China Makes 50% Domestic Equipment Mandatory For New Semiconductor Plants: Report

• According to the report, China aims for 100% domestic equipment in these plants. 
• China’s rule goes beyond tools on the U.S. export restrictions list, with companies being asked to use domestic equipment even in domains where imports from the U.S., Japan, South Korea, and Europe are available, as per the report.
• The rule is reportedly yielding results, as per the report.

China is reportedly making it compulsory for chipmakers in the country to ensure that at least half of their new capacity has domestically produced equipment.

While there is no public documentation of the rule yet, Chinese chipmakers seeking state approval to build or expand their plants have been asked by local authorities to prove that a least 50% of their equipment is locally made, although they would prefer it to be higher, Reuters reported.

Authorities are asking for procurement tenders as proof, people familiar with the matter told Reuters. Applications that do not meet the requirements are typically rejected. According to the report, China aims for 100% domestic equipment in these plants.

The move comes as China aims for a self-sufficient domestic semiconductor supply chain after the U.S. banned exports of advanced AI chips and semiconductor equipment to the Asian nation.

Beyond US Export Controls

China’s mandate includes components beyond those on the U.S. export restrictions list. The move is a broader push to adopt domestic tools even in domains where imports from the U.S., Japan, South Korea, and Europe are available, as per the report.

However, in instances where domestically developed equipment is not yet available, for example, in advanced chip production lines, the requirements are relaxed.

Early Signs Of Impact

The rule is reportedly already yielding results, according to a source cited by Reuters. Before the rule, domestic companies like SMIC would prefer U.S. equipment over Chinese ones, but after the 2023 U.S export restrictions, Chinese companies had to pivot to work with domestic suppliers.

Naura, one of the largest chip equipment manufacturers in China, is reportedly testing its etching tools, a critical tool in the chip manufacturing process, on a cutting-edge 7nm (nanometre) production line at Semiconductor Manufacturing International Corporation, according to two sources.

One of the sources also believes that two or three major equipment manufacturers would eventually dominate the Chinese markets, and Naura would certainly be one of them.  

Why US Markets Should Care

The U.S. and China have been competing for technological dominance, with the battle intensifying in recent years. Despite the U.S. restricting the use of advanced AI technology by China, such as banning the export of Nvidia’s Blackwell chips to the country, there have been reports of Chinese companies gaining access to it through other means.

Earlier this month, a Barron’s report said that Tencent Holdings had allegedly gained access to Nvidia’s (NVDA) Blackwell chips through a Tokyo-based cloud service provider. Another report from The Information alleged that China’s tech behemoth DeepSeek had used the banned Blackwell chips to develop a new AI model.

However, Chinese President Xi Jinping has been rallying to build a fully self-sufficient domestic semiconductor supply chain to boost the country’s technological dominance globally.

U.S. chipmaker Nvidia (NVDA) shares have gained over 36% in the past year, while Advanced Micro Devices (AMD) shares have risen over 76%. The iShares Semiconductor ETF (SOXX), an exchange-traded fund tracking the Philadelphia Semiconductor index, has climbed over 40% in the same period. Meanwhile, the iShares MSCI China ETF (MCHI) has gained over 28% in the last one year.

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