China’s semiconductor industry has witnessed a staggering 1,050% increase in the value of chip-making lithography systems imported from the Netherlands in November, compared to last year. The total value of these imports reached an impressive US$762.7 million, marking a tenfold year-on-year surge. This surge is particularly noteworthy as it comes amidst tightened export rules imposed by the United States.

Of the 42 lithography systems imported by China in November, the Netherlands played a pivotal role, contributing 16 systems. ASML, the Netherlands-based company and the world’s leading exporter of lithography machines has significantly influenced China’s chip-making landscape. These advanced machines are crucial for producing integrated circuits, a technology area where China has faced challenges despite substantial government investment.

Notably, the surge in imports is a response to the United States’ expanded export control rules in October, specifically targeting the area of lithography systems. The removal of the “de minimis” rule impacted certain deep-ultraviolet tools, prompting a rush of shipments before the new restrictions took effect. ASML’s CEO, Peter Wennink, clarified that the latest restrictions primarily exclude the majority of its Chinese customers engaged in mature or legacy semiconductor manufacturing.

Chinese imports also surged from Japan, another key player in the semiconductor industry. Fifteen lithography systems, valued at US$816.8 million, were imported in November, with Canon and Nikon being notable contributors. However, Japan, like the Netherlands, had imposed export controls on chip-making equipment in response to a U.S. request in January.

Despite the challenges posed by these export controls, Semiconductor Manufacturing International Corp (SMIC) has exhibited resilience. In the face of a 15% drop in revenue in the September quarter, SMIC increased its 2023 budget to a substantial US$7.5 billion, demonstrating a continued commitment to semiconductor manufacturing. SMIC, a major industry player, can still procure DUV systems from ASML, except its Shanghai fabs.

Chinese imports of semiconductor manufacturing equipment, as a whole, rose by over 90% year-on-year in the last quarter, amounting to 63.4 billion yuan ($8.7 billion), according to Chinese customs data. The concerns linger that the imported equipment, particularly advanced lithography tools, could potentially be utilized to manufacture high-end semiconductors, enhancing China’s manufacturing capabilities and closing the technological gap.

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Smaller Chinese semiconductor design firms have encountered challenges in securing advanced packaging services domestically, prompting them to seek alternatives. Malaysia, a significant player in the global semiconductor supply chain, has emerged as an appealing destination for Chinese chip firms. Unisem, majority-owned by China’s Huatian Technology, and other Malaysian chip packaging companies have reported increased business and inquiries from their Chinese counterparts.

The factors driving Chinese interest in Malaysia include the positive perception of Malaysia’s relationship with China, affordability, a skilled workforce, and access to sophisticated equipment. Unisem Chairman John Chia emphasized that the business dealings are legitimate and compliant, despite concerns over potential reactions from the US. Notably, Unisem’s customer base in Malaysia is predominantly from the United States.

Malaysia currently contributes 13% to the global market for semiconductor packaging, assembly, and testing, with ambitions to increase this share to 15% by 2030. Chinese chip firms, including Xfusion and StarFive, are actively planning expansions in Malaysia, joining the ranks of global giants like Infineon and Intel, which have already made multibillion-dollar chip investments in the country.

Amid the global semiconductor landscape’s evolving dynamics, other countries such as Vietnam and India are also positioning themselves as alternatives for chip manufacturing services. This trend reflects a broader industry shift where Chinese companies seek to assemble their chips outside China, mitigating geopolitical risks and gaining easier access to non-Chinese markets.

As Malaysia continues to attract substantial investments in the chip industry, the collaboration between Chinese semiconductor design companies and Malaysian chip packaging firms underscores the industry’s adaptability and the pursuit of strategic partnerships in response to geopolitical uncertainties.

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• Samsung and ASML forge $760 Million partnership for Semiconductor advancements
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