• ASML and other chip equipment stocks slide on news that a Chinese state-backed firm has begun mass-producing domestic DUV lithography machines, raising fears of reduced reliance on Western suppliers.
  • The breakthrough could undermine the long-term impact of U.S. export restrictions and soften future demand for ASML's tools in China.
  • Analysts say the development adds uncertainty to semiconductor supply chains, though near-term effects on ASML's revenue remain unclear.

Market Reaction

Shares of ASML Holding NV fell as much as 4.5% in Amsterdam trading on Thursday, while U.S. chip equipment makers like Applied Materials Inc. and Lam Research Corp. also declined, after a report said China has achieved mass production of its own deep ultraviolet (DUV) lithography machines. The news rattled investors who view China's growing domestic capability as a threat to Western equipment makers' market share.

According to people familiar with the matter, the domestic DUV tools are being produced by a state-backed entity and are already being deployed in some Chinese fabs. While the technology is likely generations behind ASML's latest systems, it could still satisfy demand for mature-node chips, reducing China's dependence on imports.

"This is a significant milestone for China's semiconductor self-sufficiency drive," said an analyst at a major investment bank, asking not to be named as they are not authorized to speak publicly. "If China can produce enough DUV tools for its own needs, it would directly hit ASML's future sales in the region."

Export Controls in Focus

The news comes amid ongoing U.S. and European efforts to tighten export controls on advanced chipmaking equipment to China. The Biden administration has been weighing additional restrictions on DUV systems, which are less advanced than extreme ultraviolet (EUV) machines but still critical for many chip types. However, the domestic breakthrough could undercut the effectiveness of such curbs.

"The goal of export controls is to slow China's technological advancement, but if they can now produce their own DUV tools, the policy's impact is weakened," said a trade policy expert. "It may accelerate calls in Washington for even stricter measures, including on the supply chain for DUV components."

ASML has previously warned that export controls could push China to accelerate its domestic development. The company's CFO said in an earnings call last month that "restrictions can stimulate local innovation, and we see that happening." ASML declined to comment further when contacted.

Implications for the Industry

For now, analysts expect the near-term financial impact on ASML to be limited, as Chinese fabs still rely heavily on imported DUV tools for advanced nodes. But the long-term outlook is cloudier. If China's domestic DUV ecosystem matures, ASML could lose a significant portion of its China revenue, which accounted for nearly 20% of total sales in 2023.

"This is a wake-up call for Western equipment makers," said a semiconductor analyst. "The key question is how quickly China can scale production and improve yields."

The development also highlights the broader shift in the global semiconductor landscape, with China increasingly investing in domestic tooling despite export controls. Investors will watch for further policy responses from Washington and the Netherlands, as well as any updates from ASML's next earnings report.

Correction: A previous version of this article misstated the percentage of ASML's revenue from China. This has been corrected to 20%.