Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How Chinas State Chipmaking Is Reshaping Tech Supply Chains
Transcript
- Lucas: So, China's semiconductor output grew 27 percent year-over-year in May. That's according to the National Bureau of Statistics. And it's not just a blip — this is part of a sustained push that's been accelerating since late 2023. Luna: Twenty-seven percent is massive. But is it mostly low-end stuff, or are they actually moving up the value chain? Lucas: Good question. Most of the volume is still mature nodes — 28 nanometer and above, used in automotive microcontrollers, power management chips, that kind of thing. But SMIC, their leading foundry, has reportedly been producing 14-nanometer chips in significant volumes since last year. Not cutting-edge, but it's enough for a lot of industrial and consumer applications. Luna: Right. And that's exactly the stuff that used to be imported from Taiwan or South Korea. So the domestic replacement is real. Lucas: It's real, and it's being driven by massive state investment. The government has poured hundreds of billions into the semiconductor fund — the Big Fund, they call it — and local governments are chipping in with subsidies, land, and tax breaks. The goal is to make China largely self-sufficient in chips by 2030. Luna: But hasn't the US export control regime actually slowed them down? I mean, they can't get the latest ASML lithography machines. Lucas: Absolutely, the controls have hurt. ASML is barred from shipping its extreme ultraviolet machines to China, so they can't make the smallest geometries — 5 nanometer and below. But here's the paradox: the sanctions have also galvanized the Chinese industry. Local chip equipment makers are seeing orders surge. And imports of older-generation lithography tools from Japan and the Netherlands actually jumped last year, as companies stockpiled before new restrictions kicked in. Luna: So it's a classic 'necessity is the mother of invention' scenario. But how much of this output is actually competitive on cost and yield? Lucas: That's the big question. Industry analysts estimate that SMIC's yield on 14-nanometer is maybe 70 to 80 percent, compared to TSMC's 95 percent-plus. And cost per wafer is higher, partly because they have to use more complex multi-patterning techniques to compensate for not having EUV. So it's not a straight replacement. But for many Chinese end users — especially state-owned enterprises and companies sensitive to supply chain security — price isn't the only factor. Luna: And I imagine Huawei is a key customer. They've been designing their own chips for years, and after the US cut them off from TSMC, they had to pivot to domestic foundries. Lucas: Exactly. Huawei's HiSilicon division now designs chips that are made by SMIC. The Kirin 9000s, which uses a 7-nanometer equivalent process, was a big surprise when it launched in 2023. And since then, they've iterated. Meanwhile, Alibaba's chip design arm, Pingtouge, is also tapping into domestic foundry capacity for its server CPUs and AI accelerators. Luna: So the entire Chinese tech ecosystem is being rewired. But what does this mean for global players like Nvidia or AMD? They've had to create special lower-performance chips to sell to China, under US export rules. Lucas: Right, Nvidia's A800 and H800 were specifically designed to comply with export controls. But now they're facing a new competitive threat: Chinese alternatives. Companies like Cambricon and Huawei are producing AI chips that — while not as powerful — are good enough for many domestic data center applications. And because they don't rely on US technology, they're not subject to export restrictions. So over time, US chip makers could lose market share in China. Luna: And China is a huge market. So the sanctions are both slowing China's access to cutting-edge tech, but also creating a parallel ecosystem that competes with American companies. Lucas: Exactly. And there's another angle: China is also becoming a bigger exporter of chips. Not leading-edge, but mature-node chips are being shipped to Southeast Asia, Africa, and even Europe. The value of China's chip exports rose 18 percent year-over-year in the first half of 2026. So they're not just substituting imports — they're becoming a supplier to the world. Luna: That's interesting in the context of trade tensions. If China floods the market with cheap chips, could that trigger anti-dumping measures from the US or EU? Lucas: It's possible. We've already seen that play out in solar panels and steel. But chips are more complex — there's a national security angle that makes governments wary of cutting off supply entirely. Plus, many of these chips go into products made by Western companies in China. So it's a tangled web. Luna: So what's the net effect on global supply chains? Are we looking at a decoupling, or more of a fragmentation? Lucas: More fragmentation, I think. We're seeing the emergence of two distinct supply chains: one centered on advanced chips made with Western and Taiwanese technology, and another for mature-node chips that China can produce. But they're not completely separate — many products use chips from both. For example, a smartphone might have a Qualcomm 5G modem made by TSMC, but the power management chip could be from a Chinese foundry. So it's messy. Luna: And expensive. Duplicating supply chains is costly. But governments are willing to pay for resilience. Lucas: Absolutely. And that brings us to the longer-term strategic question: can China actually achieve its self-sufficiency goal by 2030? Most analysts are skeptical. The gap in leading-edge manufacturing is wide, and it's getting wider as TSMC and Samsung push toward 2 nanometers. But for the chips that matter most to China's domestic economy — industrial microcontrollers, automotive chips, memory — they're making real progress. Luna: It reminds me of the old Soviet approach to semiconductors. They managed to make copies, but they were always a generation or two behind, and at huge cost. Lucas: There are echoes, but the difference is scale and market. China has a massive domestic market that can absorb this output, and a central government willing to subsidize it indefinitely. The Soviet Union didn't have that. So the outcome might be different — a viable, if not cutting-edge, semiconductor ecosystem. Luna: And that ecosystem has already enabled some real-world products. I was reading that Chinese automakers are now using domestic chips for their EVs — BYD, NIO, XPeng — which helps them avoid supply chain disruptions from Taiwan or the US. Lucas: Exactly. BYD actually designs its own chips for battery management and infotainment. And they're not alone. The automotive sector is a huge driver of demand for mature-node chips, and Chinese foundries are well positioned to supply them. So even if they're not making the latest smartphone processor, they're winning in areas with high volume and steady demand. Luna: Let's talk numbers. The data we have shows China imported about $350 billion worth of chips in 2025, down slightly from the year before. Meanwhile, domestic output is growing fast. Lucas: Right, imports are still huge, but the trend is downward. And the mix is changing — fewer consumer chips, more high-end processors that China can't make yet. So the government's push is partly about reducing the trade deficit in electronics. And given the overall trade data — China's exports of goods and services hit $3.5 trillion in 2025 — they have the surplus to fund this investment. Luna: And the yuan at 6.78 per dollar helps. It makes imports of chip-making equipment cheaper in local currency terms, which is good for SMIC and other fabs. Lucas: Good point. The weaker yuan also makes Chinese chip exports more competitive. So there's a synergy here. The currency policy, the industrial subsidies, the export controls — it's all pushing in the same direction. Luna: One thing I've been wondering: how much of this chip push is actually about national security versus economic development? Because they're often framed together. Lucas: It's both, but the security angle has become more prominent since the US blacklisted Huawei and started restricting technology transfers. The Chinese leadership sees chip independence as critical for military modernization and for avoiding a 'stranglehold' scenario. But economically, it's also about capturing value in a high-tech industry and creating high-skilled jobs. Luna: So it's a classic 'Made in China 2025' play, just with more urgency. Lucas: Exactly. And the results so far are mixed but not trivial. Output is up, but profitability is weak. Many of these fabs are running at a loss, supported by state subsidies. The question is whether they can eventually become commercially viable without perpetual support. Luna: And if the global chip market takes a downturn — which it has before — could that force consolidation or even some failures? Lucas: Almost certainly. The current boom is partly driven by AI demand and the automotive chip shortage hangover. If that slows, we could see overcapacity. But the Chinese government has shown it's willing to prop up strategic industries. So I think the weakest players might get merged into stronger ones, but the overall ecosystem will survive. Luna: It's a fascinating experiment. And one that has implications for investors, supply chain managers, and policymakers everywhere. Lucas: Absolutely. And if you find walking through the economy with us helps you make sense of all this, we're able to keep the show ad-free thanks to listeners who support us. If you've gotten value from the China Economy series, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a simple way to help us keep doing these deep dives. Luna: Yeah, and we really appreciate it. Every bit of support lets us spend more time on research and bring you these angles that you won't get in a typical news headline. Lucas: Exactly. So back to the chip story — one more thing I want to touch on is the role of Chinese tech giants in this push. Alibaba, Tencent, Baidu are all designing their own chips now, using Arm or risc v architectures, and having them manufactured in China. Luna: Right, Baidu's Kunlun chip for AI inference is a good example. And they're not alone. Lucas: Exactly. So the ecosystem is building out from both ends: government-funded fabs on the supply side, and commercial demand from tech and auto on the demand side. That alignment is powerful. Whether it's enough to close the gap with TSMC and Samsung by 2030 is another matter, but the direction is clear. Luna: And for companies and investors outside China, the key takeaway might be that the era of a single global chip supply chain is over. You have to plan for regional diversification. Lucas: Well said. And that's a topic we'll keep tracking as the data evolves. Thanks for listening.