TAIPEI -- Semiconductor Manufacturing International Co., China's top state-backed contract chipmaker, has placed an order for one set of extreme-ultraviolet lithography equipment, the costliest and most advanced chip production tool, to close technology gaps with market leaders and to secure the supply of critical gear amid trade tensions between the U.S. and China, according to people familiar with the matter.
The company's move to purchase its first EUV lithography equipment from Dutch chip gear builder ASML, worth $120 million, highlights its growing ambition to help boost Chinese homegrown semiconductor manufacturing technology, even though it is still two to three generations behind market leaders. The move also secures the supply of the cutting-edge lithography tool that all top global chip giants, including Intel, Samsung Electronics and Taiwan Semiconductor Manufacturing Co., are buying to ensure the later production of more powerful and advanced chips.
TSMC, Intel and Samsung have already ordered many EUV systems from ASML. TSMC, the world's biggest contract chipmaker by revenue, for instance, has booked up to 10 systems for this year, according to supply chain sources. Samsung has booked roughly six EUV systems, while Intel will take about three for 2018, these people said.
GlobalFoundries, the world's No. 2 contract chipmaker, also placed an order for one. ASML said in a mid-April earnings call that it plans to ship 20 EUV systems in 2018, without specifying customers' orders.
The order by SMIC in April came after the U.S. said it will ban Chinese telecommunications equipment maker ZTE from using American-made components and services for seven years, said an industry source familiar with the situation.
SMIC has reserved some funding from the Chinese government for the expensive equipment that costs roughly the same amount as last year's net profit of $126.4 million, the source said. SMIC's reserved EUV system is expected to be delivered by 2019, according to the source.
There have long been restrictions on the ability of cutting-edge chip manufacturing equipment to be sold or shipped to China. The restrictions have been justified through the Wassenaar Arrangement, a multinational voluntary export-control compliance that covers the export of technologies that could have military uses. But companies can obtain exemptions to such restrictions.
A spokesperson for ASML told the Nikkei Asian Review that it treats customers worldwide, including its Chinese clients, equally and there are no restrictions according to the Wassenaar Arrangement to sell EUV equipment to Chinese customers. The Dutch company declined to comment on whether SMIC placed an EUV system order, as well as on orders from TSMC, Intel and Samsung. ASML is the exclusive provider globally for such advanced equipment.
SMIC did not immediately respond to requests by Nikkei for comment.
The U.S. and China are currently negotiating trade issues. U.S. President Donald Trump in a tweet on Monday appeared to justify his 180-degree turn on a previous decision by his administration to ban ZTE from acquiring U.S. parts.
A day earlier, Trump said he and Chinese President Xi Jinping were working to give ZTE "a way to get back into business, fast."
Even if Trump reverses the U.S. ban on ZTE, in a show of goodwill ahead of a new round of trade talks in Washington, the previous harsh crackdown on ZTE and moves to pose tariffs have already sent clear warnings to Beijing that China needs to advance its own chip technology to reduce heavy foreign reliance as quickly as possible.
EUV lithography equipment is crucial in future chip technology development and has long been viewed as a savior to the so-called Moore's Law. The EUV system can emit light with wavelengths one-fifteenth as small as the current equipment, enabling it to etch finer circuits on a chip.
Moore's Law is the notion of physics proposed by Intel co-founder Gordon Moore in 1965 that says every two years or so the number of transistors on a chip will double, and thus the performance of chips will advance accordingly. Many are worried that this idea, which has driven the semiconductor industry for the past four decades, could come to a halt because it could become too difficult to fit so many transistors on a tiny chip.
Leading chip manufacturers are still working to install and test EUV lithography tools, as none previously have successfully produced such advanced chips and there are still challenges to overcome.
"The EUV scanner, if successfully installed, could help reduce cycle time and replace some very complicated processes in producing advanced chips," said Lin Jian-hung, an analyst at the Topology Research Institute. "But the new equipment also requests many new materials to support and also needs to undergo many tests."
Currently, core processor chips for Apple's premium iPhone X and iPhone 8 range adopted TSMC's 10-nanometer process technology, while the upcoming new iPhones this year would use 7-nanometer process technology.
The smaller the nanometer size, the more expensive and challenging to develop, and the more powerful and advanced the chips are. There is an industry consensus that the cutting-edge chip manufacturing process technology will be smaller than 5-nanometer and will require an EUV tool to complete.
On the business side, SMIC is a smaller rival of market leader TSMC in manufacturing chips for others, known as the foundry segment, and counts Qualcomm, Huawei's chip arm Hisilicon Technologies, and other chip designers as clients.
SMIC is roughly two to three generations behind TSMC, Samsung and Intel in terms of manufacturing technology. Samsung is the world's biggest memory chipmaker, while Intel dominates the segment for microprocessors for personal computers and servers.
SMIC is still working to improve its own 28-nanometer process technology and last year brought in Liang Mong-song, a former senior executive at Samsung and TSMC, to be its co-chief executive to help develop its 14-nanometer process technology. Samsung and TSMC are now racing to manufacture 7-nanometer chips.
"SMIC's effort shows that it will continue investing in semiconductor technologies despite the high expense and even if it takes years for it to catch up with the industry leaders," said an industry manager familiar with the matter. "Buying such costly equipment does not guarantee success for SMIC's chip technology development, but it at least shows the commitment."
For the January-March quarter, SMIC generated $831.04 million in revenue -- which includes $107.6 million in a tech license fee gain from a joint-venture. Net income for the period plunged almost 58% year-over-year to $29.37 million.
Still, the company revised up its full-year capital expenditure for chip production to $2.3 billion from $1.9 billion for 2018, citing increasing spending for manufacturing and research-and-development equipment, and the construction of new facilities, according to Zhao Haijun, co-chief executive of SMIC in an earnings call on May 10.
"We forecast China [chip designers] will continue to grow 20% per year for the next couple of years," Zhao said. "We [as the homegrown contract chipmaker] are well-positioned to capture the meaningful prospect and to expand our addressable market by accelerating the development of our technology."
Nikkei staff writer Lauly Li contributed to this report.