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Exclusive: China mandates 50% domestic equipment rule for chipmakers, sources say

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China is requiring chipmakers to use at least 50% domestically produced equipment when adding new manufacturing capacity, according to three people familiar with the matter, as Beijing intensifies efforts to build a self-sufficient semiconductor supply chain.

The requirement is not publicly documented, but companies seeking government approval to build or expand fabrication plants have been told in recent months that they must demonstrate—through procurement tenders—that at least half of their equipment will be sourced from Chinese suppliers, the sources said. Applications that fail to meet the threshold are typically rejected, although authorities may allow flexibility depending on supply constraints. For advanced production lines, where domestic tools are not yet fully available, the rules are applied more leniently.

The mandate represents one of the most significant steps China has taken to reduce reliance on foreign technology, a drive that accelerated after the United States tightened export controls in 2023, restricting sales of advanced AI chips and semiconductor manufacturing equipment to China. While those restrictions blocked access to the most advanced tools, the new rule is pushing Chinese chipmakers to choose local suppliers even in areas where foreign equipment from the United States, Japan, South Korea and Europe remains available.

“Authorities prefer it to be much higher than 50%,” one source said, adding that the long-term goal is for fabs to use entirely domestic equipment. China’s industry ministry did not respond to a request for comment.

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The policy aligns with President Xi Jinping’s call for a “whole-nation” approach to semiconductor self-sufficiency, involving thousands of engineers and researchers across companies and institutes. Reuters has previously reported that Chinese scientists are working on prototypes of advanced chipmaking machines—an area Washington has sought to restrict for years.

State-linked buyers have sharply increased orders for domestic tools. Public procurement data show that state-affiliated entities placed a record 421 orders this year for Chinese lithography machines and components, worth about 850 million yuan. Beijing has also poured hundreds of billions of yuan into the sector through the “Big Fund,” which launched its third phase in 2024 with 344 billion yuan ($49 billion) in capital.

The effects are already visible. China’s largest chip equipment maker, Naura Technology, is testing its etching tools on a cutting-edge 7-nanometre production line at SMIC, sources said, after successfully deploying tools on 14-nanometre lines. Etching equipment in China was previously dominated by foreign suppliers such as Lam Research and Tokyo Electron, but is now increasingly being replaced by domestic firms including Naura and AMEC.

Naura has also developed replacement components, such as electrostatic chucks, to keep foreign tools running after overseas suppliers curtailed services following export restrictions. Neither Naura, AMEC, SMIC, Lam Research nor Tokyo Electron responded to requests for comment.

Global competitors are watching closely as foreign suppliers are gradually squeezed out of the Chinese market. Naura filed a record 779 patents in 2025, more than double its filings in 2020 and 2021, while AMEC filed 259, according to data verified by Reuters. Stronger demand has translated into financial gains: Naura’s first-half 2025 revenue rose 30% to 16 billion yuan, while AMEC reported a 44% increase to 5 billion yuan.

Analysts estimate China has now reached roughly 50% self-sufficiency in photoresist-removal and cleaning equipment, a segment once dominated by Japanese firms. Industry sources say the domestic market is likely to be led by just a handful of major players, with Naura firmly among them.

China’s AI Strategy Leans on Huawei Chip Clusters and Cheap Energy to Counter the U.S.

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China has found a powerful workaround to the U.S. chokehold on advanced semiconductors — combining Huawei’s massive chip clusters with abundant cheap energy to accelerate its artificial intelligence (AI) ambitions.

While Nvidia remains the global gold standard for AI chips, U.S. export restrictions have cut China off from the American company’s most powerful processors. Yet, Chinese tech giants like Huawei, Alibaba, and DeepSeek continue to build large-scale AI models using domestically produced hardware.

At the core of this effort is Huawei’s Ascend series — less advanced than Nvidia’s GPUs individually, but competitive when linked together in vast, high-speed “clusters.” One example is the Huawei CloudMatrix 384, which connects 384 Ascend 910C chips to deliver performance rivaling Nvidia’s GB200 NVL72, despite relying on five times as many chips.

“This approach leverages high-speed interconnects to compensate for weaker chips,” said Brady Wang, associate director at Counterpoint Research. “It suits China’s strengths — large-scale engineering and manufacturing.”

The tradeoff is power consumption. Huawei’s architecture demands far more energy than Nvidia’s — but China’s cheap and plentiful electricity turns that disadvantage into an asset. Supported by investments in solar, wind, and nuclear energy, as well as local government subsidies, Beijing has created a favorable environment for energy-intensive AI infrastructure.

“Less efficient chips are sustainable in China because energy is inexpensive and government-backed,” said Wendy Chang of the Mercator Institute for China Studies.

Still, a structural weakness remains. Huawei’s chips are made by SMIC, China’s top semiconductor foundry, using older 7-nanometer tools that lag far behind TSMC’s cutting-edge technology. Export restrictions, especially on ASML’s extreme ultraviolet lithography machines, limit China’s ability to close that gap.

“China’s main challenge isn’t scaling power or hardware clusters,” said Hanna Dohmen from Georgetown University’s CSET. “It’s whether they can keep up technologically as Nvidia and TSMC push performance forward.”

For now, though, Beijing’s combination of Huawei’s hardware muscle and low-cost power is proving enough to keep China in the global AI race.

China’s SMIC Reports Resilience Despite U.S. Tariffs, Expects Tight Capacity Through October

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China’s leading semiconductor foundry, Semiconductor Manufacturing International Corp (SMIC), stated on Friday that U.S. tariff measures have not caused the “hard landing” initially feared. The company cited strong domestic demand that will keep its production capacity tight until October.

Co-CEO Zhao Haijun said during a post-earnings call that customers have largely mitigated the impact of U.S. President Donald Trump’s tariff plans—such as the proposed 100% tariff on chip imports—through inventory stockpiling and sourcing from alternative suppliers. He noted that previous tariff rounds increased costs by less than 10% for overseas customers.

China’s additional tariffs on U.S. goods reached 125% in April, following Trump’s tariffs effectively pushing the rate on Chinese goods to 145%. However, the latest semiconductor tariffs exclude companies manufacturing in the U.S. or committed to doing so. SMIC, blacklisted by the U.S. in 2020, has no U.S.-based manufacturing.

SMIC’s revenue for Q2 grew 16.2% year-on-year to $2.2 billion, though its profit declined 19.5% to $132.5 million, missing analyst expectations. The company shipped 2.4 million eight-inch equivalent wafers in the quarter, a 4.3% increase from Q1.

Capacity utilization rose to 92.5%, and monthly production capacity expanded modestly by 1.85% quarter-on-quarter to 991,000 wafers. Zhao forecasted continued tight capacity driven by strong domestic demand, especially for analog, WiFi, Ethernet, and memory controller chips.

SMIC expects Q3 revenue growth of 5% to 7% over Q2 but anticipates the industry’s typical seasonal slowdown in Q4, with rush orders and early shipments likely to taper.

SMIC’s shares in Hong Kong dropped over 5% following the report.