The global semiconductor industry was shaken by a striking report shared by The Information. The news that Shanghai Yuliangsheng Technology, a Chinese government-backed company, had begun mass production of domestically developed immersion DUV lithography machines sent shockwaves through the markets. Sharp declines in the shares of giants like ASML, Applied Materials, Lam Research, and KLA indicated that investors perceived this news as a market threat. Markets priced in the fact that years of technological embargoes, instead of slowing China down, were forcing it to build its own domestic ecosystem, and that this strategy was now beginning to materialize.

These new lithography systems produced by China are primarily focused on the production of 28nm node chips used in automotive, Internet of Things (IoT), and some consumer electronics products. The systems also allow for the production of 7nm chips using multi-patterning techniques. According to production planning, the goal is to deliver 5 devices to Chinese semiconductor giants such as SMIC, Hua Hong, and CXMT before the end of 2026. This number is planned to increase to 20 by 2027.

On the other hand, it should be noted that this move is less of a technological revolution that could threaten ASML's current market share globally, and more of a step towards supply chain independence for China. The domestically developed machines still exhibit performance equivalent to ASML's systems from years ago in critical metrics such as wafer processing speed (throughput), overlay accuracy, failure rate, and system uptime. For example, while ASML's current devices can process over 300 wafers per hour, China's domestic production lags far behind this speed and is more akin to ASML's technology from 2008.

Despite the panic in global technology media, it is necessary to underline a fundamental distinction. China's current mass production technology only encompasses DUV (Deep Ultraviolet) systems. However, for the production of 5nm and smaller chips that train AI models and push market boundaries, EUV (Extreme Ultraviolet) technology is absolutely essential. Currently, ASML is the only company in the world capable of producing commercially proven, high-efficiency EUV machines. ASML's machines consist of systems integrating around 100,000 parts from over 5,000 suppliers, representing the pinnacle of optical and precision engineering.

While China continues its efforts to develop its own EUV prototype, achieving commercially viable hardware in this field is expected, at best, to take until the early or even mid-2030s. Therefore, ASML's extensive technological advantage in the EUV market, used by global giants like Apple, NVIDIA, TSMC, and Intel in their cutting-edge manufacturing processes, remains secure. China's current DUV drive does not eliminate its need for Western technologies in the production of cutting-edge node technology.

The primary reason for the sharp sell-off in the markets was the fundamental disruption of investors' perception of ASML's enduring monopoly in its business model. China accounts for approximately 14% to 20% of ASML's projected total revenue of €43 to €45 billion by 2026. The shift of Chinese companies towards domestic alternatives in mature chip technologies has the potential to directly reduce ASML's future DUV equipment sales and periodic maintenance and service revenues.

The sanctions have necessitated a massive influx of state funds into China's hardware sector. Even if initially performing poorly, market giants like SMIC and CXMT are testing these domestic machines on active production lines, accelerating the training of systems with real-world data. While this may not end ASML's global market leadership in the long term, it is seen as the beginning of a long marathon that will gradually erode its dominance in China.

The export controls and current restrictive bills implemented by the US were designed to completely cut off China's access to technology. However, this emerging production picture proves that the strategy, rather than stopping China, provided them with a clear motivation to build their own domestic ecosystem. The domestic lithography sector, which was non-existent or progressing very slowly before the sanctions, has now crossed a vital threshold in breaking its dependence on foreign sources.

In short, China’s new DUV machines aren’t, and probably won’t be, capable of being a global rival to ASML’s EUV empire for many years to come. However, this production news marks a turning point where geopolitical fault lines are breaking in the global semiconductor supply chain. While China may not produce the cutting-edge chips that dominate the AI ​​race, it has begun to write the formula for escaping dependence on the West in the trillions of dollars worth of mature chip industry that powers daily life.