Semiconductors

Semiconductors are crucial to many of China’s strategic goals: digitalizing the economy, boosting high-tech exports such as electric vehicles (EVs) and solar panels, and developing modern weapons. With its state-led “Big Fund,” China has invested more than CNY 686 billion (EUR 87.5 billion) into the industry since 2014, in addition to local government support and private investment.

Indigenizing the semiconductor industry has gained urgency, as US sanctions and export controls have cut off access to advanced semiconductors critical for development in AI, military and other fields. Since the US sanctioned the telecoms giant Huawei in 2019, Huawei has quietly become the central force in the state’s effort to develop homegrown chips, alongside other companies.

China is a major producer of semiconductors using older manufacturing technology and is a leader in backend processes – chip assembling, testing, and packaging. But it lags in making advanced semiconductors and lacks the tools to manufacture them. US export controls have cut off access to critical foreign-made equipment.

Nevertheless, leading manufacturer SMIC has produced an advanced 7nm smartphone chip and a line of AI chips, both for Huawei. Taiwan’s TSMC, the world’s leading semiconductor contract manufacturer, first pioneered a 7nm process in 2018 (has since produced several rounds of further innovations), suggesting SMIC lags by roughly five years. However, China’s lack of access to Extreme Ultraviolet Lithography (EUV) machines, essential for making advanced semiconductors and exclusively produced by the Netherlands’ ASML, may hamper further progress.

Graphics dashboard

China could dominate legacy chip manufacturing in 2030

Currently China has the largest production capacity for legacy chips, which are older, established semiconductor designs. Chinese companies have already committed to a doubling in capacity by 2030 (compared to 2023 levels). European semiconductor companies will see increasing competition from China, where profits often take a backseat.

Big Fund investment directs most resources to IC manufacturing

The first two rounds of China’s Big Fund semiconductor investment fund were focused on costly IC manufacturing. The latest and largest round of 344 billion CNY (44 billion EUR), announced in May 2024, is expected to focus on AI chips and high-end equipment, where China urgently needs self-sufficiency in the face of US export controls.

China still depends on foreign semiconductor manufacturing equipment

Semiconductor fabs rely on many different types of machines. To fully indigenize production, China would need to produce all these machines. They are often not easily interchangeable. Even though Chinese firms currently have a market share of 11 percent in etching, their machines often cannot be used to replace foreign ones.

Semiconductors in China: Timeline of crucial events

Development

Policy/regulation

The US adds Huawei and its subsidiaries to the Entity List, restricting exports to them. This impacts Huawei's supply chain, with 33 of its 92 core suppliers based in the US.

Jan. 2019

US applies Foreign Direct Product Rule to Huawei, blocking its technology access globally. Companies are barred from using US technology (mainly semiconductors) to supply Huawei.

Mai 2020

Top Chinese scientist suggests China use open-source RISC-V chip design architecture to overcome Western sanctions, and create an ecosystem around “RISC-X” in Belt and Road countries.

Nov. 2020

US expands export controls on advanced semiconductors and manufacturing equipment, restricting tech specs of chips and including arms-embargoed countries.

Sep 2023

Huawei and SMIC release Kirin 9000S, a 7nm 5G chip for Huawei's latest high-end smart phone – even after US export controls blocked equipment considered necessary to make such chips.

Sep 2024

Second tranche of Big Fund raises CNY 2 trillion (EUR 25.6 billion) to support Chinese semiconductor industry – beyond just fabs – to create an ecosystem for making semiconductors in China.

Okt. 2019

COVID-19 severely disrupts supply chains for automotive chips. Car companies must cut output due to the shortage. Chinese chip companies evolve to meet the demand of its auto industry.

Juni 2020

US institutes country-wide semiconductor export controls, a major policy shift that restricts all of China’s access to "chokepoint" technologies, not just certain entities.

Okt. 2022

Third phase of China Integrated Circuit Industry Investment Fund (Big Fund III) raises CNY 3.4 trillion (EUR 44.3 billion) from state-owned investors for semiconductor industry, the largest to date.

Mai 2024

Recent developments

Tech progress

Huawei is rumored to develop a high-end lithography machine (EUV) that uses a different technique than global monopolist ASML. However, it is unclear if the machine will ever be ready, as Huawei is reportedly only building the first machine currently and EUV machines are some of the most complex in the world. In addition, the picture accompanying the supposed breakthrough looks more like a machine designed for error detection and measurements than an EUV machine. (Source (DE): Golem, 12.03.2025)
Changxin Memory (CXMT), the largest and only domestic manufacturer of DDR4/LPDDR4 memory chips, is making advancements in the yield for DDR5 chips. It thus narrows its technology gaps to world leaders like Samsung (Source (EN): TechPowerup, 27.12.2024)

Domestic dynamics

Few Chinese chipmakers have been able to support DeepSeek to run on their hardware. The leader, presumably Huawei, can only run DeepSeek at a quarter of the speed of Nvidia hardware. Poor inter-chip communication and lack of native support for FP8 data format are among the issues Chinese chips still face. (Source (CN): Baoyong Gang, 03.03.2025)
With China’s recent successes in manufacturing chips, focus shifts to inputs like semiconductor equipment, photomasks and photoresists. Firms invested heavily in domestic production facilities for semiconductor manufacturing equipment late in 2024, but dependencies are ubiquitous still. (Source (CN): EE Times China, 02.02.2025)
China’s largest contract manufacturer, SMIC, warns of possible oversupply in 2025 in mature-node chips. As Chinese companies have expanded capacity and invested capital, their gross profit margins have shrunk. There are no signs that capacity expansion is constrained currently. (Source (EN): Reuters, 12.02.2025)
Several Chinese chipmakers have launched new 12-inch wafer lines, expanding production capacity for power devices and advanced logic chips. (Source (CN): EE Focus, 03.01.25)

Foreign involvement

China’s chip exports exceeded one trillion yuan for the first time in 2024. This reflects its increasing production prowess, especially in legacy chips. At the same time, however, China still imports more than twice what it exports in chips, and Chinese imports have increased again after a short dip in 2023. (Source (CN): EET China, 05.02.2025)
The Ministry of Commerce is weighing an anti-subsidy probe into US mature-node chips, reportedly after Chinese chipmakers requested it. Growing overcapacity in China for domestic mature-node chips has already resulted in some US companies cutting prices. This can also be seen as a response to the US raising tariffs on Chinese mature chips in 2024 and 2025. (Source (CN): MOFCOM, 16.01.2025)

Semiconductors in China: Profiling the actors

Huawei: From telecommunications provider to technology manufacturing leader

Huawei has emerged as the leader for semiconductors in China. It designed the first domestically-produced 5G-capable smartphone chip, the Kirin 9000S and is invested in 97 companies through its Hubble Investment arm. In the global technology competition between China and the US, Huawei thus now plays a key role in two of the most critical technologies, mobile internet and semiconductors.