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The only way to succeed in semiconductors is through collaboration.

Text丨Dong Muchu, China Business Strategy

Lithography machine giant ASML has received a huge number of orders. In the first two quarters of this year, China became ASML's largest customer.

How can ASML dare to continue doing business in China in the face of US blockade? The answer lies in the 36 years since it entered China.

【Expand production, expand production】

In April 2024, ASML, which celebrated its 40th anniversary, welcomed a new CEO, 50-year-old Frenchman Fouquet.

Fu Kai, who joined the company in 2008, led the team to develop the extreme ultraviolet lithography (EUV) project, making ASML the world's only EUV equipment manufacturer.

Fouquet succeeds Peter Winn, who had served as CEO since 2013. Under the latter's leadership, ASML became the company with the highest market value in Europe.

When handing over the baton, Peter Wen shook Fu Kai's hand and sent his best wishes, and also reminded him of the Chinese market, which he was most concerned about.“Not selling EUV to China is the choice of the governments, not ASML.”

The newly appointed Fouquet is also most concerned about business with China.

ASML's second quarter report released in July showed that its Chinese market revenue was approximately 2.3 billion euros. After the first quarter, it once again became its largest source of revenue with a share of 49%.

Traditional major customers South Korea and Taiwan ranked second and third, accounting for 28% and 11% respectively, an increase from the first quarter. The United States and Japan were both 3%, a decrease from the first quarter.

On the one hand, there is the importance of the Chinese market, and on the other hand, there is pressure from the United States. This makes the position of ASML CEO very difficult, but both Fouquet and Peter Win are working hard to seek a balance and breakthrough.

Fouquet’s colleagues said he was more interested in solving technical problems than political ones, and Fouquet himself said, “Our role is not to engage in politics or to decide what is right and what is wrong.”

On the issue of US restrictions on exports to China, Fouquet and Peter Winn have the same attitude. He publicly stated that it is irrational to prevent others from producing what you need, and that Western automobiles and consumer electronics products are in urgent need of Chinese chips.

In the past two years, ASML's global orders have been declining due to the semiconductor downturn. However, even with restrictions, orders from China have been growing. ASML Chief Financial Officer Dassen said, "China's demand is strong because they are increasing production capacity."

At the end of February this year, when most people were still immersed in the atmosphere of the Spring Festival, SMIC, China's largest and the world's fifth largest semiconductor foundry, located in Beijing Daxing Economic and Technological Development Zone, had already started work in full swing.

The gates of SMIC's Beijing Fab 1 and Fab 2 are filled with express tricycles. As lunchtime approaches, employees gather together to eat. The two factories have the capacity to produce 160,000 12-inch chips with a capacity of 24 nanometers or above per month.

According to the plan, SMIC has set a production target for 7-nanometer chips and decided to build a third factory in Beijing.

In 2018, SMIC and ASML signed a contract to purchase 11 extreme ultraviolet lithography machines, but in December 2020, the United States added 59 Chinese companies including SMIC to the control list, preventing ASML from selling extreme ultraviolet lithography machines to them.

But SMIC's expansion plan did not stop. After failing to obtain the most advanced lithography equipment to continue catching up with advanced processes, the company turned to increasing investment in mature processes, competing in processes with quantity, accumulating technology, occupying the market, and waiting for opportunities.

In the first quarter of this year, SMIC shipped 1.7 million wafers and achieved the second-highest revenue in history of 12.594 billion yuan, a year-on-year increase of 19.7%. It was second only to TSMC in the current period and climbed to the position of the world's second largest pure wafer foundry; another major domestic wafer foundry company, Hua Hong Semiconductor, achieved revenue of 460 million US dollars in the first quarter, which also exceeded expectations.

The expansion of production capacity of Chinese chip foundries has naturally led to equipment expenditures. According to the financial report, SMIC's capital expenditure in the first quarter reached 15.9 billion yuan, which is also the reason why ASML has received a large number of orders in the Chinese market.

ASML expects that its performance in the second half of 2024 will be stronger, and the semiconductor industry will enter an upward cycle in 2025. However, with the arrival of a new owner of the White House, the chip competition between China and the United States may become more intense.

As the new CEO of ASML, Fouquet also made a statement like a vaccination:

"Don't expect me to overturn the table. ASML will continue to operate in the ASML way. The decoupling of the semiconductor supply chain is extremely expensive and difficult. Sooner or later, people will realize that the only way to succeed in the semiconductor field is to cooperate."

【ASML and China】

Shen Bo, President of ASML China, said that many people don’t know that ASML has been deeply rooted in the Chinese market for more than 30 years.

In 1986, the new building of Tsinghua University's Institute of Microelectronics was completed. Several key leaders decided to abandon all previous scientific research projects and concentrate on the research of very large-scale integrated circuits.

During the process of introducing equipment, ASML, which had only been established for two years at the time, came into the sight of the Institute of Microelectronics.

Since ASML delivered its first lithography machine to Tsinghua University in 1988, by the end of 2023, ASML's installed capacity in China has reached nearly 1,400 units.

In 2000, ASML established a branch in Tianjin. It currently has offices in 16 cities in China, 12 warehousing and logistics centers, 1 global training center, 3 development centers and 1 local parts supply center.

In addition to selling lithography machines in China, ASML has also cooperated with many universities and companies in the fields of industry, research and education.

In 2002, ASML signed an agreement with the Institute of Microelectronics of Tsinghua University to cooperate in the fields of new semiconductor materials, micro-mechanical manufacturing, and training of senior engineering and technical personnel in lithography processes and equipment.

In this cooperation, ASML donated two stepper lithography machines to Tsinghua University, and Tsinghua University introduced an advanced lithography machine worth 2 million euros from ASML. The total project funding is more than 7 million euros (about 60 million yuan), part of which is subsidized by the Dutch government.

Former CEO Peter Winn shared his views on why ASML wanted to seek cooperation with China, but this conversation four years ago was simplified and misrepresented by the outside world into a blood-pumping headline:

"China will never be able to replicate high-end lithography machines."

What Peter Winn really meant was that no country in the world, including the Netherlands, could manufacture advanced lithography machines on its own.

He said that ASML is a system integrator that has integrated the technologies of hundreds of companies to create a lithography machine that no one else can copy.

Take a 5nm lithography machine as an example. It requires more than 100,000 parts and weighs 180 tons. It takes a year just to assemble it, and these parts are the product of global cooperation.

For example, its lens comes from Carl Zeiss in Germany, its electromechanical equipment comes from Sparton in the United States, its excimer laser source comes from Gigaphoton in Japan, and its electron beam detection equipment comes from Hanwei Technology in Taiwan, China.

Manufacturing lithography machines requires the wisdom of all mankind, which is why ASML continues to open up scientific research cooperation. Currently, ASML has 42,000 employees worldwide, more than half of whom are from abroad.

During this process, ASML has always paid special attention to the cultivation of talents in China's semiconductor industry. David Shi, then general manager of ASML China, once said,China's semiconductor market is growing rapidly, but there are too few relevant talents.

In 2007, 70% of ASML's global revenue came from Asia, and after sales in China reached a record high, it also launched its own talent program.

In October of that year, ASML announced the establishment of scholarships at six science and technology universities in China. Tim Liu, then China manager, said,“We need outstanding talents from China to support and help our business around the world.”

The six universities are Dalian University of Technology, Harbin Institute of Technology, Northeast Polytechnic University, Shanghai Jiao Tong University, Wuhan University and Zhejiang University. Their disciplines include microelectronics and electromechanical engineering, optics, applied physics, and mechanical manufacturing and automation.

More than 10 years have passed, and ASML's talent training program has yielded results. Currently, it has more than 1,700 employees in China, and the number is still growing.

Shen Bo, current ASML global vice president and president of China, graduated from one of the six original cooperative schools: Wuhan University.

Shen Bo joined ASML in 2018. Last year, he led a team back to his alma mater for exchanges and met Professor Gui Chengqun from the Wuhan University Institute of Industrial Science.

Professor Gui graduated from Tsinghua University. When ASML's first lithography machine entered Tsinghua University, he was an assistant professor at Tsinghua University. He joined ASML in 1999 and served as a senior system engineer and project manager of the strategic business unit.

At the exchange meeting, Professor Gui said,"The most difficult part in developing lithography machines is not the technology. Solving them is just a matter of time. The most difficult part is making others understand the development characteristics of this industry."

The key is to open up and cooperate with the world, embrace and integrate advanced technologies from all over the world.

【The crime of possessing a treasure】

A man is innocent unless he is in possession of a treasure.

Because ASML has the lithography machine, a "sharp weapon" for manufacturing cutting-edge semiconductors, its business in China has been constantly obstructed by the United States.

Since 2018, the White House has launched intensive lobbying on the Dutch government to ban ASML from exporting its most advanced lithography machines to China on the grounds of national security interests.

After that, the United States wanted to go a step further and extend export controls to more mature technologies. In 2022, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce issued stricter new export controls on semiconductor manufacturing to China, and tried to persuade the Netherlands to stop exporting ASML's second most advanced immersion lithography machine to China.

In order to curb the development of China's advanced semiconductors to the greatest extent possible, the White House also directly made requests to Japan and the Netherlands, hoping that they would cooperate in semiconductor controls on China.

In the trilateral negotiations between the United States, the Netherlands and Japan, Japan's attitude was not firm, because 50% of its semiconductor equipment exports are to China, and the revenue of leading Japanese companies such as Tokyo Electron and Tokyo Precision accounts for nearly 40% in China. At the same time, the position of the Netherlands is also unclear.

As a result, ASML, which is caught in the middle, is seen by the US as a breakthrough point. "As long as ASML nods, lobbying Japan will be solved."

In April this year, facing the pressure from the White House to "stop providing after-sales service for Chinese equipment", Peter Winn, the CEO who was still in office at the time, responded, "There is no reason not to provide service for equipment that has been sold to Chinese customers. They have a lot of orders, accounting for about 20% of the backlog of orders."

After leaving office, Peter Winn became bolder in his remarks. In a radio interview in July, he said, "The U.S. restrictions on chip exports to China are based on ideology, not facts or data," and said he would lobby as much as possible to prevent severe export restrictions on China.

Unlike TSMC and Nvidia, the Chinese market is becoming irreplaceable for ASML.

TSMC's largest market is North America, accounting for 65% of sales. Apple is its largest customer. Nvidia's largest customer, Microsoft, contributes one-fifth of its annual revenue.

According to the Semiconductor Industry Association (SEMI), China's chip manufacturers will maintain double-digit capacity growth, more than twice that of other countries in the world, reaching 10.1 million wafers per month by 2025, accounting for about one-third of the industry's total capacity.

As Fouquet said, decoupling the semiconductor supply chain is extremely expensive and difficult, and China has given them an offer they cannot refuse.

【References】

[1]《China Is Still ASML’s Top Market》 Bloomberg

[2]《New CEO of Dutch chips champ enters US-China fray》 POLITICO

[3] “ASML continues to expand its Chinese talent pool, but recruitment also encounters “troubles”” Yicai Global

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