China has begun mass producing domestically developed immersion deep-ultraviolet (DUV) lithography machines, ​a technology crucial to advanced chipmaking, a person familiar with the matter said, marking a key step forward in Beijing’s drive to reduce its reliance ‌on foreign technologies.

Shanghai Aishengna Electronic Technology Group, a little-known Chinese state-owned company, is leading the production effort after incorporating teams from top Chinese lithography startups, the source said, declining to be named due to the sensitivity of the subject.

The development represents a win for Beijing’s nationwide semiconductor self-sufficiency initiative, one of President Xi Jinping’s highest priorities, but will not pose an immediate commercial threat for Dutch supplier ASML.

DUV is ​a key chipmaking tool long dominated by ASML.

The Information, a tech industry news outlet, first reported on China’s development of the tool on Monday, noting that an unidentified ​state-backed company in Shanghai had begun manufacturing the machines and planned to produce about five this year and roughly 20 in 2027. ⁠Reuters is the first to report the identity of the company.

Aishengna’s DUV machine is expected to require further testing and remains far from matching the Dutch firm’s competing models, the ​source said.

Successful deployment would, however, give Chinese chipmakers an alternative source of equipment if Western governments further restrict exports or servicing of foreign lithography tools.

The Chinese-made DUV machines are expected ​to be delivered this year to leading Chinese chipmakers including Semiconductor Manufacturing International Corp (SMIC), Hua Hong Semiconductor and memory-chip maker ChangXin Memory Technologies (CXMT), The Information said, citing two people familiar with the matter.

Immersion DUV machines use a layer of water between the projection lens and a silicon wafer to print smaller circuit patterns than conventional dry systems.

‘In that sense, I believe our relationship with the Bank of Japan is normal and smooth.’

They are used to produce a broad range of chips and can ​also be pushed to manufacture more advanced semiconductors through multiple patterning, which requires repeated exposures of the same layer.

ASML did not immediately respond to a request for comment SMIC, ​Hua Hong and CXMT also did not respond to requests for comment.

After dropping 8 percent on the report by The Information on Monday, ASML shares were down 1.6 percent at 0906 GMT, in line with other European ‌chip sector stocks but underperforming the broader pan-European STOXX 600 index.

Aishengna Backed By Shanghai Capital and Tech

Aishengna was established in August 2023 with registered capital of 7 billion yuan ($1.0 billion), backed by just two state-owned shareholders — Shanghai Electric Holding and a subsidiary of Shanghai International Trust, according to corporate records.

Little is known about the firm, which does not have a website and has disclosed nothing publicly about its operations. The source said the company has incorporated teams from lithography startup Yuliangsheng, which had begun testing a DUV prototype last year, and Shanghai Micro ​Electronics Equipment (SMEE).

SMEE and Yuliangsheng, which is an affiliate ​of Huawei-backed equipment maker SiCarrier, are ⁠deeply involved in Beijing’s semiconductor self-sufficiency efforts.

Corporate and recruitment records show Aishengna and Yuliangsheng share an address in Shanghai.

Aishengna, its shareholders, SMEE, and Yuliangsheng did not respond to requests for comment.

CHASING ASML

China has been barred by the US from buying ASML’s most advanced extreme-ultraviolet (EUV) lithography ​systems, while Dutch export controls have also restricted its access to some advanced DUV machines.

Even as Beijing pushes for self-sufficiency, China ​remains a crucial revenue pillar for ASML, accounting for roughly 16% of the Dutch giant’s net sales in the first half of the year. While barred from advanced EUV systems, Chinese chipmakers continue to heavily procure less advanced DUV tools.

Reuters reported in December, citing sources, that China had succeeded in building a prototype of an EUV system, a tool key to building the world’s most advanced chips, though it remains years ​from production.

Despite the market reaction, analysts say the news is unlikely to impact ASML’s earnings trajectory in the ​mid-term.

“Producing a handful of immersion DUV tools is not the same as producing tools that can be used for high-volume manufacturing, where yield, overlay, throughput and reliability over thousands of wafer runs are what matter,” JP Morgan Chase ​analysts wrote in a note on Tuesday.

($1 = 6.7677 yuan)