This may seem surprising. Dutch lithography giant ASML recorded a record sales performance in China.
China’s share of ASML’s global revenue structure has been between 10% and 20%, and this share continues to soar in 2023. In the first three quarters of 2023, the Chinese mainland purchased 5.28 billion euros (40.3 billion yuan) of lithography equipment from ASML, which is about twice ASML’s annual sales in China in 2022.
On November 5, Shen Bo, ASML’s global vice president and president of China, revealed in an interview with the media at the Expo that by the end of 2023, the total number of lithography machines of ASML in China will be close to 1,400.
Lithography is an important part of chip manufacturing. According to the wavelength of the light source, the lithography machine is divided into UV (ultraviolet), DUV (deep ultraviolet), EUV (extreme ultraviolet), and in theory, the advanced chip manufacturing process of 7 nanometers and below can only be achieved through EUV.
ASML is the world’s largest lithography manufacturer and the only supplier of EUV lithography machines. Some argue that the technical capabilities of ASML have actually become a bottleneck for the expansion of the semiconductor industry. Chinese chip manufacturers want to break through advanced manufacturing processes faster, and obtaining advanced lithography machines from ASML is the key.
Like TSMC, due to geopolitical constraints, ASML cannot operate in full accordance with commercial logic. Chinese Mainland cannot purchase ASML’s most advanced EUV lithography machine. Domestic production lines with processes below 14nm mainly rely on DUV lithography machines.
On September 1, 2023, the Netherlands’ Advanced Semiconductor Manufacturing Equipment Regulation came into force. In addition to EUV equipment, the Netherlands has also regulated some of the DUV products required for advanced processes – TWINSCAN NXT: 2000i and subsequent critical infiltrating DUV systems.
On October 17, the United States upgraded its chip sanctions against China again, affecting the NXT1980Di, the most advanced lithography machine that ASML can currently export to China.
It is becoming increasingly difficult for China to obtain advanced lithography machines from ASML.
But why did ASML’s China business soar to new highs in the third quarter? How long can this growth last? In 2024, will China still be able to buy the lithography machines needed for advanced processes from ASML?
What does ASML sell in China?
ASML’s product categories can be divided into I-line, KrF, ArF Dry, ArF Immersion and EUV.
EUV lithography machine is mainly applied to the process below 7nm, which is also a product that has not been available in China. The main products concerned by Chinese customers are DUV lithography machines, models include XT1900 and NXT series, of which NXT is divided into more mature NXT1980 and relatively advanced NXT2000/2050/2100, the corresponding process is about 38nm or less.
The same type of lithography machine will also have subdivision classification, such as NXT 1980 series also distinguish Ei, Di, Fi and other versions, the main difference in this classification is the difference in unit production capacity and engraving accuracy, the coverage process is not much different.
Lithography machines are expensive, both EUV and DUV lithography machines are sold for more than $100 million.
According to a document published by ASML at its 2021 investor day: The “Critical infiltrating DUV” includes the NXT2000i, NXT2050i, and NXT2100i models, while the “mid-cirtical” includes the NXT1980Di, the NXT1980Ei, and the NXT1980Fi.
Of these, the first three products are no longer available in China.
ASML’s TWINSCAN NXT2000i and subsequent infiltrating lithography systems must be licensed by the Dutch authorities after the Dutch government’s new Semiconductor Equipment Export Control regulations came into effect on September 1 this year. As a result of ASML’s communication with the Dutch government, the Dutch government has allowed ASML to continue to ship TWINSCAN NXT2000i and subsequent infiltrating lithography systems to customers who placed orders before September 1 this year.
However, as of January 1, 2024, ASML will not be granted export licenses to ship these products to Chinese customers. These products will be de facto banned from China.
NXT1980Di is the most advanced ASML product that can be purchased in China at present, and it is mainly used for 28nm production line in China, and there is an opportunity to achieve more advanced process through multiple exposure technology.
ArFi lithography machine can theoretically achieve 10nm-7nm process through multiple exposure technology, and the difference in lithography model number is more reflected in the yield. However, the multiple exposure technology itself will affect the yield and productivity, which will lead to longer process routes and increased instability factors. Increasing the number of multiple exposures, the yield and productivity will decline, and the economy will be greatly reduced.
The United States is trying to plug a loophole in China’s use of this technology to break through advanced processes. On October 17, 2023, the US Department of Commerce’s Bureau of Industry and Security (BIS) for China’s updated “Advanced Computing chip and semiconductor manufacturing equipment Export control Rules”, the “special chuck coverage” value of the control range from less than or equal to 1.5 nm, rose to 2.4 nm, while the NXT1980Di “special chuck coverage” is 1.6 nm. It was not under control, but now it is.
ASML executives said at the earnings conference on October 18 that in principle NXT1980Di is subject to US chip export control restrictions, but the restriction is based on the premise that these lithography machines are used to produce chips with advanced manufacturing processes, and NXT1980Di (compared with the previously restricted DUV lithography machines) is a low-end infiltrating tool. Therefore, the new US export control rules will only restrict individual Chinese chip factories.
“We also have a lot of Chinese customers who use these machines to produce mid-range, mature processes, and in those cases we can ship without safety concerns,” said Peter Wennink, CEO of ASML.
Why is ASML China’s revenue soaring?
In the first three quarters of the fiscal year 2023, the revenue of the Chinese mainland market accounted for 8%, 24% and 46% respectively, jumping from the fourth largest market to the first largest market. Sales in China reached 2.442 billion euros in the third quarter, a record for ASML in China.
The industry generally believes that ASML is focusing on the delivery of products to Chinese customers before the new regulations take effect, and the backlog of orders in the Chinese market in 2022 and before will be released in 2023.
During the earnings call, ASML management said that demand for DUV equipment in China continues to be strong. The high proportion of the Chinese market is due to the fact that many orders from Chinese customers have not been delivered in the past, many of which have been prepaid. For products shipped to Chinese customers this year, the majority of orders were booked in 2022.
In the past two years, the demand satisfaction rate of mainland Chinese customers is significantly less than 50%. These customers actually received a much smaller number of lithography machines than they ordered. The photolithography machines that China has centrally purchased are mainly mature processes, all of which are products that comply with the export control regulations of the United States.
In other words, ASML China’s revenue surge is mainly driven by mature processes. But why do Chinese chip factories need so many mature processes?
On the one hand, according to the news released by ASML’s management, the number of chip factories in China that are still involved in advanced manufacturing has declined sharply. “When we have route discussions with our Chinese customers, they all step back, not forward.” “Wennink said. Roger Dassen, ASML’s chief financial officer, also said the company’s Chinese customers had reversed course last year and chip factories involved in advanced processes had dropped sharply. “If that was the intent [of US chip export controls], it has now been achieved,” he said.
The vast majority of Chinese chip factories have moved to mid-range, mature processes. Whether it is electric vehicles, or energy transformation, the development of these industries requires a large number of chip support. China is seeking to build its own capacity to control such production lines. “They will be closer to autonomy, but not fully autonomous, because the local needs are so great.” “Wennink said.
“Finance” learned that, taking electric vehicles as an example, some head car companies have their own chip localization rate plan.
On the other hand, the shift of Chinese customers is not a completely isolated growth. An international chip consultancy analyst said that Fab (semiconductor manufacturing plants) are being built all over the world. This has affected demand for semiconductor equipment. In the past, design and manufacturing were separated in the semiconductor industry, mainly by foundries such as TSMC. But after this supply chain crisis, whether it is the United States, Europe, or Japan have introduced stimulative chip legislation to encourage local semiconductor manufacturing, so there is a boom in chip manufacturing plants around the world, and these increased capacity is mainly concentrated in mature processes. He believes that this is a typical manifestation of the semiconductor industry giving way to economic logic to safety logic, so overcapacity will be inevitable.
“Stuck” is not only the lithography machine
ASML’s business in China is in the midst of a geopolitical whirlwind.
A senior industry source told “Finance” that according to his estimate, the domestic NXT1980Di will not exceed 80 units at present, while 2000i and later models will not exceed 5 units.
At the earnings conference on October 18, ASML CEO Wennink said that export restrictions on Chinese customers are difficult to change. “The regulation is the result of in-depth communication between governments, and the precondition for change is that geopolitics changes first.”
He also predicted that according to the business scale of ASML in Chinese Mainland this year, the new regulations would have an impact of 10% -15% on the business in Chinese Mainland in 2024.
In fact, the export restrictions on ASML in the United States and the Netherlands are not limited to some advanced lithography machines.
A chip technician told “Finance” that after the lithography machine purchase, subsequent maintenance, maintenance, and services are also highly dependent on ASML. The purchase of auxiliary materials is also highly dependent on companies such as the United States, Japan, Korea and the Netherlands. Only the purchase of lithography machine is far from enough to completely solve the problem of the neck.
A number of industry insiders told “Finance” that due to import restrictions, there are equipment overdue service in domestic production lines, difficult maintenance, and key parts cannot be replaced. Lithography machine parts are numerous, and the domestic supply system has just been established, and the level of development is still significantly different from overseas.
Fang Liang, senior investment manager of Huayi Venture Capital, told “Finance” that when we talk about “clamping neck”, do not only stare at lithography equipment, first of all, we must establish the concept that the production line is the organic unity of personnel, equipment, materials, process parameters and production environment, and fully consider the embargo of equipment, materials and even software required for links other than lithography.