China Trends #24 - Semiconductors: China’s Industrial Policy Steamroller in Motion

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By Mathieu Duchâtel

Do US technology transfer restrictions on semiconductors deliver tangible results in outcompeting China? Ask two semiconductor professionals, and you are likely to get two opposite answers. Yes, leveraging bottlenecks on lithography and EDA is likely to work, and key companies like Nvidia, TSMC, and ASML, embedded into mutually reinforcing ecosystems, will continue to innovate together faster than Chinese competitors. No, China’s intense state support for its semiconductor sector, its national determination, and the scale of its domestic market will ultimately enable it to catch up and overtake rivals in America, East Asia and Europe—as it has been doing in electric vehicles and could be on the path to achieve in biotechnologies.

The semiconductor sector is the only one among the ten “Made in China 2025” priority areas where the government’s targets have not been met. Analysts in the first camp see this as proof of the effectiveness of US restrictions, while those in the second argue that China’s catch-up is only a matter of time. In particular, they note that Chinese firms are on the verge of dominating mature-node production, establishing cost and scale advantages that will displace competitors globally and create ripple effects.

Many in the West are familiar with this debate, which also takes place within China itself. Yet from a Chinese perspective, the problem is framed differently. It is not a question of whether the United States can slow China, but rather a question of how effective Chinese government policies are in promoting technological self-reliance, national resilience and ultimately industrial dominance. The long-term strategic vision is clear. What matters is the mix of policies to achieve goals and adjust to the international environment. 

It Is All About Scale

At the heart of China’s semiconductor policy is a hybrid industrial system that blends centralized strategic direction with decentralized market competition. Jeremy Chih-Chen Chang calls it "market-driven but state-commanded": the government deliberately fosters intense competition among firms and provincial governments to accelerate innovation and build scale. Local authorities function as venture-capital-style investors through guidance funds, while central authorities monitor outcomes and consolidate successful players into national champions.

While the significant overcapacity inherent to this approach poses serious challenges to China’s competitors, it is too often mischaracterized as a fundamental Chinese weakness. Many Chinese analysts see it differently. Overcapacity is intentional inefficiency, a strategic tool that ultimately strengthens industrial competitiveness and secures global market share. Today, redundancy is tolerated across clusters in Hefei, Wuxi or Wuhan, but it is temporary. In the end, weaker firms are systematically weeded out, leaving globally competitive players to thrive.

At this stage of its semiconductor ecosystem development, China seeks to replicate a hallmark of the BYD model-creating a vertically integrated ecosystem capable of supporting a vast network of specialized subcontractors, while sustaining innovation across the whole network. Achieving this requires concentrated investment through a nationwide pseudo-Integrated Device Manufacturer (IDM) model. While earlier phases encouraged decentralization, the current strategy emphasizes centralized mobilization of industrial and innovation resources, replicating the integration of design, manufacturing, and packaging under a unified strategic management logic. 
While Europe debates "European preference" in public procurement, Beijing has made domestic adoption mandatory for state-funded infrastructure, including cloud computing, smart cities, and digital government projects. These demand-side interventions are designed to accelerate structural consolidation. Policies first piloted in Shanghai, which required 50 percent domestic sourcing, have been extended nationwide, guaranteeing a market for companies like Huawei, Biren Technology, and Cambricon. The approach itself is familiar-leveraging public markets domestically was key in establishing Huawei’s global position in telecommunication networks. 

In semiconductors, it is currently being applied at full speed, and even accelerated. In November, China began requiring that state-funded data center projects use only domestically produced AI chips, ordering facilities less than 30 percent complete to remove any foreign components, while more advanced projects are assessed on a case-by-case basis. Analysts highlight that demand-side policies allow the ecosystem to mature as domestic adoption progresses, ensuring that production capabilities, R&D, and market absorption in China evolve in a synchronized manner.

In the case of Huawei, doubling production of Ascend 910C chips, for example, can take advantage of an initiative to align future AI model development with domestic hardware production, so that both sides benefit.

Self-Confidence Matters, Even as a Posture

At the same time, a certain triumphalism can be detected in China regarding the strategic use of export controls as instruments of retaliation against US measures. These controls are portrayed domestically as creating leverage to disrupt Washington’s approach to technology transfers and as evidence of China’s growing ability to impose escalation dominance-not only in its relationship with the United States but also vis-à-vis Europe. Licensing requirements for rare earth elements, gallium, and germanium, along with retaliatory anti-dumping investigations and other tools of economic statecraft, are being formalized as mechanisms of "normal reciprocity" and as instruments to protect domestic industries. Many countries have yet to fully assess the implications of these measures for their defense sectors, as China plans to issue general-purpose licenses for civilian users while restricting access for military end-users in defense electronics. 

The drive to remove strategic vulnerabilities is a leading force explaining China’s constant employment of industrial policies. You should not "build a house on someone else’s foundation" (那就好比在别人的墙基上砌房子) is the motto of this approach, as noted by Filip Šebok. One should probably add that doubts and questioning are to remain hidden from foreign view in a country that tightly controls communication with foreigners. Overall, US export restrictions on advanced lithography, Electronic Design Automation (EDA) software, and AI chips are clearly perceived in China not as temporary obstacles but as a long-term strategic challenge. 

Experts would like to see those restrictions play the role of a catalyst for indigenous innovation, as summarized by the phrase "short-term pressure, long-term acceleration" (短期承压、长期加速). Development of Huawei’s Ascend AI chips, domestic EDA tools and lithography, progress in 3D packaging and chiplet technologies appear strategically indispensable in this context. But even if US export controls were relaxed, Chinese industrial planning would remain structured to achieve at least near-parity with the United States, if not superiority, given that the two countries are locked in a competition of ecosystems.

In the short term, the United States is expected to maintain its lead in sub-3nm high-end chips and Nvidia’s CUDA-based ecosystem, while China’s development of specialized AI applications is poised for significant progress, supported by the scale of its domestic market. China is likely to strengthen its emerging advantage in mature-node production through cost-efficient manufacturing, unless coordinated trade defense and demand-side measures are implemented by the United States, the European Union, Japan, South Korea, Taiwan, and perhaps India and Singapore, which at this moment seems a goal out of reach. 

Copyright Image : ANTHONY WALLACE / AFP
The introduction article to this edition of China Trends by Mathieu Duchâtel was also published by The Diplomat.

By Filip Šebok

Can U.S. export controls truly constrain China, or will they merely accelerate its push for autonomy from Western suppliers? Filip Šebok, Head of the Prague Office at the Central European Institute of Asian Studies, examines China’s discourse around what it characterizes as an “ecosystem war” that extends far beyond conventional technological rivalry. Yet any doubts or internal debates remain carefully concealed from external audiences. In this polarized competition—where the United States dominates the high-end segment while China makes rapid progress in mature nodes and targeted applications—the key question is how effectively China can indigenize its supply chain. The answer will shape the future balance of the global semiconductor ecosystem.

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By Jeremy Chang

China is positioned to lead global tech competition through extensive state subsidies and massive capacity expansion. The so-called “second China shock” is widely seen as a consequence of China’s distinctive industrial model—one that could be described as market-driven yet state-commanded. Jeremy Chih-Chen Chang, CEO of the Research Institute for Democracy, Society, and Emerging Technology (DSET), further argues that Chinese firms’ vertical integration and consolidation could pave the way for their eventual dominance in global high-tech markets—and semiconductors will be no exception.

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By Mathieu Duchâtel

An intensified U.S.–China competition was bound to shape the trajectory of AI development, and the upcoming Five-Year Plan is one of Beijing’s key instruments to address this challenge. Mathieu Duchâtel, Resident Senior Fellow and Director of International Studies at Institut Montaigne, emphasizes that China is prepared to do whatever is necessary to reinforce its competitiveness and foster innovation in order to secure its AI chips and high-performance computing capabilities. By applying “system thinking” and leveraging its comparative advantages through various industrial policy tools, China’s semiconductor industry can be expected to follow a development path similar to that of its optical instrument manufacturing sector.

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