithography machines from ASML and 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 stands to lose around $2 billion in revenue, according to semiconductor consultancy ICWise.
Moving forward, these economic realities will increasingly complicate various chip-related national security objectives such as export control expansion and self-sufficiency promotion.