China’s ambitions for chip self-sufficiency thwarted by lack of tools

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HUAI’AN, CHINA – APRIL 29, 2024 – A worker produces chips for mobile phones, cars, LED lighting at a workshop in Huai ‘an city, Jiangsu province, China, April 29, 2024. 

Costfoto | Nurphoto | Getty Images

China is scrambling to counter U.S. chip restrictions, but its attempts at manufacturing key equipment reveal it’s not just a matter of spending billions.

Making the most advanced semiconductors requires cutting-edge lithography scanners to print the small, complex circuit designs onto microchips. Netherlands-based ASML is the only company in the world that can make those machines. But the Dutch government has banned the sale of its most advanced equipment to China.

That means building those machines is a focal point in China’s push to develop its domestic semiconductor industry with $96.3 billion in subsidies and preferential policies, according to CNBC’s calculation of three largest state funds.

Last week, China announced its latest lithography scanner could support a resolution of 65 nanometers or better, a significant improvement from the 90-nanometers machine it developed in 2022. But still way behind ASML’s machines with resolutions below 10 nanometers. Smaller resolutions enable the production of more powerful chips.

It would take a “large technology breakthrough” from the current 65 nm model to the latest immersive deep ultraviolet (DUV) lithography machines from ASML, Leping Huang, managing director and chief technology analyst at Huatai Securities, said.

In the meantime, ASML is still selling what it can to China. The company’s share of revenue from sales to Chinese clients more than doubled to 49% in the second quarter this year, from 17% in the last quarter of 2022.

That spike suggests China’s industry “doesn’t think they have a viable domestic alternative yet,” said John Lee, director at consultancy East-West Futures.

Technological chokehold

China has ramped up spending on semiconductor equipment since the U.S. introduced tighter export restrictions in October 2022, amid concerns that further export curbs could follow.

Throwing money at these problems will help but only so much.

John Lee

Director at East-West Futures

With substantial state investment, China could make some headways in duplicating part of the capabilities of ASML’s leading systems within the next two to three years, Paul Triolo, Partner and Senior VP for China at DGA Group said in an email. But “whatever system Chinese firms are able to produce will not likely be an exact copy of what ASML has done,” and not as advanced, he added.

“Recreating advanced lithography systems that took ASML decades to develop and commercialize is a tall order for any individual Chinese company,” Triolo said.

Earlier this year, ASML, which has been under various restrictions to not sell its most advanced deep ultraviolet (EUV) machines to China for several years, came under more pressure to not ship even its less sophisticated machines to the country.

SHANGHAI, CHINA – NOVEMBER 8, 2023 – Visitors learn about lithography machines at the booth of ASML at the 6th CIIE in Shanghai, China, November 8, 2023.

Costfoto | Nurphoto | Getty Images

This added to Beijing’s urgency, as the U.S. continues to seek export curbs on high-end tech to China. In the first half of the year, the country splurged a whopping $24.73 billion stockpiling chipmaking equipment, surpassing the total of what the U.S., Taiwan and two other major countries spent during the same period.

“Throwing money at these problems will help but only so much,” Lee said, stressing that development of key technologies, such as lithography, and a sufficient, skilled workforce are more important.

China appears to be taking a leaf out of its traditional playbook that has involved multi-year plans and subsidies to support industries such as electric cars.

The electric car strategy has seen a success, with homegrown players cutting into the market share of foreign auto giants in China.

In EVs, subsidies incentivized demand and created a “huge, protected market” for Chinese companies to quickly build up scale, said Camille Boullenois, associate director at Rhodium Group.

But in the more complex chip industry, “it’s much harder to break the technological ceiling,” she said. “The traditional levers of Chinese industrial policies seem to be less effective.”  

Meanwhile, the U.S. is not only restricting China’s access to chips, but trying to boost its own industry thus further widening the technological gap.

The U.S. Chips Science Act in 2022 allocated $52 billion in funding for domestic chip manufacturing capacity.

The U.S. share of the most advanced chips — below 10 nanometers — is projected to grow from zero in 2022 to nearly 30% in 2032, according to a joint report by Semiconductor Industry Association and Boston Consulting Group, while China’s share is forecast to barely reach 2% over those 10 years.

Priorities at odds

China’s economic slowdown has made it more difficult for local governments to support Beijing’s ambitions for self-reliance in the chip technology.

Beijing launched a $47.5 billion state-backed investment fund for chips in May, bigger than the previous two such funds combined.

But the most recent fund has fewer local governments chipping in. Only larger cities such as Beijing, Shanghai and Guangdong — which have stronger chips industries — have pledged investment, according to local media citing National enterprise credit information publicity system

Then there’s the question of whether that money will be used effectively.

Allocation of such financial support “often diverge” from the central government’s strategic objectives, Rhodium Group said in a report earlier this month.

Instead of semiconductor innovation, local governments tend to favor supporting larger, more established industries even as they face problems like overcapacity, the report found.

The analysts said that’s because local governments have constrained budgets, making them increasingly risk averse when distributing grants.

— CNBC’s Evelyn Cheng contributed to this report.

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