China is requiring chipmakers to use at least 50% domestically made equipment for adding new capacity, three people familiar with the matter said, as Beijing pushes to build a self-sufficient semiconductor supply chain.
The rule is not publicly documented, but chipmakers seeking state approval to build or expand their plants have been told by authorities in recent months that they must prove through procurement tenders that at least half their equipment will be Chinese-made, the people told Reuters.
The mandate is one of the most significant measures Beijing has introduced to wean itself off reliance on foreign technology, a push that gathered pace after the U.S. tightened technology export restrictions in 2023, banning sales of advanced AI chips and semiconductor equipment to China.
While those U.S. export restrictions blocked the sale of some of the most advanced tools, the 50% rule is leading Chinese manufacturers to choose domestic suppliers even in areas where foreign equipment from the U.S., Japan, South Korea and Europe remain available.
Applications failing the threshold are typically rejected, though authorities grant flexibility depending on supply constraints, the people said. The requirements are relaxed for advanced chip production lines, where domestically developed equipment is not yet fully available.
“Authorities prefer if it is much higher than 50%,” one source told Reuters. “Eventually they are aiming for the plants to use 100% domestic equipment.”
China’s industry ministry did not respond to a request for comment. The sources did not wish to be identified as the measure is not public.
‘WHOLE NATION’ APPROACH
China’s President Xi Jinping has been calling for a “whole nation” effort to build a fully self-sufficient domestic semiconductor supply chain that involves thousands of engineers and scientists at companies and research centers nationwide.
The effort is being made across the wide supply-chain spectrum. Reuters reported earlier this month that Chinese scientists are working on a prototype of a machine capable of producing cutting-edge chips, an outcome that Washington has spent years trying to prevent.
“Before, domestic fabs like SMIC would prefer U.S. equipment and would not really give Chinese firms a chance,” a former employee at local equipment maker Naura Technology (002371.SZ), said, referring to the Semiconductor Manufacturing International Corporation (0981.HK).
“But that changed starting with the 2023 U.S export restrictions, when Chinese fabs had no choice but to work with domestic suppliers.”
State-affiliated entities placed a record 421 orders for domestic lithography machines and parts this year worth around 850 million yuan, according to publicly available procurement data, signaling a surge in demand for locally developed technologies.
To support the local chip supply chain, Beijing has also poured hundreds of billions of yuan into its semiconductor sector through the “Big Fund”, which established a third phase in 2024 with 344 billion yuan ($49 billion) in capital.
WINNERS AND LOSERS
The policy is already yielding results, including in areas such as etching, a critical chip manufacturing step that involves removing materials from silicon wafers to carve out intricate transistor patterns, sources said.
China’s largest chip equipment group, Naura, is testing its etching tools on a cutting-edge 7nm (nanometre) production line of SMIC, two sources said. The early-stage milestone, which comes after Naura recently deployed etching tools on 14nm successfully, demonstrates how quickly domestic suppliers are advancing.
“Naura’s etching results have been accelerated by the government requiring fabs to use at least 50% domestic equipment,” one of the people told Reuters, adding that it was forcing the company to rapidly improve.
Advanced etching tools had been predominantly supplied in China by foreign firms such as Lam Research (LRCX.O), and Tokyo Electron (8035.T), but are now being partially replaced by Naura and smaller rival Advanced Micro-Fabrication Equipment (AMEC) (688012.SS), sources say.
Naura has also proven a key partner for Chinese memory chipmakers, supplying etching tools for advanced chips with more than 300 layers. It developed electrostatic chucks — devices that hold wafers during processing — to replace worn parts in Lam Research equipment that the company could no longer service after the 2023 restrictions, sources said.
Naura, AMEC, YTMC, SMIC, Lam Research, and Tokyo Electron did not respond to requests for comment.
China’s progress is being viewed with concern by global competitors, as foreign suppliers are squeezed out of the China market.
