"China’s reported chip breakthrough comes with some big caveats"

From CNBC, July 28: 

• A report emerged Monday that China has produced a key chipmaking tool, entering a market that has long been dominated by ASML.
• However, analysts told CNBC ASML is unlikely to be heavily impacted as lots of questions remain about China’s technology.
• These questions include performance versus ASML and China’s ability to scale production.  

ASML’s stock fell Tuesday after a report that China is mass-producing a critical tool that the Dutch tech giant has long held a monopoly over.

The decline came amid a steep sell-off in global semiconductor stocks as investors continued to grapple with uncertainty about the sector. ASML was last trading down 1.8%, but the stock is up over 123% this year.

Analysts told CNBC that while reports on China entering a market that ASML dominates may raise some concerns, the developments are unlikely to shake the Dutch company’s dominance, adding there are some big caveats to the story.

“I would take this with a pinch of salt as what [China does] could be limited to the very low end,” Stephane Houri, head of equity research at ODDO BHF, told CNBC.

What happened?
The Information on Monday reported that an unnamed Chinese company has begun manufacturing an immersion deep ultraviolet lithography (DUV) machine, citing people familiar with the matter. 

The tools are expected to be delivered this year to China’s biggest chip manufacturers, including Semiconductor Manufacturing International Corp. and Changxin Memory Technologies (CXMT), which went public this week.

Why did it spark a sell-off?
Investors are concerned that if China continues to build out its homegrown semiconductor technology, it could cut off some of the biggest U.S., European and other Asian firms from the huge market.

An immersion DUV machine is a tool that is used to etch circuit patterns into silicon wafers. It is a critical part of the semiconductor manufacturing process that is purchased by foundries such as Taiwan Semiconductor Manufacturing Co. (TSMC) and Intel. 

However, it is used for less-advanced chips. In contrast, an extreme ultraviolet (EUV) lithography machine is used for the most leading-edge chips, such as those designed by Apple and Nvidia.

ASML dominates the market for DUV and EUV lithography tools. No other company has been able to replicate what ASML does, which is why it is a big deal that a Chinese firm has reportedly done so. Nevertheless, questions remain as to what impact the latest developments will have on the company.

Scale and performance questions 
When it comes to the performance of China’s DUV machines, semiconductor manufacturers focus on a term known as “yield” which refers to the number of usable chips that come out of the process. All foundries aim for maximum yield.

It is currently unclear whether a Chinese manufacturer using the homegrown DUV machine will deliver a chip yield close to or above that of a machine from ASML. If the yield is not close to what ASML machines can provide, that might hamper the adoption of China’s machine....

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All that being said, Korea's KOSPI was down 10.84% on the day which brings the cumulative decline to 35% from the June 18 high. 

 

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