China's homegrown DUV shock: Will Beijing's chip ambitions reshape the industry?

Last week was a nightmare for semiconductor investors. Share prices fell day after day — not just for South Korea's two chip giants, Samsung Electronics and SK Hynix, but across global markets as well.

ASML, the Dutch maker of EUV lithography equipment that the industry calls its ultimate supplier, was no exception. Trading on NASDAQ, ASML's share price fell nearly 6 percent on June 27 to close at $1,655.26, then continued sliding through June 29 to reach $1,550.69. The stock later recovered above $1,600 as broader concerns about the chip market eased.

The selloff began after The Information, a US technology publication, reported that a Chinese state-backed company had developed its own DUV (deep ultraviolet) lithography equipment. Reuters identified the firm on June 28 as Shanghai Aiscent Electronic Technology Group.

Markets reacted to fears that ASML's seemingly irreplaceable position might be under threat. Lithography equipment — used to etch microscopic circuits onto wafers — had long been considered too technically demanding for China to replicate domestically.

Aiscent, a name unfamiliar even within the industry, is only three years old. But it did not start from scratch. Teams from lithography startup Yuliang Sheng and Shanghai Micro Electronics Equipment (SMEE) moved over to lead the DUV development effort, effectively transplanting into Aiscent the know-how China had built up in lithography equipment over many years.

The company's shareholder structure reflects this lineage clearly. Registered documents list state-owned enterprises Shanghai Electric Holdings and Shanghai International Trust as Aiscent's shareholders. Shanghai Electric is also SMEE's largest shareholder.

Understanding China's lithography ambitions requires a closer look at SMEE. Founded in 2002, the company has played a central role in China's push for semiconductor self-sufficiency. After more than two decades of research and development, SMEE announced in late 2023 that it had developed China's first DUV lithography tool capable of supporting 28-nanometer semiconductor processes.

SMEE's influence runs deep across China's semiconductor equipment ecosystem. In a pattern similar to Aiscent's formation, at least one company has already spun off from SMEE — AIMES Technology, which focuses on post-processing and related technologies for DUV lithography equipment.

SMEE's lithography tools use argon fluoride (ArF) gas to fire a laser at a wavelength of 193 nanometers, burning circuit patterns onto wafers. Because light alone cannot draw sufficiently fine lines, the company developed immersion DUV technology — filling the gap between the lens and the wafer with ultrapure water — enabling it to reach the 28nm node.

Mass production, however, has faced setbacks, according to industry analysts. That is precisely why Aiscent was formed — with Huawei providing backing from behind the scenes, alongside Yuliang Sheng and SMEE. With a target of producing up to 20 units next year, China considers the progress a significant leap forward.

Aiscent's immersion DUV tool also uses ArF laser technology and targets the 28nm node. The company says multiple patterning — a technique that layers circuit exposures — could extend its reach to 7nm manufacturing. Whether it can achieve acceptable yields through multiple patterning, however, remains the critical question.

Compared with ASML's DUV equipment, the performance gap is significant. Industry experts estimate a technology lag of roughly three to five years. ASML's latest DUV tools can support semiconductor processes down to 5nm, underpinned by extreme overlay precision that stacks circuit patterns with exceptional accuracy.

ASML's newest DUV equipment can process more than 6,000 wafers per day. Aiscent has not disclosed its throughput figures. The production capacity gap is equally stark: ASML currently manufactures around 130 DUV tools per year, while Aiscent plans to produce five units this year before scaling to 20 next year.

Despite the performance gap, the prevailing view in the industry is that Aiscent's DUV development marks a tangible milestone in China's semiconductor ambitions. Since 2022, US-China trade tensions have barred China from importing ASML's most advanced EUV lithography tools. Even certain high-end DUV equipment remains off-limits.

The tools Aiscent produces are expected to flow to SMIC, Hua Hong Semiconductor and CXMT — all key players in China's drive for domestic semiconductor production.

China's government laid out its ambitions in 2015 with the "Made in China 2025" initiative, setting a target of 70 percent semiconductor self-sufficiency by 2025. Around the same time, Beijing established the National Integrated Circuit Industry Investment Fund — known as the Big Fund — to back companies across chip design, manufacturing, packaging and equipment. The first Big Fund, launched in 2014 at 28 trillion won ($19.4 billion), grew to 41 trillion won in its second iteration in 2019, and expanded further to 69 trillion won in its third round in 2024.

CXMT, which listed on Shanghai's STAR Market on June 27, is among the Big Fund's portfolio companies. The memory chipmaker issued 6.68 billion new shares at an offering price of 8.66 yuan, raising 57.92 billion yuan ($8.58 billion) — equivalent to about 12.5 trillion won. On its first day of trading, the stock surged more than fivefold to close at 49 yuan, instantly vaulting CXMT to the top of the market by capitalization.

Notably, CXMT listed supply chain localization as one of its stated goals for its initial public offering. In its prospectus, the company noted that while China accounts for 25 percent of global DRAM consumption — making it the world's largest DRAM market — it remains heavily dependent on imports. CXMT said it plans to use the proceeds to build a semiconductor industry cluster and sharpen its competitive edge. Memory chipmakers and equipment companies are now aligned behind a single objective: localization.

Global market research firms expect these efforts to yield some results. Yole Group estimates that China's domestic semiconductor equipment self-sufficiency rate, which stood at around 23 percent last year, will rise to 39 percent by 2030. The firm says etching, deposition and thinning equipment have already entered the substitution phase, but rates lithography — the most technically demanding category — as a long-term challenge. Whether China's semiconductor industry can ultimately achieve what it has set out to do remains an open question.