tech

01

ASML Claims Ability to Remotely Control Lithography Machines

Facing pressure from high-ranking U.S. officials, ASML has assured that all sold lithography machines have a "backdoor"?

Recently, an authoritative report from The New York Times pointed out that ASML's lithography machines contain a unique internal program, allowing ASML to remotely control these machines and even automatically destroy them. This report has shocked the world, implying that when customers purchase lithography machines, the control is not in the hands of the enterprises.

The New York Times report also indicated that in addition to remote control, these lithography machines require regular maintenance. If ASML does not provide the necessary parts, they cannot be replaced with alternatives, rendering the machines useless.

The report suggests that this is not entirely ASML's own intention but is influenced by "hints" from a specific country. This country is concerned that these advanced devices might fall into the hands of countries not under its control, where they could be used to produce advanced chips, affecting the interests of the specific country. Therefore, it has demanded that ASML leave a loophole to address the risks it perceives.

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The news has also caused shock and dissatisfaction in the global chip industry chain. Not only Chinese companies but also Samsung and others find it hard to understand, as this is almost equivalent to "opening a backdoor," with the potential risks being too high.

02The "King of Lithography Machines" Caught Between a Rock and a Hard Place

It is widely acknowledged that many of ASML's statements and actions often emerge under "pressure." This so-called "King of Lithography Machines" does not actually possess the "freedom of a king" that people might imagine.

On June 5th of this year, ASML's stock price surged by more than 8.1% in after-hours trading, and its market value subsequently broke through $410 billion. This increase in value made ASML the second-largest publicly traded company in the European market, just behind Novo Nordisk, and it overtook the luxury giant LVMH for the first time. In the eyes of many, ASML is a source of pride for European manufacturing, the semiconductor industry, and even the technology sector. However, upon a closer examination of ASML's growth history, it becomes apparent that ASML may no longer be the ASML of the Europeans.

ASML was established on April 1, 1984, by three Dutch companies: Philips, ASM International, and MIP. At its inception, ASML faced the dilemma of technological backwardness and a lack of funds, compounded by the cyclical downturns in the industry, nearly pushing it to the brink of bankruptcy. Yet, with the support of its management, the company gradually made significant progress in lithography technology and introduced the PAS 2000 series of wafer steppers. These efforts allowed ASML to secure a foothold in the i-line and dry excimer laser lithography fields.

Although ASML is a Dutch company, it wields considerable influence in the American market and capital markets, primarily due to its close cooperation with the United States and the involvement of American investors.

Firstly, ASML faced a shortage of funds in its early days. In order to successfully conduct an Initial Public Offering (IPO), one of ASML's founders, Verdonschot, sought assistance from American investment banks CS First Boston and Morgan Stanley, which eventually led to their participation. These two American investment banks not only provided financial support but also helped ASML go public on NASDAQ, attracting more American investors.

Secondly, ASML further solidified its position in the American market through cooperation with American companies and institutions. For instance, ASML joined the EUV LLC consortium, which included American semiconductor giants such as Intel, Samsung, and TSMC, and received support from the U.S. government to participate in the development of more powerful EUV lithography technology. Additionally, ASML acquired the American light source manufacturer Cymer, accelerating the development of EUV technology.

Under a series of capital and equity maneuvers, ASML's current equity structure is primarily held by American Capital International Group (Capital Research and Management Company, abbreviated as MSCI) and BlackRock Inc. According to public information, Capital International Group is ASML's largest shareholder, with a stake of 15.81%. Following closely is BlackRock Inc., with a shareholding ratio of approximately 7.95% to 8.25%. Moreover, other institutions also hold certain proportions of shares. For example, T. Rowe Price Group, Inc. holds 3.43% of the shares, while the Vanguard Group, Inc.'s shareholding ratio is 3.78%.Such a shareholding structure implies that although ASML is a Dutch company, its main shareholders are all American capital. This makes ASML to some extent seen as an American-funded enterprise. In addition, companies such as TSMC and Samsung were once shareholders of ASML, but currently, their shareholding ratios are very low, and they are not even on the list of major shareholders.

The main shareholders of ASML include:

- Capital Research and Management Company, with a shareholding ratio of about 15.81%

- BlackRock Inc., with a shareholding ratio of about 7.95% to 8.25%

- T. Rowe Price Group, Inc., with a shareholding ratio of 3.43%

- Vanguard Group, Inc., with a shareholding ratio of 3.78%

As an enterprise controlled by American capital, it is not surprising that ASML "follows" the American side in some decisions.

Of course, as an independent enterprise, ASML is well aware of the importance of business integrity. The practice of a "backdoor" in lithography machines is undoubtedly a satire of the so-called Western spirit of contract. In the past business, the common view was that customers paid money and bought equipment, and the ownership of the equipment naturally belonged to the customers. However, the current issue of lithography machines has obviously abandoned the bottom line that business enterprises should have.

Therefore, in some situations, ASML executives will still make some seemingly exciting but uncertain remarks to please their target customers. For example, when former ASML CEO Peter Wennink handed over his duties to the current CEO Peter Wennink, he not only shook Peter Wennink's hand and wished him well but also couldn't help reminding him of the Chinese market he was most concerned about, "Not selling EUV to China is the choice of the governments, not ASML's choice." But the question is, how authoritative can what Peter Wennink said when he stepped down be?Fujii, as the new CEO of ASML, also made a preemptive statement: "Don't expect me to turn the table upside down; ASML will continue to be run in the ASML way. Decoupling the semiconductor supply chain is extremely costly and difficult, and people will eventually realize that the only way to succeed in the semiconductor field is through cooperation." — As a publicly listed company, does the decision-making power lie with the CEO or the major shareholders?

Such a "sandwich" position allows us to see that ASML's stock price continues to fall despite a significant profit in the second-quarter financial report.

According to ASML's latest second-quarter report, the company achieved a total revenue of 6.24 billion euros, a sequential increase of 18.0% and a year-on-year decrease of 9.6%, exceeding the management's guidance of 6.2 billion euros and also higher than the analysts' expectation of 6 billion euros; the net profit was 1.578 billion euros, a sequential increase of 28.92%, a significant improvement from the previous quarter's 1.224 billion euros; the gross margin also remained at a high level of 51.5%, exceeding the management's guidance of 51% and also higher than the analysts' expectation of 50.6%.

Facing such an impressive financial report, why is ASML's stock price still weak? — The Chinese market!

Looking at the specific sources of product and service revenue, the financial report shows that ASML's new orders in the second quarter amounted to 5.6 billion euros, of which 2.5 billion euros were for EUV lithography machine orders. Specifically, ASML sold a total of 89 new lithography machines (lithography systems) and 11 second-hand lithography machines in the second quarter, an increase of 23 and 7 respectively from the first quarter. Based on this calculation, ASML sold a total of 100 lithography machines in the second quarter.

Looking at the regional proportion of net system sales, Mainland China remains ASML's largest sales market, with the proportion of net system sales remaining the same as the first quarter, but still as high as 49%, which is about 2.333 billion euros (equivalent to 18.519 billion yuan).

According to ASML's President and CEO, Peter Wennink, during a conference call: ASML expects revenue of 6.7-7.3 billion euros in the third quarter of 2024, while the market expects 7.45 billion euros; the company expects a gross margin of 50-51% in the third quarter, while the market expects 51.12%. Both the revenue and gross margin guidance are below expectations.

However, at the beginning of 2024 alone, the Dutch government has partially revoked the licenses for the shipment of NXT:2050i and NXT:2100i lithography systems in 2023. ASML stated at the time that its sales in the Chinese market would be affected by 10-15%. Moreover, in the second half of 2024, the extension of U.S. restrictions to "traditional chips" and the EU's concerns about China's traditional chip "overcapacity" have also filled ASML's performance with uncertainty, as the traditional chip segment is already an important source of revenue for ASML.Reuters, citing data from the International Semiconductor Organization SEMI, reported that by 2025, China's chipmakers' production capacity is expected to increase by 14%, more than double the growth rate of the rest of the world, reaching 10.1 million wafers per month, which is about one-third of the global total output. Faced with such a vast market, ASML is clearly also troubled.

03

Domestic Breakthrough is the Only Option

Lithography technology, as one of the key technologies in semiconductor manufacturing, plays an important role in the entire semiconductor manufacturing industry, and there is no room for the risk of being "locked out." A domestic breakthrough is the only option.

As is well known, the semiconductor lithography machine market exhibits strong monopolistic characteristics. ASM, Nikon, and Canon are the three leading companies in the global semiconductor lithography machine industry, holding the vast majority of market share. According to the official data of each company, in 2023, the sales volume of semiconductor lithography machines for ASML, Nikon, and Canon were 449, 45, and 187 units, respectively, totaling 681 units.

As the world's top lithography machine manufacturer, ASML has a full range of lithography equipment, including DUV&EUV and immersion&scan systems, leading the global semiconductor industry and greatly influencing its progress. Its lithography technology and products are in a leading position globally.

ASML is a global leader in immersion lithography, with the NXKT:2100i device having a resolution of 38nm and a productivity rate of 295 wafers per hour (wph). Moreover, ASML is an absolute monopolist in the EUV lithography machine field; it is the only company in the world that has achieved mass delivery of EUV equipment. Its NXE:3600D EUV device has a resolution of 13nm, and the latest High-NA EUV equipment has also been delivered to customers.

Compared to ASML, Nikon also has a small number of shipments in immersion DUV, while Canon focuses on the mid-to-low-end market. Domestically, Shanghai Micro Electronics Equipment (Group) Co., Ltd. is a leader, and with the support of the "02 Special Project" and the joint efforts of companies in the industry chain, the domestic lithography machine industry chain is continuously improving. The company, Photoelectron, has achieved shipments of excimer laser light sources, and Jiguang Technology's lithography machine homogenizers have achieved considerable revenue. Maocai Optics has mastered the core technology of "ultra-precision optical component processing for lithography machine exposure lenses," and its precision optical devices have been applied to domestic lithography machines. Huazong Jingke has made breakthroughs in dual worktable technology.

In terms of specific products, Shanghai Micro Electronics Equipment Co., Ltd. has successfully developed the first domestic immersion lithography machine with a 28nm resolution and has achieved mass production. In addition, Shanghai Micro Electronics is also working hard on 28nm technology, which can manufacture 14nm chips through double exposure, although the yield rate is somewhat reduced. The first domestic new-type super-resolution lithography machine developed by the Institute of Optoelectronics of the Chinese Academy of Sciences has also been put into production, using a 365nm wavelength light source, with a single exposure achieving the highest line width resolution of 22nm.Although domestic photolithography machines have achieved breakthroughs at certain nodes, the overall level of technology still needs to be improved. Currently, domestic photolithography machines are mainly focused on the precision range of 90nm to 180nm, while the world-leading level has reached 5nm or even 3nm.

In the current context of overseas sanctions against China, photolithography machines are a key point of restriction, and domestication is the only choice!

04

The mountain of photolithography machines is not easy to climb

Photolithography machines are the core equipment of semiconductor manufacturing, directly determining the level of semiconductor process technology. Photolithography, etching, and thin film deposition are considered the three major core equipment of semiconductor manufacturing. Among them, photolithography is the core, and the update and iteration of integrated circuits largely depend on the progress of photolithography equipment. Photolithography machines are extremely precise, with very high requirements for the precision of the equipment itself and each subsystem. The manufacturing difficulty is great, and the scarcity is very strong.

Currently, the mainstream photolithography equipment in the market includes i-line, KrF, ArF, ArFi, and EUV, which are five major categories: resolution, overlay accuracy, and productivity are the core indicators of photolithography machines. Among them, resolution directly determines the process, and the ultimate level of resolution is the relentless pursuit of the photolithography machine industry. It is the most important indicator of photolithography machines. Overlay accuracy affects yield, and productivity affects the capacity and economy of photolithography machines. In addition, multi-exposure technology can further improve the chip process without changing the resolution of the photolithography machine, and it is widely used.

The optical path of the complete exposure process of the photolithography machine is roughly described as follows: Light comes out from the laser light source, passes through expansion, transmission, deflection, shaping, and homogenization, and then enters the illumination lens group, which is collimated and converged, and then emitted to the mask system, and finally irradiated to the wafer through the projection lens group, completing the entire exposure process. The complete optical path of photolithography exposure is extremely complex and precise, requiring precise matching of various optical components to be completed. In addition, during exposure, it is also necessary to match the beam sampling and energy detection unit.The optical system of photolithography machines mainly consists of two types: refractive and reflective. Refractive systems primarily utilize lenses, while reflective systems primarily use mirrors. Most photolithography machines adopt refractive optical paths. EUV (Extreme Ultraviolet) lithography machines use reflective optical paths (with reflective masks) because EUV light is highly absorbed by various media, and reflective optical paths can largely circumvent this issue.

EUV mirrors require extremely high reflectivity and surface smoothness. For EUV mirrors, enhancing their reflectivity to EUV light is a goal pursued by the industry. According to information from ASML's official website, the mirrors in their EUV lithography machines are composed of over 100 layers of materials, aimed at maximizing the reflection of EUV light. As stated in "Advanced Lithography for Large Scale Integrated Circuits: Theory and Applications," using a Mo/Si multilayer film structure can cause constructive interference between reflected light, resulting in good reflectivity for 13.5nm EUV light. Additionally, the smoothness of the mirror surface is crucial; the smoothness of the mirrors in ASML's EUV lithography machines is less than the thickness of a single atom.

Lithography equipment is a massive precision system engineering project that requires the collaboration of top global industry chain resources to form a complete industry chain ecosystem.

Over the past few decades, ASML has established close relationships with upstream and downstream industry chain companies through various means, laying the foundation for its significant success in the lithography equipment field. In 1986, ASML established a partnership with the optical lens leader Zeiss. In 2001, it acquired the Silicon Valley Group, in 2013, it acquired the laser light source leader Cymer, in 2016, it acquired HM1, and in 2018, it acquired Mapper. Moreover, ASML has a close relationship with downstream chip foundry giants, receiving investments from Intel, TSMC, and Samsung in 2012 as part of their Collective Cooperative Interconnect Program (CCIP) to jointly promote the development of EUV equipment.

Overall, ASML's industry chain is global, and if overseas semiconductor sanctions against China further intensify, it may have adverse effects on the domestic photolithography machine industry chain.

05

Learning from the "Northern Neighbor"

Whether it's remotely disabling photolithography machines or banning sales, it's clear that our country is not the only one facing these issues.

In response to this situation, Russian semiconductors have taken the lead in action. According to Russian media reports, Russian semiconductors are currently accelerating reverse engineering. Specifically, this involves a comprehensive disassembly of advanced photolithography machines from ASML, followed by in-depth research by professionals to grasp the principles and core technologies of EUV lithography machines. On this basis, Russian semiconductors can then innovate and develop technologies to break free from the technological "chokehold" of the West.As of now, Russian semiconductors have successfully developed a 90nm photolithography machine, significantly reducing the delivery cycle, and the price is more realistic. Compared to the photolithography machines of the Dutch company ASML, the comprehensive competitiveness is stronger. According to insiders, it is expected that by 2025, Russian semiconductors will be able to achieve mass production of 28nm photolithography machines, and strive to break through the 10nm advanced process by 2023. It is clear that Russian semiconductors have not compromised, but are benchmarking against the Dutch company ASML, wanting to use more diversified methods to achieve technological breakthroughs and break the technological monopoly of the West.

It is worth mentioning that Russian semiconductors have also relaxed patent restrictions. Due to the domineering technological blockade by the West, Russia does not intend to follow international intellectual property rules anymore. Russia has officially decided not to recognize and protect the technological patents of unfriendly countries within Russia. In other words, if you are unfriendly to Russia, the protection of your patent technology will not be recognized. That is to say, Russia can freely use these patent technologies and will no longer be recognized as infringement. It must be admitted that Russia's way of fighting back is more direct and tough.

Although Russia lacks modern technology for producing high-performance, commercially viable microchips locally, this does not mean that local manufacturers do not know how to produce semiconductor cores. For example, according to photolithography professional Denis Shamiryan, the Russian company Mikron has mastered the 180nm technology in mass production and the 90nm technology in single-piece production. For the 90nm process, Mikron uses photolithography equipment from STMicroelectronics. Mikron's civilian products are limited to bank cards and passport chips, with an annual output of 4 billion microchips.

As Shamiryan recalls, Russia also planned to produce chips at Angstrem-T in Zelenograd, Moscow region, using 130nm and 90nm technologies. At the end of the 2000s, Angstrem-T purchased a complete ASML production line from AMD's Fab36 factory in Dresden. However, these plans never came to fruition because Angstrem-T was declared bankrupt in 2019. However, another entity named Angstrem in Zelenograd has produced a series of microchips.

For Russia, independent chip manufacturing is inseparable from key semiconductor equipment, especially photolithography machines. Currently, the main global suppliers of 193nm ("deep ultraviolet") wavelength DUV photolithography machines are only ASML, Nikon, and Canon, and the 13.5nm ("extreme ultraviolet", close to the X-ray range) wavelength EUV photolithography machines can only be manufactured by ASML.

An ASML spokesperson confirmed to The Insider that ASML has never sold a large amount of equipment to Russia. Since 2014, only ASML-brand photolithography machines worth $50 million have been imported into Russia. Although $50 million seems like a lot, it is not even enough to buy an EUV photolithography machine.

ASML claims that Russia has only imported parts of dismantled old equipment from third countries. The Ukrainian publication "Pravda" largely confirms this assessment. It is reported that as of 2022, there are five ASML photolithography machines with a wavelength range of 365 to 193 nanometers (all PAS 5000 series) operating in Russia, located at the Russian Institute of System Analysis, Mapper, Zelenograd Nanotechnology Center, and Mikron.Secondly, in the field of semiconductor raw materials, Russia has been actively promoting domestic substitution while also conducting extensive stockpiling, thereby minimizing its vulnerability to external dependencies.

On one hand, the Russian government has increased its investment in the research and development of domestic semiconductor materials, encouraging enterprises to achieve autonomous production of key raw materials through technological innovation. For instance, in key material areas such as silicon wafers and photoresists, Russian companies have already made certain breakthroughs.

On the other hand, Russia has been integrating resources globally, establishing cooperative relationships with multiple countries and regions to ensure a stable supply of semiconductor raw materials. By collaborating with enterprises in developed semiconductor industries, Russia has not only gained advanced technical support but also stockpiled a large amount of key raw materials, providing strong support for the development of its domestic semiconductor industry.

Overall, Russia's strategic layout in the field of semiconductor raw materials demonstrates its national will and determination for industrial development. While promoting the domestic substitution of its own semiconductor industry, Russia's experience also offers lessons and insights for other countries in similar fields of development.