ASML Machine Made the Huawei Smartphone Chip that Alarmed US

According to sources familiar with the situation, China’s Semiconductor Manufacturing International Corp. utilized equipment from ASML Holdings NV in order to produce an advanced processor used for a Chinese Smartphone that alarm the US.

The people, who asked not to be named, said that ASML’s “immersion deep ultraviolet” machines, in conjunction with other tools, were used to create the Huawei Technologies Co.chip.

ASML declined comment. No evidence has been presented that ASML’s sales have violated export restrictions.

After the report was released, shares of the firm dropped up to 2.1%. They were trading at €558.5 per share as of 3:54 pm local time.

The US, Japan and the Netherlands have been working together to stop China from accessing advanced technology such as the 7-nanometer chips that power Huawei’s Mate 60 Pro. This is to limit the country’s advancement in technology and to prevent it from gaining an edge in military terms.

Huawei shocked the world by quietly launching its 5G smartphone in August, despite these restrictions. TechInsights conducted a teardown on the device, which revealed that the chip was manufactured by SMIC. This showed the manufacturing capabilities of China far surpassing what the US had hoped to do in order to slow down China’s advancement,began to ask about the manufacturing process of the chip and the effectiveness Washington’s controls. SMIC did not respond to a comment request.

ASML plays a key role in the global supply chain for chips. ASML has a monopoly over advanced extreme ultraviolet (EUV) lithography systems that are essential for the production of cutting-edge semiconductors. It also provides deep ultraviolet lithography equipment needed to produce more mature semiconductors.

ASML was never able to export its EUV machines into China due to export restrictions. Analysts say that less-advanced DUV machines can be retooled to produce 7 nanometer chips and even more advanced ones. It is more expensive to use EUV and therefore difficult to scale up production in a highly competitive market.

China is one of the few countries that will pay a large portion of the costs associated with chip manufacturing. Chinese companies have legally stocked up DUV gear since years, especially after the US implemented its first export controls last summer before Japan and the Netherlands joined.

Last summer, the Dutch government was compelled by President Joe Biden’s administration to announce plans to prevent ASML’s shipping of three of four of their most advanced immersion DUV machines to China, which is its second-most-capable category of machinery. ASML can still export these products to China for the time being, but they will no longer be allowed to do so from January.

In an investor presentation that the company published last week ASML reported a significant increase in business this year from China as chipmakers increased orders in anticipation of the full implementation of export controls in 2024. ASML reported 46% of its sales to China in the third quarter. This compares with 24% the quarter before and 8% for the three months ended in March.

The new controls announced by the Biden administration this month will further restrict the export of DUV machines.

Stephen Bartenstein, Peter Lichtenbaum and Covington & Burling LLP export control attorneys, did not comment on the affected companies.

ASML’s Chief Executive Officer Peter Wennink said to investors last week, that the new US and Dutch restrictions will affect up 15% of the firm’s sales in China.

According to Wennink, ASML is still allowed to ship its older NXT-1980Di machine, which is less advanced, to Chinese factories that produce older chips. It can’t, however, sell to semiconductor fabs at the forefront of technology.

According to those familiar with the issue, this rule applies to ASML shipments going to six fabs located in China — including a SMIC facility. The US Bureau of Industry and Security has not responded to any questions about the matter. It is unclear if this facility produced the 7-nanometer Huawei chip.

According to industry experts, the new US restrictions bring the country’s limitations on equipment in line with the Netherlands. The US has gone further in the regulation of DUV immersion machines than its allies, a move which could be interpreted as extraterritorial bullying.

Senior Dutch officials confirmed that the US informed the Netherlands government about the measures of October 17. The move was not well received by all Dutch politicians. Two parties in the ruling coalition and a group of Dutch lawmakers called on their government to oppose the new US sanctions.

Even a close ally would find it difficult to accept unilaterally changing rules in a contest that involves competitiveness and strategic autonomy.

ASML CEO Wennink has also spoken out against the measures, warning that they could encourage China to develop a competing technology. In a Bloomberg News interview in January, he stated that the more pressure you apply to China, the more likely they are to increase their efforts.

The United States have made a different analysis of security. Leisje Schireinemacher, Dutch Minister of Foreign Trade, said this week in the Dutch parliament that they are free to make such decisions. She also stated that the European Union has a role to play in the discussions with the US regarding export controls of sensitive technology.