China’s ambitions to become chip self-sufficient falter due to lack of tools

As China scrambles to counter U.S. chip regulations, its attempts to manufacture key equipment make clear it’s not just a matter of spending billions of dollars.

Manufacturing cutting-edge semiconductors requires state-of-the-art lithography scanners to print small, complex circuit designs onto microchips. based in the netherlands ASML We are the only company in the world that can manufacture these machines. However, the Dutch government has banned the sale of cutting-edge equipment to China.

That means manufacturing these machines is the focus of China’s push to develop its domestic semiconductor industry through $96.3 billion in subsidies and incentives, according to calculations from three major state-funded funds reported by CNBC.

Last week, China announced that its latest lithography scanners can support resolutions of 65 nanometers or more, which is a significant improvement from the 90 nanometer machine it developed in 2022. However, it is still far behind ASML’s machines, which have a resolution of less than 10 nanometers. Smaller resolution allows for the production of more powerful chips.

Leping Huang, managing director and chief technology analyst at Huatai Securities, said that moving from the current 65nm model to ASML’s latest immersion deep ultraviolet (DUV) lithography equipment will require “significant technology advances.” Ta.

Meanwhile, ASML is still selling as much as possible to China. The company’s share of sales to Chinese customers more than doubled from 17% in the final quarter of 2022 to 49% in the second quarter of this year.

John Lee, director of consultancy East West Futures, said the surge suggests that Chinese industry “doesn’t think there’s a viable domestic alternative yet.”

Since the United States introduced strict export restrictions in October 2022, China has increased spending on semiconductor equipment due to fears of further export restrictions.

With significant state investment, China could make some progress in replicating some of the functionality of ASML’s key systems within the next two to three years, said Paul, partner and senior vice president of China at DGA Group.・Triolo said in an email. But he added that “whatever system a Chinese company could build, it’s unlikely to copy exactly what ASML has done” and not be very advanced.

“Replicating the advanced lithography system that took ASML decades to develop and commercialize is a difficult challenge for any company in China,” Triolo said.

Earlier this year, ASML, which has been under various restrictions for years not selling its most advanced deep ultraviolet (EUV) equipment to China, came under further pressure not to ship even less sophisticated equipment to China. It was done.

This has increased the urgency of the Chinese government as the US continues to seek restrictions on exports of high-end technology to China. In the first half of this year, the country spent a whopping $24.73 billion stockpiling chip-making equipment, more than the United States, Taiwan and two other major countries spent in the same period.

“Spending money on these issues helps, but that’s about it,” Lee said, stressing that the development of key technologies such as lithography and a sufficient skilled workforce are more important.

China appears to be moving away from traditional strategies involving multi-year plans and subsidies to support industries such as electric vehicles.

The electric vehicle strategy has been successful, with domestic companies cutting into the market share of foreign auto giants in China.

Camille Brunois, associate director at Rhodium Group, said subsidies had stimulated demand for EVs and created a “huge, protected market” for Chinese companies to scale up rapidly.

But in the more complex chip industry, “it’s much harder to push the boundaries of technology,” she says. “Traditional instruments of China’s industrial policy appear to be ineffective.”

Meanwhile, the United States is not only restricting access to Chinese chips, but also trying to revitalize its own industry and further widen the technological gap.

The American Chip Science Act of 2022 allocated $52 billion in funding for domestic chip manufacturing capacity.

According to a joint report by the Semiconductor Industry Association and Boston Consulting Group, the U.S. share of cutting-edge chips smaller than 10 nanometers is expected to increase from zero in 2022 to nearly 30% in 2032. China’s share is expected to barely reach 2% in this decade.

China’s economic slowdown is making it increasingly difficult for local governments to support Beijing’s ambitions for chip technology independence.

In May, the Chinese government established a $47.5 billion state-backed investment fund for chips, which is larger than the two previous funds combined.

However, few local governments are investing in the latest funds. According to local media citing the state-run enterprise credit information and public information system, only large cities with strong semiconductor industries, such as Beijing, Shanghai and Guangdong province, have pledged to invest.

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

The Rhodium Group said in a report earlier this month that the allocation of such financial support “often diverges” from central government’s strategic objectives.

According to the report, local governments tend to prefer supporting larger, more established industries rather than semiconductor innovation, despite facing issues such as overcapacity.

Analysts said this is because local governments are restraining their budgets and becoming increasingly risk-averse when handing out subsidies.

—CNBC’s Evelyn Cheng contributed to this report.