ASML's stock dropped 6.5% following a report indicating that China has commenced mass production of DUV lithography equipment.

      TL;DR: ASML's shares dropped 6.5% after The Information reported that a company in Shanghai has started mass-producing DUV lithography tools. China’s share of ASML’s sales decreased to 14% in Q2 from 19% in Q1.

      ASML's stock fell by as much as 6.5% in Amsterdam on Monday following a report from The Information indicating that a Shanghai company has begun mass production of immersion deep ultraviolet lithography tools. These are the very machines that ASML is prohibited from selling to China due to Dutch and US export restrictions. If true, this development achieves precisely what the controls sought to avoid: China developing its domestic capabilities because it can no longer make purchases from abroad.

      ASML has not yet provided a comment. The percentage of ASML’s net system sales attributed to China declined to 14% in the second quarter, down from 19% in the first quarter. This drop is indicative of both stricter export controls and the potential that Chinese chip manufacturers are seeking alternative sources. While China was ASML’s largest market earlier this year, the relationship has been deteriorating each quarter as the Dutch government, under pressure from the US, limits exports of its NXT:2050i and NXT:2100i systems.

      By ASML's standards, DUV lithography is not considered cutting-edge. The company's most advanced tools employ extreme ultraviolet (EUV) technology, which China is unable to replicate and has never been permitted to acquire. Nevertheless, DUV machines are adequate for producing chips used in a wide range of electronics, including cars, smartphones, and AI inference accelerators. The establishment of a domestic Chinese DUV manufacturing capability would weaken the commercial justification for ASML’s sales in China, while not necessarily bridging the technological divide at the frontier.

      The US aims to completely cut off China from chip-making equipment, and the MATCH Act would compel the Netherlands and Japan to align their DUV regulations with US standards within 150 days. If China can now produce its own DUV tools, the leverage offered by these restrictions would be reduced. ASML’s stock decline reflects a market reevaluating the extent of the risk to the company's revenue from China—not just from regulatory impacts, but from the threat of replacement. The export controls were intended to impede China's progress, but they might have inadvertently motivated it to accelerate its development.