Chinese Chipmakers Face Supply Hurdles as Domestic DUV Production Rises

Chinese semiconductor manufacturers are accelerating domestic production of deep ultraviolet lithography systems, even as the broader chip design sector faces tight component supplies and operational hurdles. State-owned Shanghai Aishengna Electronic Technology Group has begun mass producing domestic immersion DUV machines, with initial tools headed toward major domestic chipmakers including Semiconductor Manufacturing International Corporation, commonly known as SMIC.

The advancement in domestic equipment manufacturing arrives as Chinese artificial intelligence chip designers struggle to secure enough hardware to meet soaring demand. Prominent AI chipmaker Cambricon recently reported third-quarter revenue that fell significantly short of analyst estimates. Although the company's revenue doubled year over year to 3.53 billion yuan, equivalent to roughly $529 million, analysts had projected expectations of 6.26 billion yuan due to persistent manufacturing limitations.

Industry analysts note that Chinese firms face acute shortages of high-bandwidth memory components, which are essential for packing alongside AI processors. Because U.S.-led sanctions prevent major international memory producers from supplying buyers in China, local designers are forced to rely heavily on domestic foundries like SMIC. However, these local factories remain restricted from acquiring ASML's most advanced chipmaking machinery, creating a significant technological bottleneck.

Despite these manufacturing constraints, Cambricon reported a 148 percent rise in net profit to 1.4 billion yuan and maintained its full-year 2026 revenue target of at least 13.5 billion yuan. The Beijing-based company serves as a key domestic alternative to Nvidia, whose advanced chips are barred from sale in China under export regulations. Morgan Stanley estimates that Cambricon will capture approximately 14 percent of China's AI chip market this year, trailing only Huawei.

Meanwhile, the rise of mid-tier Chinese equipment manufacturers is beginning to pressure international suppliers. ASML continues to face overwhelming demand driven by global artificial intelligence needs, with management indicating that planned supply for 2027 and 2028 will fall short of customer orders already stretching into 2029 and 2030. While market analysts consider the recent market selloff in ASML shares to be disproportionate given that Chinese DUV technology still lags behind by several generations, the emergence of domestic alternatives marks a notable shift in the global semiconductor landscape.

As China's chip industry navigates both export restrictions and supply chain vulnerabilities, companies are moving quickly to stockpile inventories and expand domestic production capabilities. Whether local foundries and equipment builders can successfully scale operations to bridge the gap left by international sanctions remains a central challenge for the region's technology sector.