Can China Replace Lithography Powerhouse ASML?

China may be on the verge of cracking deep ultraviolet (DUV) lithography machines. Does it mean DUV king ASML is a goner?

Investors seem to think so. Shares of the Dutch tech giant have tumbled roughly 9% this week after The Information reported on Monday that a state-backed Chinese firm has cracked the chip-printing DUV machines in which ASML has long held a monopoly. While it’s yet another sign that China is nearing a state of AI industrial independence, experts cautioned Tuesday that the panic behind the selloff is almost certainly overblown.

Deep Purple

So what did The Information actually report? A state-backed company (identified by Reuters Tuesday as the Shanghai Aishengna Electronic Technology Group), whose staff includes former top employees at other Chinese lithography startups, is starting to mass-produce DUV machines this year; it plans to deliver five to top Chinese semiconductor firms by the end of the year and 20 by next year. That was enough to rattle investors’ confidence that ASML would remain the undisputed lithography king for years to come. 

Analysts, however, say that while there may be smoke on the deep ultraviolet water, there isn’t exactly fire:

• For starters, the Chinese firm’s production projections pale in comparison with the volume of ASML, which shipped just over 131 ultraviolet machines last year and recently said it would increase capacity by 30% in each of the next two years. 
• More importantly, while cracking DUV tech is a breakthrough, there’s no indication the Chinese competitor has engineered the more advanced extreme-ultraviolet (EUV) lithography systems, which are necessary for the precision production of  leading-edge AI chips.

“Producing a handful of immersion DUV tools is not the same as producing tools that can be used for high-volume manufacturing, where yield, overlay, throughput and reliability over thousands of wafer runs are what matter,” JPMorgan analysts wrote in a note to clients on Tuesday. Bank of America analysts called the selloff an “over-reaction.” To put it in fitting terms for the lithography monopoly: China may have scooped up the first-around-the-board Mediterranean and Baltic avenues, but ASML still holds Boardwalk, Park Place and all the greens, yellows, reds, oranges and purples (or rather, violets).

Don’t Pass Go: Still, the JPMorgan analysts conceded that the development represented a “long-term risk” to ASML’s China revenue. During its latest earnings call earlier this month, ASML said it expects 20% of revenue this year to come from China, meaning some $10 billion in sales is at risk of disappearing lithout a trace.