The Dutch government has succumbed to Washington’s pressures, despite earlier comments from Dutch Foreign Trade Minister Liesje Schreinemacher that the Netherlands would not “copy the American measures one-to-one”.

The revelation came yesterday on December as Bloomberg revealed that new export controls of semiconductor equipment against China could come as soon as next month, even though negotiations are still taking place.

The equipment in question most likely pertain to ASML’s deep ultraviolet (DUV) lithography machines. Under US pressures, ASML has since 2018 stopped shipping its extreme ultraviolet (EUV) lithography machines, capable of producing nodes at 7nm and below, to China. However, following newly US-introduced export controls against Chinese semiconductor industry in October that partly targeted logic chips at 16/14nm or below, DUV machines have been under the spotlight, and so are the two countries dominating DUV production: Japan and the Netherlands.

Key question: which type of DUV lithography system?

Currently, ASML’s DUV lithography offerings are based on mercury I-line laser at 365nm wavelength, krypton fluoride (KrF) excimer laser at 248nm or argon fluoride (ArF) laser at 198nm. While early DUV systems rely on KrF lasers that can produce features at 80nm, later DUVs depend on ArF lasers.

Even though conventional ArF lasers can only bring feature size down to 57nm technology node, resolution enhancement techniques like the TSMC-pioneered immersion lithography allows ArF laser to further shrink feature size down to 38nm. With the aid of multiple patterning, ArF immersion DUV machines can further overcome lithographic limitations and produce chips at 16/14nm nodes and even below – exactly what TSMC did with first-generation 7nm technology, and likely what SMIC also achieved amid recent reports of 7 nm breakthrough, even though using DUV machines on 7nm is ultimately economically inefficient.

Notably, as ArF immersion systems can also produce technology nodes at 40nm, while ArF-based dry systems cover nodes from 28nm to 130nm, it is hard to pinpoint implications without knowing which version of DUV machine is targeted by the US. According to DIGITIMES Research semiconductor analyst Eric Chen, the export control in discussion most likely deals with ASML’s immersion-based DUV machines.

Though details of the export control remain unclear, some have raised concerns toward its implications to ASML’s revenues and R&D expenditures, and pointed to potential competition from Japanese DUV makers Nikon and Canon. Eric Huang, DIGITIMES vice president and former head of DIGITIMES Research, dismisses such concerns, indicating that Chinese market has little impact on ASML’s R&D expenditures, which primarily focus on EUV development for major clients like TSMC, Samsung and Intel. With the Dutch government bowing to US pressures, Huang believes that Tokyo would fall in line soon.

As of 2021, ASML sold a total of 309 lithography machines, up from the previous year’s 258 units, and ArF immersion systems (ArFi) account for 36% of sales, with 81 units shipped. Meanwhile, EUV sales remain the main revenue source of ASML, with 42 units sold, accounting for 46% of 2021 revenue. By region, the Chinese market only accounted for 16% of ASML sales, while Taiwan and South Korea respectively accounted for 44% and 35% of ASML sales, thanks to the world’s only two cutting-edge foundries, TSMC and Samsung. Latest data from third-quarter 2022 reveal that ArFi systems represented 31% of ASML sales, and 51% of ASML sales came from EUV systems. Taiwan and South Korea continued to be ASML’s main markets with 47% and 24% of revenue share. China, in contrast, only made up 15% of ASML sales in Q3 2022.

In the long run, Huang notes, even if Chinese chipmakers fail to meet certain IC demand as a result of sanctions, as long as the market demand is there, the gap will soon be filled by non-Chinese chipmakers, thus creating demand for ASML.

Advanced packaging a remote goal

Given that China’s homegrown lithography equipment maker Shanghai Micro Electronics Equipment (SMEE) is already producing equipment able to manufacture chips at 90nm, it would make little sense for the US to push for export controls on non-immersion versions of DUV equipment, according to DIGITIMES Research analyst Eric Chen, who surmises that ASML and the Dutch government are currently negotiating with Washington regarding which version of DUV machine will be covered.

Domestic equipment makers like SMEE, nevertheless, are still years behind their international peers, according to Chen, drawing attention to the absence of an integrated, mutually inter-operable semiconductor upstream supply chain in China to support advanced process node development, despite the presence of occasional domestic champions like Advanced Micro-Fabrication Equipment (AMEC) that is able to provide dielectric and TSV etch tools supporting technology nodes down to 5nm. According to Chen, with Chinese semiconductor industry mainly producing at mature technology nodes, whether or not domestic equipment makers working on advanced nodes have enough market demand is another question. For example, based on SMIC’s latest available wafer revenue breakdown by technology published in Q4 2021, technology nodes at 28nm and below only contributed to 18.6% of revenue, while 0.15/0.18 micron accounted for 28.6%.

With progress in advanced technology stalled, advanced packaging has been widely perceived as an alternative path forward for Chinese chip industry. However, Chen observes that TSMC remains the main force that has been driving global advanced packaging, leaving a wide gap for competitors to catch up. For example, traditional IC packaging market leader, Taiwan-based ASE Group sees less than 10% of revenues coming from advanced packaging, not to mention Chinese peers with comparably smaller revenues such as Jiangsu Changjiang Electronics Tech Co. (JCET), Tongfu Microelectronics and HT-Tech. Factoring in that advanced packaging technology is considerably expensive, mastery of the technology likely remains a goal unattainable in the short term.