China’s ambition to become self-reliant in semiconductor production has faced a major obstacle: the lack of access to essential chipmaking tools. Despite spending billions of dollars to grow its semiconductor capabilities, China is still struggling to catch up with leading international technologies. This struggle highlights both the resilience and the difficulties facing China’s tech industry as it navigates the complex web of geopolitical restrictions and technological barriers.
The West has become more and more unified in keeping sensitive technology out of Chinese hands, given their recent belligerence, their determination to dominate their region, their aggressive and exploitative trade practices, and their theft of intellectual property from every Western nation. No doubt that China has stolen the technical documentation for much of what they need, but having the plans and being able to build it are two different things.
The Missing Pieces: Advanced Lithography Machines
At the heart of China’s struggle lies its inability to acquire the advanced lithography tools that are critical to producing high-performance chips. These lithography machines, made only by the Dutch company ASML, are the key to producing the intricate patterns that define modern semiconductors. However, due to pressure from the U.S., the Dutch government has banned ASML from selling its most sophisticated Extreme Ultraviolet (EUV) machines to China, severely hindering Beijing’s ability to manufacture advanced chips. These tools are needed to create the smallest, most efficient chips—the kind used in the latest technology, including smartphones, servers, and other high-powered electronics.
China’s current domestic lithography technology has shown some progress. In 2024, China announced the development of a lithography scanner capable of producing chips with a 65-nanometer resolution, which is a significant improvement from the 90-nanometer machine it produced in 2022. However, this remains far behind ASML’s latest equipment, which can produce chips at resolutions below 10 nanometers. “It would take a large technology breakthrough from the current 65 nm model to the latest immersive deep ultraviolet (DUV) lithography machines from ASML,” said Leping Huang, managing director at Huatai Securities. The gap between China’s current capabilities and those of the Netherlands-based ASML highlights the significant hurdles China faces in trying to catch up to the cutting edge of semiconductor manufacturing.
International Restrictions and the Players Holding China Back
China’s inability to access these critical tools is largely due to the actions of the United States and its allies. In October 2022, the U.S. introduced tighter export restrictions, limiting the sale of high-end semiconductor technology to China. The Dutch government soon followed suit, banning the sale of ASML’s most advanced machines. These restrictions are part of a broader strategy to prevent China from gaining access to technologies that could boost its military and surveillance capabilities. Camille Boullenois, an associate director at Rhodium Group, summed up the challenge for China, noting that “in the more complex chip industry, it’s much harder to break the technological ceiling… the traditional levers of Chinese industrial policies seem to be less effective.”
These export controls have severely impacted China’s semiconductor ambitions. While ASML still sells some older-generation lithography tools to Chinese manufacturers, it is the cutting-edge EUV machines that China is barred from acquiring. EUV technology is crucial for building chips with the smallest possible features, which translates into higher performance and energy efficiency. Without access to these machines, China cannot produce the most advanced chips, putting its technological capabilities at a disadvantage compared to those of other major players like the U.S., Taiwan, and South Korea.
China’s Response: Spending Big to Close the Gap
To counter these restrictions, China has ramped up its investment in the semiconductor industry. In May 2024, Beijing launched a massive $47.5 billion state-backed investment fund for chips, exceeding the value of its previous two funds combined. This new fund is part of a larger strategy to boost domestic semiconductor production, which has seen China spend billions of dollars to stockpile chipmaking equipment before further sanctions could be implemented.
The scale of China’s spending is enormous. In the first half of 2024 alone, China spent $24.73 billion on chipmaking equipment, surpassing the combined spending of the U.S., Taiwan, and South Korea during the same period. “Throwing money at these problems will help but only so much,” said John Lee, director at East-West Futures. He emphasized that while investment is crucial, the development of key technologies, such as advanced lithography, and cultivating a skilled workforce are even more critical.
Paul Triolo, a partner and senior vice president for China at DGA Group, believes that with substantial state investment, China might be able to replicate some of the capabilities of ASML’s leading systems within the next two to three years. However, he adds, “whatever system Chinese firms are able to produce will not likely be an exact copy of what ASML has done, and not as advanced.” The challenges in recreating the sophisticated lithography systems, which took ASML decades to develop, highlight the uphill battle facing Chinese manufacturers.
China’s Strategic Shift and Domestic Production Challenges
The limitations imposed by international restrictions have forced China to adjust its semiconductor strategy. Since China cannot compete with the advanced chips made by companies like Taiwan’s TSMC or South Korea’s Samsung, Chinese manufacturers are turning their focus toward producing legacy chips and enhancing their 3D packaging capabilities. Some of China’s most well-known tech firms, including Huawei, are making notable progress. Huawei recently managed to mass-produce 7-nanometer chips without relying on ASML’s EUV technology, surprising many in the global semiconductor market and demonstrating that China can still innovate even under significant restrictions.
Still, China’s domestic production rate for the entire semiconductor manufacturing process remains low, covering only about 20% of the process, with domestic lithography tools contributing less than 1% to the overall capability. The country’s only significant lithography tool manufacturer, Shanghai Micro Electronics Equipment Group (SMEE), along with companies like Naura Technology, are working to develop these critical tools. However, they are far from matching the sophistication and reliability of ASML’s products. The China Association for Science and Technology (CAST) omitted lithography from its recent list of semiconductor challenges, a move which many believe is more political than a reflection of genuine technological capability. “Words cannot change the reality of the challenges that the Chinese semiconductor industry is facing,” noted a recent report. Developing a competitive lithography machine will take years, if not decades, and until then, China will remain dependent on imported technology.
The Economic and Political Ramifications
The economic slowdown in China has further complicated Beijing’s semiconductor ambitions. While the central government has committed significant resources to the sector, local governments are becoming increasingly cautious about their investments. Only larger cities like Beijing, Shanghai, and Guangdong, which have more robust chip industries, have pledged substantial investments. The latest $47.5 billion chip fund has seen fewer local governments chipping in compared to previous funds. This cautious approach is partly due to constrained local budgets, as well as the perception that investing in risky semiconductor technologies may not yield immediate returns.
There is also the issue of how effectively the funds are being used. Analysts have noted that the allocation of financial support often diverges from the central government’s strategic objectives. Instead of focusing on semiconductor innovation, local governments tend to support larger, well-established industries that are less risky, even if they are plagued with issues like overcapacity. This misalignment between national goals and local actions could slow China’s progress toward semiconductor self-reliance.
The Impact of U.S. Investment and China’s Path Forward
While China is grappling with these challenges, the U.S. is not sitting still. In 2022, the U.S. passed the CHIPS and Science Act, allocating $52 billion to expand its domestic semiconductor manufacturing capacity. This move aims to increase the U.S.’s share of advanced chip production—from 0% in 2022 to nearly 30% by 2032. Meanwhile, China’s share of advanced chips is forecasted to reach only around 2% over the same period. This widening technological gap underscores the urgency for China to innovate despite the restrictions.
China’s experience in the electric vehicle (EV) industry offers a potential playbook for the semiconductor sector. In the EV industry, subsidies and a protected market allowed Chinese companies to scale up quickly and challenge international competitors. However, replicating this model in the semiconductor industry has proven to be far more challenging. “In the more complex chip industry, it’s much harder to break the technological ceiling,” Boullenois explained, noting that traditional Chinese industrial policies have not been as effective when it comes to high-tech chip manufacturing.
Despite the challenges, China continues to innovate where it can. Some companies are experimenting with open-standard technologies like RISC-V, while others are investing heavily in research and development centers focused on lithography and other fab equipment. Huawei, for example, is building a significant R&D center to push the boundaries of lithography technology, hoping to one day reduce reliance on foreign suppliers.
ACZ Editor: China’s domestic market is not likely sufficient to justify the chipmaking capability China is shooting for. In addition to the potential military ramifications, the West is concerned that China will flood the market with subsidized chips to put Western chipmakers out of business. We must be wary on all fronts.