Inside a secure facility overseen by the Central Science and Technology Commission, Chinese engineers have activated an Extreme Ultraviolet (EUV) lithography machine—a technology the U.S. spent years attempting to block. 

A recent Reuters investigation confirms the EUV prototype is now operational in Shenzhen. This development is not just a technical milestone; it is a seismic structural realignment that effectively marks the end of the unified global semiconductor market and inaugurates an era of deep technological division.

Lack of access to the leading edge technology of ASML’s EUV lithography machines is the most important chokepoint for China’s semiconductor ambitions. “It makes sense that companies would want to replicate our technology, but doing so is no small feat,” ASML told Reuters in a statement.

Over the past five years, the global semiconductor industry believed that strict “small yard, high fence” restrictions would keep China several generations behind in technology.

The news about the Shenzhen prototype, seen as a “hybrid apparatus born of necessity,” shows that these barriers are disappearing. Although the machine has not yet made chips ready for the market, its presence speeds up China’s path to semiconductor independence, possibly by 2028 to 2030. This changes the global supply chain’s risk outlook.

Anatomy of a technological insurgency

The Shenzhen project, referred to as China’s “Manhattan Project” for chips, represents a departure from the subsidy-heavy, commercially driven strategies of the past. Instead of relying on disparate commercial companies, Beijing has adopted a “whole-of-nation” approach, with Huawei serving as the central systems integrator. 

“China’s strategy is to boost self-sufficiency in critical sectors as insurance against adversaries cutting off access to foreign technologies,” argued Brian Spegele, senior correspondent in The Wall Street Journal’s Beijing bureau. “Leaders are signaling that the high costs of doing so are worth it, especially as relations with Washington remain volatile.”

This approach brings together state research groups like the Shanghai Institute of Optics and Fine Mechanics (SIOM) and private companies. Lithography is a top national security goal, not just an industrial one.

Technically, the prototype highlights the divergence between Western commercial logic and China’s strategic imperative. While ASML relies on CO2 lasers for EUV light generation, Chinese researchers are refining a design based on solid-state lasers. ASML discarded this method due to insufficient efficiency for mass production. However, Chinese teams now report a 3.42% conversion efficiency, approaching the threshold required for practical application.

This achievement relies as much on skilled people as on engineering. The project has actively hired top engineers from ASML, sometimes offering up to $700,000 to sign on. According to Reuters, this “human intelligence collection” provided important know-how about system integration that cannot be gained through cyber-espionage alone.

At the same time, Huawei is working on a Laser-Induced Discharge Plasma (LDP) source, a simpler option using high-voltage discharge instead of lasers. LDP produces less power, but it acts as a backup plan. If the main laser method cannot be scaled up without banned Zeiss mirrors, LDP could still be used to make enough chips for military needs, even if only in small quantities.

New, bifurcated global semiconductor economy

The operational Shenzhen prototype formalizes the splitting of the global semiconductor market into two separate and increasingly incompatible systems. This development terminates the globalization era for the chip industry, substituting it with two parallel supply chains governed by distinct economic and geopolitical rules.

The Western System, led by the United States, Europe, Taiwan, and South Korea, will continue to drive bleeding-edge technology. TSMC and Intel are already testing ASML’s “High-NA EUV” machines for sub-2 nanometer fabrication, prioritizing high performance for AI and data centers, with market-driven pricing. The West’s primary goal is maintaining a “compute gap” that ensures its technological superiority over China.

TSMC is already moving into the “Angstrom era” with A16 nodes and backside power delivery. Their goal is to ensure Taiwan technology stays ahead of China. While technologically trailing the West, focusing on 5nm to 3nm processes, China is not bound by traditional commercial viability.

In China, state-supported foundries like Semiconductor Manufacturing International Corp. (SMIC) accepts lower yields to make sure supply is secure. The main aim is to offer affordable chips to the “Global South” and Belt & Road markets, which could create a “dependency trap” for countries that cannot pay Western prices.

Mature chips price war

While most people are watching the race for advanced AI chips, a bigger and more immediate economic change is happening with “mature node chips” (28nm and above). These chips are essential for cars, industrial machines, and home appliances.

As equipment shortages ease thanks to local advances and grey-market buying, analysts think China could control 30% to 40% of the world’s older chip capacity by 2030. The Shenzhen breakthrough lets China focus on using this supply chain as a tool. By flooding the market with state-backed chips, Chinese companies could push prices so low that Western rivals cannot compete.

This situation puts Western industrial giants in a tough spot. Car and appliance makers, under heavy cost pressure, may find it hard to resist buying cheaper Chinese chips. This possible control over the basic electronics supply chain is a strategic risk, just as serious as the race for AI leadership.

Disruption of the ASML equipment monopoly

The growth of China’s domestic equipment industry is a “nightmare scenario” for established suppliers such as ASML, Nikon, Tokio Electron, and Canon. The Shenzhen prototype was partly built from reused equipment bought through middlemen, which has shaken up the secondhand market for lithography tools. 

As China moves toward domestic substitution, the Chinese market—historically accounting for a significant share of Western toolmakers’ revenue—will eventually close. In response, the United States and Japan are tightening controls not just on new sales, but on servicing and spare parts for the existing installed base of machines in China.

These actions are meant to make China’s manufacturing lines less reliable, which further breaks up the global supply network and forces China to depend more on its growing “shadow supply chains.”

These shadow networks have created a hidden layer within the global industry. Groups like SiCarrier play a key role in getting restricted parts and hiring talent to get around “small yard, high fence” rules. As a result, the supply chain has changed from an open, efficient system to a battleground where intelligence work and industrial buying are hard to tell apart.

Commercial reality for Chinese manufacturers

Even with the Shenzhen breakthrough, China still faces big challenges before it can mass-produce chips for the market. Right now, SMIC makes 7nm chips using older DUV machines and complicated multi-patterning methods. This is very costly—reports say SMIC’s cost per wafer is 40% to 50% higher than TSMC’s, and yields for 7nm chips are below 50%.

In a free market, these inefficiencies would normally put a company out of business. But in China, the government covers these costs to make sure key companies like Huawei can get ahead.

The goal for China’s EUV machine is to remove the need for expensive multi-patterning, so the industry can move from relying on state support to being commercially viable. Until that happens, likely around 2029, the Chinese chip sector will still need a lot of government funding to balance its strategic aims with economic realities.

Erosion of the “Silicon Shield”

One of the biggest impacts of the Shenzhen prototype is on Taiwan’s security. Taiwan makes 92% of the world’s most advanced logic chips, which led to the “Silicon Shield” theory—the idea that Taiwan’s importance protects it from attack.

Building its own EUV technology, even if not as good as TSMC’s, weakens this shield. If Beijing can make enough advanced chips for its military and key infrastructure, it “immunizes” itself against the tech risks of a possible conflict. This changes the balance of deterrence, suggesting that the idea of mutual economic destruction in a Taiwan conflict may no longer hold true.

Seeing these new risks, TSMC is speeding up its plans to spread out production. The company will start making 3nm chips in Arizona by 2027, earlier than planned. TSMC is also growing in Japan and Germany. It says its top research and development will stay in Taiwan, but these steps show a shift from economic efficiency to greater geopolitical safety.

Inflation and disruption of supply chains

The launch of the Shenzhen prototype clearly shows that the containment strategy has hit its limit. The West still leads in top performance, but its monopoly on chip-making tools is over. The semiconductor industry is moving from a single global market to a divided battleground, with different standards, split supply chains, and tough competition for control over older technologies.

For the global economy, this shift means more inflation and disruption. The benefits of a global supply chain are being replaced by the extra costs of national security. As the “Silicon Curtain” falls, Western policymakers are moving from trying to block China’s access to technology to focusing on staying ahead—keeping a lead that accepts China’s rise as a chip power but aims to keep the West one step ahead.

From EETimes