China imported 42 lithography systems (chip-making equipment) with a total value of $8.168 billion in November, mostly from the Netherlands and Japan, according to South China Morning Post. Included among them were 16 lithography machines imported from the Netherlands valued at $7.627 billion, representing a year-on-year increase of 1,050% in value of such equipment from the European chip machinery powerhouse.

Why it matters: Lithography machines are a core type of equipment in chip manufacturing, with advanced models available only at extremely high cost. The Chinese demand for lithography machines is increasing rapidly as the domestic semiconductor industry is being boosted in an effort to offset the impact of tighter US chip export controls. At the high end, only a few companies worldwide are capable of producing them.

Details: China aims to stock as much advanced lithography equipment as possible before the Netherlands’ export restrictions come into full effect in January 2024. 

• Among the 42 lithography machines imported by China in November, 16 are from the Netherlands’ ASML, the world’s largest lithography machine manufacturer, as reported by SCMP. 15 machines are from Japan’s Canon and Nikon, while the remaining 11 are reported to have come from second-hand equipment dealers in other countries.
• Although the quantity of lithography machines imported from the Netherlands in October was higher at 21 units, the total value was only $672.5 million, significantly lower than the total value of $7.627 billion for the 16 lithography machines imported in November, an average 46% more.
• The monthly unit price difference suggests that Chinese companies are continuing to acquire more advanced chip-making systems despite the US’s attempts to limit such purchases, according to SCMP. 
• Most of the equipment shipped in November obtained approval from the Dutch government by the end of 2022 or early 2023, said Jan-Peter Kleinhans, director of technology and geopolitics at Stiftung Neue Verantwortung, a German non-profit think tank based in Berlin. ASML’s lead time in 2023 was around 18 months, indicating that equipment shipped in the fourth quarter of 2023 would have been ordered in either the second or third quarter of 2022, he added.

Context: In June this year, the Netherlands announced export controls, placing restrictions on the shipment of ASML’s chip-making machines to China. Starting from September 1, ASML has been required to acquire a license for the export of its deep ultraviolet (DUV) lithography systems to China.

• Following the new rules, ASML announced that its existing licenses allowed it to continue shipping DUV lithography machines to China until the end of 2023, despite export restrictions in the Netherlands taking effect from September. 
• ASML’s export licenses necessary for shipping these systems to Chinese customers will become invalid from January 1, 2024, and are unlikely to be renewed.
• As of 2021, domestically manufactured lithography systems made up less than 5% of those used in Chinese fabs, according to SCMP’s report.

ASML, the Netherlands-based producer of the world’s most advanced lithography systems (chip-making equipment), has asserted that it is capable of fulfilling its contracts with Chinese customers before the end of this year, according to Bloomberg, despite the Dutch government’s new export control measures for chip-manufacturing equipment coming into effect on September 1. Under the new regulations, Dutch companies need to apply for export licenses from Dutch customs in advance if they intend to export certain high-end semiconductor-related items outside the EU. A spokesperson from ASML added that the company cannot obtain export licenses to export these products to China in 2024.

Why it matters: ASML’s commitment to fulfilling its China orders up to the end of the year will help ease some of the pressure on the country’s chip sector, which has been the subject of a series of stringent export control measures on semiconductor-related items from first the US and subsequently Europe and Japan. From January next year, the export ban on ASML’s advanced DUV (deep ultraviolet) equipment is expected to have a far-reaching impact on China’s domestic semiconductor industry chain.

Details: On June 30, the Dutch government officially introduced new semiconductor export controls, with the measures set to take effect on September 1, 2023. Prior to this date, ASML was permitted to submit export license applications to the Dutch government.

• On August 31, ASML said that the company owned licenses to ship restricted chip-making machines to China until the end of the year, despite the new export restrictions coming into effect in September. Industry observers have therefore speculated that ASML had already applied for export licenses in advance. 
• ASML is the exclusive EUV (extreme ultraviolet) lithography supplier for chip-making below 7nm, according to a report from TMTpost. The company’s most advanced EUV products were already banned from being exported to China even before the Dutch government’s new regulations. Instead, ASML mainly exports DUV lithography for chip-making above 7nm. However, in 2024, the firm will discontinue the export of DUV equipment to China since it is unlikely that new licenses will be approved by the Dutch government beyond the end of this year.
• On July 19, ASML announced its second-quarter financial report for 2023. Sales to China accounted for 24% of ASML’s total revenue in the second quarter, representing an increase of 200% year-on-year, according to the company’s financial report.
• CEO Peter Wennink stated on an earnings call that the new export control measures were unlikely to have a significant impact on the company’s revenue performance in 2023.

Context: At present, China’s import of lithography equipment depends heavily on the Netherlands. In response to new restrictions in 2024, China may increase its imports in the remaining four months of this year. However, this is clearly not a long-term solution.

• China’s lithography imports reached $3.96 billion in 2022, with the Netherlands accounting for 64.3% ($2.54 billion) of this total, according to data from China Customs. From January to July in 2023, lithography imports from the Netherlands amounted to $2.58 billion, marking a significant increase of 64.8% year-on-year.