Contract chip maker Taiwan Semiconductor Manufacturing Co (TSMC) is investing €838 million (£664 million) in Netherlands tools maker ASML to speed up the development of faster and more power-efficient chips while reducing manufacturing costs.

ASML is one of the world's largest tool makers and already provides chip manufacturing equipment to TSMC and other companies such as Intel, Samsung, GlobalFoundries and United Microelectronics (UMC).

TSMC will get a 5% equity stake in ASML as a result of the investment. TSMC will additionally invest €276 million in research and development of technologies such as extreme ultraviolet (EUV) lithography and 450mm wafers which could help make chips faster and manufacturing cheaper.

The investment follows Intel's announcement last month that it would invest €1.7 billion for a 10% stake in ASML, and later invest €838 million for an additional 5% stake. Intel also invested in ASML's 450mm and EUV lithography research and development efforts. ASML at the time said it would continue to work with other customers beyond Intel.

ASML in a statement this morning said the company is limited to selling 25% of the company's stake to customers as part of a Customer Co-Investment Program, which has a goal to accelerate the advancement of key manufacturing technologies. A 20% stake of the company has now been issued to Intel and TSMC.

Intel has the most advanced manufacturing process and is currently making laptop and desktop chips based on the 22-nanometre process. TSMC recently shifted to the 28nm process from the 40nm process, but problems in ramping up have resulted in chip supply issues for companies like Qualcomm, which has had a shortage of Snapdragon S4 chips used in mobile devices such as HTC's One X. Qualcomm has said the Snapdragon chip supply issues would be remedied by the end of this year as the company finds other chip makers and TSMC resolves its manufacturing issues.

Now TSMC is fervently trying to keep pace with Intel on chip technologies. TSMC last month announced an agreement with chip licensing company ARM to implement the 3D transistors in chips based on the 64-bit ARMv8 64-bit architecture using the 20nm manufacturing process and beyond. Intel started implementing 3D transistors in its chips starting with the 22nm process. 3D transistors make chips faster and more power-efficient.

TSMC is the world's largest contract chip manufacturer ahead of GlobalFoundries and UMC, with chip sales of $4.3 billion during the second half this year, growing by 22% compared to the first quarter this year, according to an IC Insights survey released last week.

The move to 450mm wafers is an expensive affair, requiring billions of dollars to be invested in tools and the establishment of factories. However, the move has been delayed as the economy slowed down and chip makers tried to make adjustments in the existing 300mm wafers used in fabrication plants. Chips are made by slicing silicon discs from long cylinders, then "printing" circuits on the wafers and cutting them up into chips. The larger 450mm wafers will allow Intel and TSMC to produce more chips from each wafer, with less waste.

TSMC is investing in ASML's development of tools for EUV (extreme ultraviolet) technology, which could allow chip makers to cram more transistors on silicon. Existing tools use longer wavelengths to transfer circuit patterns on silicon using masks. EUV shortens that range and allows the creation of finer images on wafers, allowing chips to carry more transistors.

The investments into ASML will help make circuits smaller and control manufacturing costs, said TSMC's executive vice president and co-chief operating officer Shang-yi Chiang.

The 450mm and EUV technologies are due for manufacturing in the second half of this decade, TSMC said.