The sophistication of EUV relates mainly to a wavelength measuring just 13.5 nanometers, considerably less than the 193 nanometers of deep ultraviolet (DUV) lithography, an older technology previously shipped to China in large volumes. The difference, an ASML spokesperson once told Light Reading, is like that between a thick marker and a fine ballpoint.

This analogy suggested that using DUV machines to produce complex 7-nanometer chips would be like drawing an intricate portrait with a fat pen. But SMIC is believed to have done it via a technique called multiple patterning. As the name implies, this essentially means repeating the lithographic process with DUV equipment to achieve the desired results. Double- and quadruple-patterning are among the specific options available.

The main uncertainty is at what cost, and some evidence of multiple patterning's economic disadvantages may have emerged in SMIC's results. In the latest, published a few days ago, SMIC reported a 20% year-over-year increase in first-quarter sales, to about $1.75 billion, and yet profits tumbled 73%, to $63.5 million. Executives at the company laid most of the blame on high depreciation charges, incurred as new equipment was powered up for the first time.

But an examination of SMIC's results also reveals a 31% rise in cost of sales, to more than $1.5 billion. SMIC's gross margin accordingly sank from about 21% a year ago to less than 14%. Richard Windsor, an analyst with Radio Free Mobile, thinks the workaround of using DUV and multiple patterning to make those 7-nanometer chips has proven expensive.

Experts say the big drawback of multiple patterning is that it tends to result in lower "yields," a percentage measure of the functional chips derived from a silicon wafer. Intel is thought to have experimented with it for 10-nanometer production before it eventually gave up and bought EUV machines instead. TSMC had a similar experience, according to Windsor. In a blog, he writes that yields were so low as to be uneconomical.

"However, we are expected to believe that SMIC has got this to work well enough so that its yields are economic and that it is making money," he said. "I think that the reverse is true and that a part of the weakness we have seen in gross margins over the last several quarters is due to increasing revenues coming from chips made using multi-patterning techniques."

There was certainly no acknowledgement of this in SMIC's first-quarter report or commentary prepared by executives for their earnings call with analysts. But Windsor is not the only expert questioning those cost-of-sales numbers. Earl Lum, the founder of EJL Wireless Research, who previously worked in the chip industry, agrees that a 31% increase may be a sign of "a potential yield hit."

US hawks will celebrate anything that points to problems for Chinese technology companies, especially those involved in chips. If Windsor and others are right, then growing shipments of Huawei's newest phones may chew further into SMIC's profits and potentially hurt its competitiveness. The alternative could be higher prices for end users, making rivals based outside China seem a much better bet.

SMIC's options, though, are limited. Japan's Canon and Nikon are the only other big makers of lithography machines. Regardless of Japan's appetite for upholding sanctions against China, neither company has an EUV range of products. Developing that expertise took many years, cost billions and necessitated partnerships with chip companies and component makers worldwide, ASML insists. China is reportedly aiming for self-sufficiency in EUV, among other things, and it is not shy of long-term commitments. But a homegrown Chinese rival could be a long time in the making.

Author: Saikat Bhattacharya