“This changes the game for chipmaking in China,” said one market analyst as ASML’s stock plunged more than 7% following news that a Shanghai-based, state-supported company has begun mass production of domestic immersion DUV lithography machines. The Dutch semiconductor equipment giant had initially gained over 2% in pre-market trading, boosted by easing tensions with Iran and Nvidia's talks to support a massive OpenAI data center project, but the optimism faded quickly once the story broke.

ASML’s exposure to China has troubled investors for some time. In its Q2 earnings report, China accounted for 14% of net system sales, down from 19% in Q1, while CFO R.J.M. Dassen had projected about 20% for the full year. Now, with the emergence of local Chinese DUV technology, that forecast faces uncertainty. Since U.S. and Dutch export restrictions prevent ASML from shipping its most advanced EUV machines to China, Chinese manufacturers relied heavily on acquiring older DUV tools from ASML. This revenue stream now appears under threat as domestic suppliers step in.

The unnamed Chinese company reportedly assembled its development team by recruiting talent from other local firms, including government-backed Shanghai Yuliangsheng Technology. The announcement triggered a broader selloff in U.S. semiconductor equipment stocks: Applied Materials fell roughly 5%, Lam Research nearly 7%, and KLA Corporation close to 5%. Investors fear that if China has overcome the lithography bottleneck, the rest of the semiconductor equipment supply chain could soon follow. This comes alongside U.S. congressional efforts to advance the MATCH Act, aiming to restrict China’s access to DUV machines, which may now lose effectiveness if China’s domestic production scales up.

Still, the Chinese DUV technology remains in early stages. Production targets are modest, with only five units planned for this year and up to 20 by 2026, a far cry from ASML’s global output. China’s more advanced EUV ambitions lag even further behind, with machines still in prototype form and years away from commercial use. The development puts pressure on ASML’s last stronghold in China but does not immediately threaten the company's global dominance. Meanwhile, the chip sector’s volatility continues, as seen in recent market dips following China's tech advances.