Amid concerns on the impact of the U.S. presidential election as well as the ongoing chip war between the world’s two superpowers, China’s chipmaking equipment market is expected to contract next year, according to a report by Nikkei. Citing remarks from SEMI, in 2025, the semiconductor equipment market in China is anticipated to drop below USD 40 billion and back to the level of 2023, after peaking in 2024.

According to SEMI, the decline can be attributed to the cooling demand after a period of accelerated purchasing spurred by U.S.-China tensions, the Nikkei report mentions. Spending on semiconductor manufacturing equipment in China is projected to exceed USD 40 billion this year for the first time, according to SEMI.

On the other hand, according to an executive of the Chinese branch of a global chip equipment supplier cited by the report, in 2025, the semiconductor equipment market in China is anticipated to decrease by 5-10% from the previous year, which is resulted from the decline of utilization rates for equipment at China’s semiconductor factories as well as the previous rush in purchases.

The projection aligns with Dutch chip equipment giant ASML’s financial forecast released earlier in October. It now forecasts 2025 net sales between 30 billion and 35 billion euros (USD 32.7 billion to USD 38.1 billion), in the lower end of its previous guidance range, according to a report by CNBC.

Though during the July-September quarter, China contribute to around 50% of ASML’s sales, Chief Financial Officer Roger Dassen noted that the company expects its China business to show a “more normalized percentage in our order book and also in our business,” indicating that China would come in at around 20% of its total revenue for next year, according to the CNBC report.

It is also worth noting that according to SEMI, the market contraction in China extends beyond next year. According to the Nikkei report, SEMI projects that China’s spending on chipmaking equipment will experience an average annual decline of 4% in compound growth from 2023 to 2027.

On the other hand, chipmaking equipment spending remains robust in regions other in China. Citing SEMI’s projection, Nikkei notes that spending in the Americas is projected to grow 22% annually between 2023 and 2027, with Europe and the Middle East increasing by 19%, and Japan by 18%.

Despite declining growth, China will remain the largest market for semiconductor manufacturing equipment, with estimated spending of USD 144.4 billion from 2024 to 2027, according to SEMI. This exceeds investments in South Korea (USD 108 billion), Taiwan (USD 103.2 billion), the Americas (USD 77.5 billion), and Japan (USD 45.1 billion).

To elaborate a bit, Nikkei suggests that China’s heightened outlay aligns with its goal of achieving greater self-sufficiency in chip production, as its self-sufficiency rate was only 23% in 2023.

Naura Technology Group, a state-owned company, is China’s largest supplier of semiconductor manufacturing equipment, followed by Advanced Micro-Fabrication Equipment (AMEC), according to Nikkei.

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(Photo credit: Naura Technology)

Under the pressure to speed up AI development, the White House, on October 24^th, announced the nation’s first-ever strategy for leveraging the power of AI while managing its risks to enhance national security, according to a report by the Washington Post, citing the remarks by national security adviser Jake Sullivan.

The memorandum, in which the roles of China and Taiwan have been highlighted, is instructing the Pentagon and intelligence agencies to boost their use of artificial intelligence, while prohibiting agencies from utilizing the technology in ways that “do not align with democratic values, the report noted.

Sullivan also emphasized that the country needs to accelerate the deployment of AI within the national security framework faster than its rivals, according to another report by Reuters. He stated that if the U.S. fails to implement AI more swiftly and thoroughly to enhance its national security, the nation risks wasting the advantage it has worked so hard to achieve.

It is worth noting that in the memo, the government is instructed to assist U.S. companies in safeguarding their AI technologies from foreign espionage and to continue efforts to diversify the supply chain for high-end computer chips essential for advanced AI initiatives, the majority of which are manufactured in Taiwan, the report suggests.

To hinder advancements in supercomputing and AI that could support the Chinese military, the U.S. implemented export controls on advanced chips and chip making equipment for China in 2022 and 2023, limiting shipments from companies such as AI accelerator giant NVIDIA.

The latest announcement, according to the Washington Post, following an executive order on AI signed by President Joe Biden in October 2023, reinforces the administration’s initiatives to counter technological competition from China and other adversaries.

In addition, this memo reportedly reflects the administration’s ongoing efforts to address concerns regarding the potential risks of AI while simultaneously promoting its use within the government and fostering continued innovation among Big Techs in the U.S.

According to the report, the military has historically been an early adopter of various AI applications, such as image-recognition algorithms that analyze satellite images to identify potential targets and autonomous cruise missiles that navigate complex terrains.

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China has turned itself into “the world’s market” for semiconductor, while it eyes to play a crucial role in chip manufacturing by procuring more equipment. The latest reports by Bloomberg and Technews, citing data from China’s General Administration of Customs, indicates that Chinese imports of chip equipment in the first seven months of 2024 hit a new high, totaling USD 26 billion.

It is worth noting that in July 2024, the Netherlands’ total exports to China exceeded USD 2 billion, reporting the second-highest single-month record ever, the reports say, which can be largely contributed to China’s stockpiling of ASML’s systems and other machinery.

Tightening U.S. Export Restrictions May Lead to China’s Import Surge with Mature Nodes Its Major Focus  

The primary reason behind this surge, according to Bloomberg, may likely be that Chinese tech companies are preparing for further export restrictions on advanced chip manufacturing tools launched by the U.S. and its allies.

The report states that Chinese tech companies are particularly focused on purchasing semiconductor equipment for mature process, from companies like ASML, Applied Materials, and Tokyo Electron. The move allows fabs in China to produce chips needed for local industries, primarily the automotive sector.

Most of the equipment was said to be lithography systems used for mature nodes, which are crucial for Chinese foundries like SMIC. The company is rumored to produce 5nm chips for Huawei this year, by using old deep ultraviolet (DUV) lithography machines purchased from ASML.

New Local Fabs Opening up, Driving China’s Chip Making Equipment Procurement

In addition to counter the possible export restrictions from the U.S., the reports state that China’s aggressive procurement may also be due to the expansion wave of fabs this year. According to SEMI’s projection, among the 42 new fabs expected to go online in 2024, China leads by 18, which further boosts the country’s purchase of semiconductor production equipment.

The momentum also drives demand for local semiconductor equipment manufacturers in China. Chinese semiconductor company Advanced Micro-Fabrication Equipment Inc. (AMEC) reported a strong second quarter, with its revenue up 36.46% year-on-year to RMB 3.448 billion. Its etching equipment revenue reached RMB 2.698 billion, a year-on-year increase of 56.68%.

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(Photo credit: SMIC)

Amid the heating tech war between the U.S. and China, and the stringent sanctions imposed to prevent China from obtaining cutting-edge chips, it appears that China is still able to find its way out. According to a report by Tom’s Hardware, citing the New York Times, the latest tactic of China would be setting up new companies to trade advanced hardware and operating them until they are shut down.

Before that, it is understood that Chinese firms have been smuggling NVIDIA chips through some underground networks, which involve buyers, sellers and dispatchers, according to a previous report by the Wall Street Journals.

Now the country seems to find another option in order to evade the sanctions. According to the New York Times and Tom’s Hardware, buyers that include state-owned or affiliated companies, even sanctioned companies, are reportedly collaborating with the Chinese defense industry, as transactions ranging from a few hundreds of GPUs to a deal worth USD 103 million have been observed lately.

The new tactic, it is reported, would be to establish new companies to acquire advanced chips before facing U.S. sanctions. For instance, after Sugon, established under the strong promotion of the Chinese Academy of Sciences and focuses on fields like computing, storage, security and data center, was banned from obtaining NVIDIA chips due to its ties with the Chinese military, some former executives created a new company named Nettrix.

The reports further note that within six months, Nettrix became one of the largest Chinese manufacturers of AI servers, as tech giants including NVIDIA, Intel, and Microsoft have already begun doing business with it, all without violating any American laws. Given the company’s recent establishment, the U.S. likely hasn’t had the opportunity to thoroughly vet its background.

The reports suggest that the White House might significantly reduce Chinese backdoors in trade by ensuring that only licensed, white-listed buyers can legally procure these chips. However, many in the industry oppose increasingly stringent bans, arguing that they harm American companies more than they help.

Before the upcoming U.S. presidential election in November, the Biden authority is said to be considering a series of actions targeting semiconductors. The latest one includes new measures that might unilaterally impose restrictions on China as early as late August, preventing major memory manufacturers like Micron, SK hynix, and Samsung Electronics from selling high-bandwidth memory (HBM) to China.

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(Photo credit: Nettrix)

According to TrendForce’s latest investigation, Chinese foundries have already suspended plans to expand production capacity for advanced processes after the US government began restricting the exportation of equipment and technical support for processes related to non-planar architectures. TrendForce believes that a further tightening of the restrictions on lithography equipment will mainly affect mature processes, especially the 28nm. Chinese foundries might proceed more slowly in adding new production capacity or raising output for the 28nm process due to the prolonged reviews on their equipment purchases.

TrendForce semiconductor analyst, Joanne Chiao, said that Chinese semiconductor companies have already suspended the development of chips featuring the GAA architecture (i.e., nodes that are generally ≤3nm) after the US government began restricting the exportation of EDA tools and related technical support. If we talk about the FinFET architecture that Chinese foundries are able to produce for now, it is possible to achieve the faster computing speed of the more advanced chips by combining multiple lower-end chips. However, it might also be very challenging to raise the production yield rate of a solution that integrates multiple chips, not to mention that the power consumption of such solution might be very high as well.

Seeing the US export control, for now, US government has not imposed restrictions on the exportation of technical support for processes related to planar architectures. On the other hand, Chinese foundries might halt their advanced chip (14nm) production at any time if they encounter an equipment malfunction or another problem that requires technical support from US equipment providers.

At last, Chiao emphasized that the US sanction has definitely accelerated the development of an “all-China” semiconductor manufacturing supply chain. Nevertheless, the world’s top eight semiconductor equipment providers all come from Japan or the US. From the perspective of the foundry industry, it will be hard for China to realize a wholly or mostly native semiconductor supply chain within the foreseeable future.