China’s ambitions for chip self-sufficiency are thwarted by a lack of tools

China is scrambling to fight U.S. chip restrictions, but efforts to make major equipment show it’s not just spending billions.

Creating the most advanced semiconductors requires sophisticated lithographic scanners to print small, complex circuit designs onto microchips.. based in the Netherlands ASML it is the only company in the world that can make these machines. But the Dutch government has banned the sale of state-of-the-art equipment to China.

That means building the machine is a focal point in China’s push to expand its domestic semiconductor industry with $96.3 billion in subsidies and preferential policies, according to CNBC’s calculation of the three largest state funds.

Last week, China announced its latest lithography scanner that can support a resolution of 65 nanometers or better, a significant improvement over the 90-nanometer machine it is developing in 2022. But it is still a long way from the ASML machine with a resolution below 10 nanometers. Smaller resolutions enable the production of more powerful chips.

It will take a “major technological breakthrough” from the current 65 nm model to ASML’s latest deep ultraviolet (DUV) immersive lithography machine, Leping Huang, managing director and chief technology analyst at Huatai Securities, said.

In the meantime, ASML is still selling what it can to China. The company’s share of sales to Chinese clients more than doubled to 49% in the second quarter of this year, from 17% in the last quarter of 2022.

The surge shows China’s industry “doesn’t think it has a viable domestic alternative,” said John Lee, director of consultancy East-West Futures.

China has raised tariffs on semiconductor equipment since the US introduced tougher export restrictions in October 2022, amid concerns that it could push the export curve.

With substantial state investment, China can make some headways in duplicating part of ASML’s leading system capabilities in the next two to three years, Paul Triolo, Partner and Senior VP for China at DGA Group said in an email. But “whatever system the Chinese company might come up with would not be an exact copy of what ASML has done,” and would not be as advanced, he added.

“Re-creating the advanced lithography system that took ASML decades to develop and commercialize is a tall order for individual Chinese companies,” Triolo said.

Earlier this year, ASML, which had been under various restrictions not to sell the most advanced deep ultraviolet (EUV) machines to China for several years, was under more pressure not to deliver even less advanced machines to the country.

This adds to Beijing’s urgency, as the US continues to push for exports of advanced technology to China. In the first half of the year, the country splurged $24.73 billion stockpiling chipmaking equipment, surpassing the total of what the US, Taiwan and two other major countries did in the same period.

“Spending money on this problem will help but only so much,” said Lee, emphasizing that the development of key technologies, such as lithography, and sufficient and skilled labor are more important.

China appears to be taking a leaf out of its traditional playbook involving multi-year plans and subsidies to support industries such as electric cars.

The electric car strategy has been successful, with domestic players cutting into the market share of foreign car giants in China.

In EVs, subsidies are driving demand and creating a “huge protected market” for Chinese companies to quickly scale up, said Camille Boullenois, associate director at Rhodium Group.

But in the more complex chip industry, “it’s harder to break the technology ceiling,” he said. “The traditional levers of China’s industrial policy appear less effective.”

Meanwhile, the US is not only limiting China’s access to chips, but trying to boost its own industry to further widen the technology gap.

The US Chip Science Act by 2022 provides $52 billion in funding for domestic chip manufacturing capacity.

The US share of the most advanced chips – below 10 nanometers – is expected to grow from zero in 2022 to almost 30% in 2032, according to a joint report by the Semiconductor Industry Association and the Boston Consulting Group, while China’s share is predicted to barely reach. 2% over those 10 years.

China’s economic slowdown has made it harder for local governments to support Beijing’s ambitions to become self-reliant in chip technology.

Beijing launched a $47.5 billion state-backed investment fund for Chip in May, bigger than the two funds combined previously.

But the most recent fund has fewer local governments signing up. Only big cities such as Beijing, Shanghai and Guangdong – which have stronger chip industries – have them. promised investment, according to local media citing the national corporate credit information publicity system

Then there is the question of whether the money will be used effectively.

The allocation of such financial support “often diverges” from the central government’s strategic objectives, Rhodium Group said in a report earlier this month.

Instead of semiconductor innovation, local governments prefer to support larger and more established industries even when facing problems like overcapacity, the report found.

Analysts say that because local governments have limited budgets, they are increasingly at risk when it comes to distributing funds.

– CNBC’s Evelyn Cheng contributed to this report.