China’s semiconductor market is at a pivotal moment, characterized by an aggressive state-driven ambition for self-sufficiency and rapid indigenous technological development.

This forceful drive grows against persistent geopolitical pressures and significant technical hurdles. The market is substantial, reaching an estimated $182.8 billion in 2024, with forecasts suggesting continued robust expansion.

Growth is boosting due to burgeoning domestic demand in key sectors like AI, 5G, and automotive electronics. The strategic imperative to reduce reliance on foreign technology is a direct consequence of ongoing export controls and the government’s view of over-reliance as a critical national security vulnerability.

China Semiconductor Ambition

Furthermore, according to the Center for Security and Emerging Technology at Georgetown University, China is producing twice as many research papers as the United States on chip design and production.

Massive government involvement

China’s government is central to its semiconductor strategy, providing substantial financial support through initiatives like the “Big Fund” and policies such as “Made in China 2025” and the 14th Five-Year Plan. This national effort aims for technological self-reliance and global competitiveness by building a complete domestic semiconductor ecosystem.

This approach reflects a unique economic model. As economist Keyu Jin noted in her book The New China Playbook, “The combination of state guidance at the macro level and market mechanisms at the micro level… is what explains China’s rapid growth spurts and its technological uptake in such a short period.”

The unique blend allows for rapid system-wide changes and mobilization towards national goals, such as becoming a major player in electric vehicles, and is now applied intensely to semiconductors.

While some Western observers characterize this as state capitalism focused on large state-owned enterprises (SOEs), a more nuanced state-private collaboration model has emerged.

This model leverages strong state capacity with often weaker institutions to benefit from deep interlinkages between firms and state agencies.

Significant manufacturing progress

China spent US$41 billion on wafer fabrication equipment in 2024, accounting for about 40% of all purchases in this field worldwide.

Semiconductor Manufacturing International Corporation (SMIC), China’s leading foundry, spearheads the nation’s efforts in advanced process nodes. SMIC achieved a significant breakthrough with its 7nm process (N+2), notably used for manufacturing HiSilicon’s Kirin 9000s chip, initially found in Huawei’s Mate 60 Pro smartphone.

The ability to produce this chip using Deep Ultraviolet (DUV) lithography, despite lacking access to ASML’s Extreme Ultraviolet (EUV) tools, marked a crucial milestone.

Some analysts even suggest SMIC’s 7nm technology performance characteristics are comparable to industry leader TSMC’s 5nm offerings. SMIC is also progressing towards 5nm production utilizing DUV.

While DUV allows current advanced node production, its complexity, cost, and lower yields compared to EUV make it a temporary solution. China’s lack of indigenous EUV technology is a critical bottleneck, emphasizing the need to develop its own EUV capabilities for long-term competitiveness in advanced chip manufacturing.

Companies like SiCarrier highlight the quest for domestic equipment, claiming DUV-based 5nm solutions and signaling intent to build a more complete domestic ecosystem. While strategically important, achieving commercially viable domestic EUV is viewed as a long-term wager, and it is unlikely to reshape the leading-edge competitive dynamics for at least five to ten years.

Huawei’s vertical integration

Under sustained international pressure and restrictions, Huawei Technologies has embarked on an ambitious pivot to establish a vertically integrated, resilient domestic semiconductor supply chain, effectively pursuing Integrated Device Manufacturer (IDM) ambitions.

Huawei’s expansion is a direct response to U.S. sanctions. It aims to build an end-to-end domestic supply chain for advanced chips, reportedly with financial backing from local government entities.

The progress in Huawei’s Ascend chip series, despite potential performance differentials with Nvidia’s top-tier offerings, suggests a “good enough” AI hardware strategy is viable for China.

China Semiconductor Ambition and Adversity

Reports indicate Huawei operates or significantly influences at least eleven fabs across China, spanning memory, logic chips, and foundry services. When including R&D centers, this footprint could extend to 20 sites.

Gaining mature process self-sufficiency

Parallel to the advanced node push, SMIC and the broader Chinese foundry sector are aggressively expanding capacity in mature process nodes (such as 28nm, 40nm, and 55nm).

This pragmatic focus is securing stable revenue, gaining market share, and potentially creating global dependencies in segments that don’t require cutting-edge chips.

China Semiconductor Ambition and Adversity

SMIC’s strong 2024 revenue, with 12-inch wafers (often mature nodes) accounting for 77% of the total, supports this. An aggressive 40% price cut for its 28nm process in January 2025 exemplifies this competitive maneuver. China’s foundry strategy is thus two-pronged: pursuing advanced nodes for strategic autonomy while fiercely competing on price in mature nodes.

Packaging and materials beyond the silicon

China is also making significant investments and advancements in advanced packaging technologies. Domestic companies like JCET, Tongfu Microelectronics, and Huatian Huichuang Technology are enhancing capabilities in chiplets, 2.5D/3D integration, and Fan-Out Wafer-Level (FOWL) packaging.

Advanced packaging is a route to better chip performance despite scaling challenges, but its cost-effective scaling hinges on a mature domestic supply chain for materials and specialized equipment. While China has made progress, its local advanced packaging equipment and materials supply chains have historically lagged behind global leaders, and closing this gap is a significant undertaking.

The availability of advanced materials is a broader bottleneck. For example, the Asia Pacific photoresist market, with China as a key contributor, is growing. However, domestic companies are still actively working to develop and supply various formulations, including argon fluoride laser (ArF).

Potential bifurcation of semiconductor market

China’s determined pursuit of self-sufficiency carries profound implications for the global semiconductor industry and the geopolitical landscape.

Increasingly stringent export controls imposed by the United States and allies explicitly aim to limit China’s access to advanced chips, design tools, and critical manufacturing equipment like EUV.

In response, China has “doubled down” on domestic development and initiated an “all-out effort” towards self-sufficiency, including massive state funding and leveraging older DUV technology. China has also implemented retaliatory measures, such as export controls on materials like gallium and germanium, and security reviews of foreign tech companies.

China’s semiconductor strategy presents an “innovation dilemma” for multinational companies. Restrictions create immediate market access loss, while subsidized domestic efforts risk long-term displacement by Chinese competitors across the value chain. The competitive response will likely be multifaceted, including achieving “good enough” performance with DUV for domestic needs or cost advantages in mature nodes, rather than solely focusing on the leading edge.

China can cause market disruption. Innovations in advanced packaging can also improve system performance. This could lead to a bifurcation of the global semiconductor market. China’s role is evolving from primarily assembly, testing, and packaging to an increasing focus on design and manufacturing.

China will likely become a more self-reliant and powerful regional semiconductor bloc, leveraging its domestic market and mature node dominance, rather than a globally dominant leader across the entire spectrum.

Challenges and future outlook

Despite progress, China’s semiconductor industry struggles with manufacturing yields, cost competitiveness, and talent development. Ambitious self-sufficiency goals (70% by 2025, 100% by 2030) seem difficult to achieve from a low 2020 base (around 16%) due to ongoing issues in advanced manufacturing and the supply chain.

These targets may be more aspirational than strictly achievable by the stated deadlines, likely leading to adjustments or a focus on strategic segments.

he most probable near-term outlook (next 5-7 years) combines incremental domestic gains and entrenched global bifurcation. China will likely improve DUV-based processes, equipment, materials, and advanced packaging, becoming more self-sufficient in mature and mid-range segments and a formidable competitor globally.

China’s semiconductor journey remains a complex interplay of national ambition, substantial investment, engineering ingenuity, and persistent geopolitical and technological headwinds.

By: DocMemory
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