Huai'an, China – April 29, 2024 – A worker produces mobile phone, automobile, and LED lighting chips in a workshop in Huai'an, Jiangsu Province, China, on April 29, 2024.
Cost Photo | Noor Photo | Getty Images
China is grappling with U.S. chip restrictions, but its attempts to build critical equipment show it's not just a matter of spending billions of dollars.
Manufacturing state-of-the-art semiconductors requires cutting-edge lithography scanners to print small, complex circuit designs onto microchips. Headquartered in the Netherlands ASML is the only company in the world that can manufacture these machines. But the Dutch government has banned the sale of its most advanced equipment to China.
That means making these machines is China's focus in promoting the development of its domestic semiconductor industry, with $96.3 billion in subsidies and preferential policies provided, according to CNBC's calculations of three major state funds.
last week, China releases latest lithography scanner Can support 65 nm or better resolution than 90nm machines developed in 2022. But still far behind ASML Machines with resolutions below 10 nanometers. Smaller resolution can produce more powerful wafers.
Huang Leping, managing director and chief technical analyst of Huatai Securities, said that going from the current 65 nm model to ASML's latest immersive deep ultraviolet (DUV) lithography machine will require a “major technological breakthrough.”
Meanwhile, ASML is still selling what products it can to China. In the second quarter of this year, the company's share of revenue from sales to Chinese customers more than doubled to 49% from 17% in the fourth quarter of 2022.
John Lee, director of consultancy East-West Futures, said the spike showed Chinese industry “felt they had no viable domestic alternatives yet”.
technology kills
Since the United States implemented tighter export restrictions in October 2022, China has increased spending on semiconductor equipment, There are concerns that further export restrictions may emerge.
Investing in these questions can help, but only to a limited extent.
john lee
Director of East-West Futures
Paul Triolo, partner at DGA Group and senior vice president of China, said in an email that with significant state investment, China could make some progress in replicating some of the capabilities of ASML's leading system in the next two to three years. But he added that “whatever systems Chinese companies are able to produce are unlikely to fully replicate what ASML has done” or be as advanced.
“Recreating the advanced lithography systems that ASML has spent decades developing and commercializing is a daunting task for any Chinese company,” Triolo said.
Earlier this year, ASML, which has been subject to various restrictions for years from selling its state-of-the-art deep ultraviolet (EUV) machines to China, now faces increased pressure to ban the export of even less advanced machines to China.
Shanghai, China – November 8, 2023 – Visitors learn about lithography machines at the ASML booth at the 6th China International Import Expo in Shanghai, China, on November 8, 2023.
Cost Photo | Noor Photo | Getty Images
This increases Beijing's urgency as the United States continues to seek to restrict exports of high-end technology to China. In the first half of this year, China spent a whopping US$24.73 billion to stockpile chip manufacturing equipment, exceeding the combined expenditures of the United States, Taiwan and two other major countries during the same period.
“Investing money in these issues will help, but it will have a limited impact,” Li said. It is more important to emphasize the development of key technologies such as lithography and an adequate and skilled workforce.
China appears to be following its traditional approach, including establishing multi-year programs and subsidies to support industries such as electric vehicles.
The electric vehicle strategy has been successful, with local companies taking market share from foreign auto giants in China.
Camille Boullenois, deputy director of Rhodium Group, said that in the field of electric vehicles, subsidies have stimulated demand and created a “huge, protected market” for Chinese companies to rapidly expand their scale.
But in the more complex chip industry, “it's much more difficult to break through the technical ceiling,” she said. “The traditional levers of China’s industrial policy appear to be less effective.”
At the same time, the United States not only restricts China's access to chips, but also attempts to revitalize its own industry and further widen the technological gap.
The 2022 U.S. “Chip Science Act” allocates US$52 billion to domestic chip manufacturing capabilities.
It is predicted that the U.S. share of the most advanced wafers (below 10 nanometers) is expected to grow from zero in 2022 to nearly 30% in 2032 Semiconductor Industry Association and Boston Consulting Group joint reportwhile China's share is expected to reach only 2% in this decade.
misaligned priorities
China's economic slowdown is making it harder for local governments to support Beijing's ambitions to become self-reliant in chip technology.
Beijing launches $47.5 billion State-backed chip investment fund in Maylarger than the previous two such funds combined.
But the latest fund has less local government input. Commitment to invest, According to local media citing the National Enterprise Credit Information Publicity System
The next question is whether the money will be used effectively.
The allocation of such financial support “often deviates” from the central government's strategic goals, Rongding Group stated in the report earlier this month.
The report found that local governments tend to support larger, more mature industries rather than semiconductor innovation, even if they face problems such as overcapacity.
Analysts say this is because local governments have limited budgets, making them increasingly risk-averse when allocating grants.
—CNBC’s Evelyn Cheng contributed to this report.