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China’s drive to build a self-reliant semiconductor industry is entering a more demanding phase as Beijing channels state money, purchasing power and research resources into closing technological gaps exposed by an escalating rivalry with the United States.
The effort extends far beyond producing more chips. China is seeking domestic alternatives for the equipment, software, materials and intellectual property needed to design and manufacture semiconductors, the tiny components that underpin artificial intelligence, smartphones, electric vehicles, telecommunications networks and modern weapons.
Chinese companies have made substantial gains in chip design, mature manufacturing processes, packaging and testing. Yet the country remains dependent on foreign suppliers for some advanced lithography systems, electronic design software and specialised manufacturing equipment. Those weaknesses have become more consequential as the United States and its allies restrict China’s access to technologies capable of producing cutting-edge chips.
State investment targets an entire supply chain
Beijing has treated semiconductor production as a strategic priority for more than a decade. Its most prominent financing vehicle, the China Integrated Circuit Industry Investment Fund, was established in 2014 and is commonly known as the “Big Fund.” Its first two phases directed billions of dollars towards foundries, chip designers, memory producers and equipment manufacturers.
A third phase was registered in 2024 with capital of 344 billion yuan, then worth about $47.5 billion, making it the largest of the three funds. Its creation signalled that China was prepared to sustain investment despite an economic slowdown, pressure on local-government finances and mixed results from earlier subsidy programmes.
The new funding is expected to place greater emphasis on semiconductor manufacturing equipment, materials and advanced memory. Those areas have become increasingly important as artificial intelligence systems create demand for high-bandwidth memory and other specialised components used alongside graphics processors and AI accelerators.
Central financing is only part of the system. Provincial and municipal governments have offered factories inexpensive land, tax concessions, credit and infrastructure. State-linked investors have backed production clusters in Shanghai, Beijing, Shenzhen, Wuhan and other cities, while government procurement can provide emerging suppliers with early customers.
The strategy is designed to connect companies across the industry. Chip designers need foundries capable of reliably manufacturing their products; foundries require domestic machinery, chemicals, wafers and components; and equipment makers need factories willing to test technology that may initially perform below established foreign alternatives.
That approach can accelerate development, but it carries risks. Earlier rounds of investment produced duplicated projects, inefficient plants and allegations of corruption. The commercial discipline required in semiconductor manufacturing is unforgiving: a company can build an expensive factory yet struggle to achieve the production yields needed to compete profitably.
Export controls intensify the technology race
China’s push has accelerated alongside increasingly extensive Western controls. The United States has restricted the sale of advanced computing chips and technology used to manufacture them, arguing that the equipment could support military modernisation, intelligence collection and weapons development.
In December 2024, the U.S. Commerce Department added controls covering 24 types of semiconductor manufacturing equipment, three categories of software tools and high-bandwidth memory. It also added 140 organisations to an export-restriction list. China condemned the measures as economic coercion intended to contain its technological development. This is a cause of concern in China as it still remains dependent on semiconductor imports as shown in the chart below.
The Netherlands and Japan, both important suppliers of chipmaking machinery, have also tightened export rules. Dutch manufacturer ASML has never been permitted to send its most sophisticated extreme ultraviolet lithography systems to China. Restrictions have also affected exports of some advanced deep ultraviolet machines, narrowing the routes available to Chinese foundries seeking to improve production.
The controls have not stopped development, but they have made it costlier and less predictable. China’s largest contract chipmaker, Semiconductor Manufacturing International Corp., has demonstrated an ability to produce advanced chips without access to extreme ultraviolet equipment. Analysts say that can involve additional processing steps, however, potentially reducing yields and raising costs compared with production at global leaders such as Taiwan Semiconductor Manufacturing Co. and Samsung Electronics.
China is therefore pursuing two goals at once. It is attempting to advance towards smaller, more powerful chips while rapidly expanding output at mature process nodes. Those older technologies remain essential for vehicles, household appliances, industrial machinery, power-management systems and telecommunications equipment.
Investment in mature production can deliver faster commercial returns and reduce dependence on imported components. It may also create tension overseas if subsidised Chinese factories produce more chips than the domestic market can absorb, driving down prices and challenging manufacturers in other countries.
Progress brings scale but not complete independence
China’s strongest advantage is the scale of its electronics and manufacturing industries. Domestic chipmakers can work with large producers of smartphones, electric vehicles, batteries, networking equipment and consumer appliances. Those customers provide demand, operating data and opportunities to refine products more quickly than would be possible in a smaller market.
Research partnerships are also expanding. Universities, state laboratories and companies are collaborating on chip architecture, materials, manufacturing processes and packaging. Advanced packaging, which connects multiple specialised chips within one system, offers China another way to improve computing performance without relying solely on the smallest manufacturing nodes.
Artificial intelligence has added urgency. Chinese technology companies need growing quantities of processors and memory to train and operate large language models, while restrictions complicate access to the most powerful foreign hardware. That has encouraged work on domestic accelerators, software frameworks and data-centre systems designed around locally available components.
Still, semiconductor independence is not a single threshold that China can simply cross. Modern chips depend on globally distributed expertise, with critical tools, chemicals, designs and components supplied by companies in the United States, Europe, Japan, South Korea and Taiwan. Replacing every foreign input would be enormously expensive and could produce less efficient supply chains.
Beijing’s more attainable objective may be resilience rather than complete isolation: ensuring Chinese industries can continue operating if access to foreign technology is reduced. Success will depend not only on the amount invested but on whether domestic suppliers can deliver reliable products at competitive prices.
The result is likely to be a more divided global semiconductor system. China will continue building alternatives, while the United States and its partners tighten control over the most sensitive technologies. Between them, multinational manufacturers must navigate changing rules, rising costs and a supply chain increasingly shaped by national security as much as commercial demand.
