China's Chip Ambitions Hinge on Matching ASML's Lithography Expertise

China's chip ambitions are being tested by the challenge of matching ASML's lithography capabilities. China has been striving to develop its own lithography technology, but it is facing difficulties in replicating ASML's mastery. The lack of domestic lithography expertise is hindering China's chip development, and it is unclear whether China can overcome this hurdle to become a global leader in chip production.

Title: China's Chip Ambitions: The Lithography Challenge

China's chip ambitions are being tested by the challenge of matching ASML's lithography capabilities. China has been striving to develop its own lithography technology, but it is facing difficulties in replicating ASML's mastery. The lack of domestic lithography expertise is hindering China's chip development, and it is unclear whether China can overcome this hurdle to become a global leader in chip production.

Semiconductor Manufacturing International Corp. (SMIC), China's top chipmaker, is working diligently to expand its output of advanced chips, including 14-nanometer and 7-nanometer varieties [1]. These chips are just a few generations behind the world's leading chipmakers, representing a significant breakthrough for SMIC, which has been laboring under a U.S. blacklisting for five years. However, SMIC's mission goes beyond just making the chips; it aims to produce them entirely with Chinese equipment.

ASML Holding NV, a global leader in lithography equipment for the semiconductor industry, has revised its financial targets for the year and warned that it could not guarantee growth in 2026 due to increasing uncertainty from President Trump's tariffs [2]. The company's equipment is used to print integrated circuits on silicon chips, and its dominance in the EUV lithography market is unmatched, with approximately 90% of advanced logic chips utilizing its technology. ASML's gross margin guidance of 50–53% in the current quarter accounts for potential tariff impacts but remains elevated, reflecting high-margin services revenue from its installed base of over 500 tools globally.

The sudden reversal of U.S. export restrictions on Nvidia's H20 AI chips to China on July 14, 2025, marks a pivotal moment in the global AI arms race [3]. This decision underscores Nvidia's entrenched dominance in AI infrastructure and highlights a critical truth: the long-term growth of AI compute demand—driven by China's massive market—will overshadow near-term volatility. Nvidia's fiscal 2024 revenue from China totaled $17 billion—13% of its top line—a figure that grows more critical as the company pivots to AI-centric hardware and software.

China's AI Infrastructure Buildout: Beijing has earmarked hundreds of billions for AI development, with state-owned enterprises and private firms alike racing to deploy large language models (LLMs) and industrial AI systems. The H20's reintroduction positions Nvidia to supply the compute power for this boom. Nvidia's ecosystem—CUDA software, partnerships with cloud providers, and its Blackwell architecture—creates switching costs that Intel or AMD cannot match. Even as rivals like Graphcore or Tenstorrent innovate, they lack the scale to compete in China's massive market.

ASML's China sales: Dutch lithography titan ASML Holding N.V. reported better-than-expected earnings in the second quarter. The company, a major player in the global chipmaking supply chain, said revenue hit 7.7 billion euros ($8.9 billion), up 23%, while net profits came to 2.3 billion euros, a 45% increase. President and CEO Christophe Fouquet said that 27% of revenue came from the Chinese market [4].

While China's chip ambitions are facing significant challenges, particularly in the realm of lithography technology, the country's commitment to AI development and the strategic partnerships it forms, such as with Nvidia, indicate a long-term commitment to becoming a global leader in the semiconductor industry. The future of China's chip industry will likely be shaped by its ability to innovate and adapt to the evolving technological landscape.

References
[1] https://asia.nikkei.com/Business/Technology/Tech-Asia/The-final-chip-challenge-Can-China-build-its-own-ASML
[2] https://www.ainvest.com/news/asml-cfo-expresses-uncertainty-tariff-impact-2507/
[3] https://www.ainvest.com/news/nvidia-china-chip-win-regulatory-turn-signals-ai-supremacy-2507/
[4] https://www.caixinglobal.com/2025-07-17/cx-briefing-asml-expects-china-sales-to-hold-up-this-year-102342280.html