The workaround China is using to boost AI chip output under sanctions

The workaround China is using to boost AI chip output under sanctions

China’s semiconductor industry has found a workaround to Western export controls by upgrading older chipmaking machines rather than importing restricted new ones. Chinese fabrication plants are retrofitting advanced deep ultraviolet lithography systems from ASML to manufacture chips used in artificial intelligence and high-end smartphones, according to people familiar with the matter.

The approach allows Chinese chipmakers to extract more performance from equipment that remains legal to own and operate, highlighting gaps in a regulatory regime designed to slow China’s technological progress. Instead of relying on banned tools, fabs are enhancing existing machines with upgraded components sourced from overseas, the Financial Times reported.

Working with constrained technology

US and Dutch export controls prevent ASML from selling its most advanced lithography systems to China. While extreme ultraviolet machines are completely off-limits, even the latest generations of deep ultraviolet tools are restricted. As a result, many Chinese fabs rely on older systems such as ASML’s Twinscan NXT:1980i.

Despite these limitations, Chinese manufacturers have managed to use these machines to produce seven-nanometre chips, a process node required for modern AI workloads. In the semiconductor industry, nanometres refer to generational advances rather than literal physical dimensions.

People familiar with the upgrades say Chinese fabs have obtained improved wafer stages, optical components and alignment sensors through secondary markets. These enhancements allow greater precision when layering circuits, improving yields and throughput without formally breaching export rules.

Local ingenuity meets global supply chains

China’s largest chipmaker, Semiconductor Manufacturing International Corporation, and technology giant Huawei are among those known to be producing advanced chips using older ASML tools. While it remains unclear whether all their production lines use upgraded components, analysts say the results are increasingly evident in finished products.

The process often relies on multi-patterning, a technique that involves repeated passes of DUV lithography to achieve finer features normally produced with EUV machines. Multi-patterning is slower, more expensive and prone to defects, but component upgrades help offset some of these drawbacks by improving accuracy and efficiency.

Analysts at TechInsights recently said Huawei’s latest Kirin processor reflects China’s most advanced manufacturing capabilities to date, suggesting continued progress despite technology restrictions.

Export controls under pressure

The developments underscore the challenges facing US-led efforts to constrain China’s semiconductor ambitions. Washington has pushed allies including the Netherlands, Japan and South Korea to tighten controls across the supply chain, limiting not just equipment sales but also servicing and technical support.

ASML is permitted to maintain existing machines in China but is prohibited from improving their overlay accuracy or boosting throughput beyond marginal levels. The company says it complies fully with all applicable laws and does not support upgrades that exceed legal limits.

However, people familiar with the situation say third-party engineering firms have carried out on-site modifications using imported components, allowing fabs to sidestep restrictions without direct involvement from ASML.

Political uncertainty and enforcement risks

The US Bureau of Industry and Security has been examining what support Chinese fabs receive for ASML equipment and had been considering tighter rules to restrict even permitted servicing. It remains unclear whether further action will be taken after the Trump administration signalled a pause in trade tensions with Beijing.

For ASML, China remains a crucial market. The company’s sales to China surged as customers rushed to secure equipment ahead of expected restrictions. China accounted for more than a third of ASML’s global revenue in 2024, up from just over a quarter the previous year.

ASML has warned investors that sales to China are likely to decline sharply as controls take full effect, but analysts say the installed base of machines gives Chinese fabs room to continue innovating.

A narrowing technology gap

Industry experts caution that retrofitting older tools cannot fully replace access to cutting-edge equipment from companies such as TSMC or Samsung. Costs remain higher and production less efficient. Still, China’s progress suggests that export controls may slow, but not stop, its advance.

As Chinese fabs continue to squeeze more capability out of restricted technology, the global semiconductor race appears increasingly shaped by adaptation rather than outright denial of access.