China's Chip Localization Drive Squeezes Taiwanese Suppliers as Domestic Rivals Gain Ground

A growing Chinese market becomes harder to profit from

China's domestic semiconductor equipment suppliers increased their share of the country's market from 25% in 2024 to 35% in 2025, according to the Center for Strategic and International Studies (CSIS). For Taiwanese companies that helped supply China's chip industry, that shift is turning a large customer base into a tougher competitive battleground.

Wafer Works illustrates the pressure. Its Shanghai subsidiary, which went public in China in 2024, earned RMB26.7 million in the first half of 2026, compared with an annual profit of RMB360 million five years earlier. The figures cover different reporting periods, but show how far earnings have fallen from their earlier level. Wafer Works is now expanding at Erlin Park in Taiwan's Central Taiwan Science Park.

Chinese competitors such as National Silicon Industry Group (NSIG) have continued investing despite steep losses, supported by subsidies. Taiwanese suppliers therefore face rivals able to keep adding capacity through difficult trading conditions. Grand Process Technology and MA-tek have also sold majority stakes in their Shanghai subsidiaries.

At a dinner during SEMICON Taiwan in September 2026, executives from Taiwan's publicly traded semiconductor equipment companies discussed the growing reach of Chinese competitors. Hubei Dinglong's move from toner into polishing pads and Konfoong Materials' rising sales of sputtering targets showed how competition was spreading into specialized materials.

China's progress remains uneven. Foreign suppliers retain advantages in several demanding products, and Chinese factories still depend on global technology. The immediate change for Taiwanese businesses is more concrete: winning orders in China increasingly means competing against domestic suppliers backed by a national policy to replace imports.

Customers also face a choice. They can continue using familiar foreign products with established performance, or spend time qualifying local alternatives that may offer greater protection against future restrictions on technology exports.

What the localization numbers actually measure

CSIS's semiconductor localization commentary, published on March 24, 2026, describes gains in equipment alongside a much larger unfinished task in chip production. Its authors, Sujai Shivakumar, Charles Wessner and Thomas Howell, estimate that China has directed $150 billion in public funding toward its semiconductor effort since initiatives launched in 2014 and 2015.

China sought to meet 70% of domestic chip demand through domestic production by the end of 2025. The commentary puts the actual share at about 30%, a gap of roughly 40 percentage points. Equipment suppliers, meanwhile, reached 35% of their domestic market, exceeding the separate 30% equipment target cited by CSIS.

Those percentages describe different activities. Chips are the finished electronic components that perform calculations or control devices. Semiconductor equipment consists of the machines used to manufacture them. A Chinese factory can produce chips while still relying on imported machinery, chemicals and silicon wafers.

Local equipment suppliers' rise from 25% to 35% represents a gain of 10 percentage points in one year. CSIS puts their share in both etching and thin film deposition at 40%. Etching removes selected material from a wafer, while deposition adds thin layers needed to build electronic circuits.

Naura reportedly supplies 60% of the oxidation and diffusion furnaces used in Semiconductor Manufacturing International Corporation's production at the 28 nanometer process. These furnaces help form insulating layers or alter silicon's electrical properties. The figure identifies a strong position in a particular production process rather than across every type of chipmaking machinery.

How the push gathered pace

China's effort predates the latest restrictions on technology exports. Public funding, purchasing policies and concerns about losing access to foreign supplies have increasingly pulled factories and domestic suppliers toward the same goal.

• 2014 and 2015: China launched major initiatives to expand domestic chip production and build equipment and materials suppliers.
• Late 2020: SMIC was added to the US entity list, increasing pressure on the company to investigate local alternatives.
• 2022: The United States introduced controls covering advanced chips and manufacturing technology. Restrictions subsequently expanded.
• 2024: Shanghai Wafer Works went public in China, while domestic equipment suppliers held about 25% of China's market.
• 2025: Domestic equipment share reached 35%, according to CSIS, while domestically produced chips supplied about 30% of consumption.
• 2026: Taiwanese suppliers faced continued pressure, and TrendForce projected that domestic producers would take 50% of China's AI chip market.

CSIS argues that export controls have accelerated this process by making dependence on foreign technology a more immediate business risk. Its assessment is that restrictions have constrained access to advanced products while also encouraging Chinese customers to adopt domestic alternatives.

Materials become the next competitive front

SMIC has been asking customers to help monitor, verify and adopt local suppliers of wafers, chemicals, gases and other production inputs. ChangXin Memory Technologies (CXMT) is also investigating domestic replacements for foreign sources.

The initial focus includes established processes such as 55 and 40 nanometers, with plans to extend below 28 nanometers. These process labels identify generations of manufacturing technology. Older processes remain useful for many industrial, automotive and consumer products, even as the most demanding processors require newer technology.

Chinese factories are expanding their use of domestic sputtering targets, polishing pads, slurry and chemicals and gases of very high purity. Sputtering targets provide material deposited onto wafers. Pads and slurry work together in chemical mechanical polishing, or CMP, to flatten surfaces before further manufacturing steps.

Hubei Dinglong and Konfoong Materials show why Taiwanese executives are watching these areas closely. A supplier that wins approval for a specialized consumable can gain repeat orders because factories use those materials throughout production.

NSIG is also developing into a competitor to established wafer producers including Shin-Etsu Chemical, Sumco and GlobalWafers. For Taiwanese businesses, the pressure extends beyond selling equipment: it reaches the discs, chemicals and other inputs that chip factories need every day.

Why replacement is slower in some products

Some Taiwanese suppliers describe the immediate impact as limited, pointing to quality, production yield and customers' reluctance to change proven materials. Yield means the share of manufactured chips that work properly. Even a cheaper input can become expensive if it causes more chips to fail.

Foreign manufacturers still dominate the market for wafers measuring 8 and 12 inches across. China's faster progress has been in smaller wafers used mainly for testing. Japanese and Western products also retain advantages in demanding materials such as photoresists and polishing slurry.

Factories continue working with international chemical suppliers to protect production quality while assessing local alternatives. A new material must work consistently with the equipment, recipes and other inputs already in use. That makes replacement a process of repeated testing rather than a simple purchasing decision.

The pressure nevertheless grows as Chinese chipmakers expand. By August 2025, domestic customers accounted for more than half of SMIC's orders for 8-inch wafers, while some power semiconductor customers had increased monthly orders tenfold in two years. That growth in domestic orders gives local materials and equipment suppliers more opportunities to qualify their products.

Falling imports show where purchasing is changing

The China Electronics Production Equipment Industry Association estimated that imports across 13 categories of semiconductor equipment rose just 3.4% in the first three quarters of 2026, well below the global average. Within that total, lithography machine imports fell nearly 40% from a year earlier, while CMP equipment imports dropped 42%.

Lithography machines project patterns onto wafers so circuits can be built. CMP equipment smooths the surfaces between manufacturing stages. Slower foreign purchases in these categories are especially relevant to suppliers whose Chinese customers are testing domestic replacements.

TrendForce forecasts that Chinese suppliers will hold a majority share in many domestic semiconductor sectors by 2030. Even domestic lithography equipment is projected to rise from less than 1% of the Chinese market to 10%, although it remains one of the industry's hardest technologies to develop.

Government ambitions extend across materials and design. In January 2026, Zhejiang province set goals for the following five years covering processes from 7 to 3 nanometers, general purpose AI devices, RISC-V processor architecture, photoresists, specialty gases and sputtering targets of high purity.

RISC-V is an open instruction set, the basic vocabulary a processor uses to carry out commands. Zhejiang's targets connect processor design with the materials and machinery required to manufacture chips, widening the number of foreign suppliers exposed to substitution efforts.

Huawei combines more chips to pursue more computing power

China is also trying to improve AI computing through the way processors are connected. Semiconductor historian Chris Miller says system integration and three dimensional packaging can help raise AI chip self sufficiency even while access to the most advanced lithography remains restricted.

Huawei's Ascend 950 SuperPoD, launched in July 2026, follows that approach. Its chips were manufactured by SMIC using three rounds of deep ultraviolet exposure. Huawei says a system combining 1,024 processors can deliver about 30% more computing power than Nvidia's competing GB300 NVL72, despite each individual Chinese chip being weaker than its rival.

The comparison is Huawei's claim about a complete system. Buyers must also consider how much electricity, cooling, space and software support that computing capacity requires. Connecting many processors successfully depends on how efficiently they exchange information as well as how quickly each one calculates.

AI adoption moves beyond a single processor

Huawei's system is better suited to inference, the work an AI model performs when answering a question or generating a result. Training is the earlier process of teaching a model from large amounts of data, and Chinese technology companies still want access to Nvidia chips for that task.

Counterpoint research director MS Hwang points to a decade of Chinese semiconductor subsidies and argues that US restrictions have encouraged alternative approaches. Yangtze Memory's Xtacking technology, which joins separately manufactured layers in three dimensional NAND memory, is one example of a different manufacturing route.

CSIS describes a broader field of domestic AI suppliers. Alibaba has reportedly delivered more than 100,000 Zhenwu 810E processors, which are claimed to be comparable to Nvidia's H20. At least nine Chinese AI chipmakers, including Huawei, Baidu and Cambricon, have exceeded 10,000 shipments or total orders.

Jeremy Chang of DSET expects China to combine open source models such as DeepSeek with Huawei hardware and sell the package overseas. That would give prospective customers a connected set of processors, software and models, rather than requiring them to assemble each part independently.

Research is also exploring other computing methods. Scientists at Shanghai Jiao Tong University unveiled the optical chip LightGen in December 2025, with reported speed and energy efficiency advantages over Nvidia's A100 in generating three dimensional images and video. The work adds another direction to China's effort alongside conventional electronic processors.

Advanced lithography and global ties remain central

Huawei executive director Richard Yu confirmed in October 2026 that China was developing extreme ultraviolet lithography tools. EUV uses light with a much shorter wavelength than deep ultraviolet systems, allowing manufacturers to produce finer circuit patterns. The Dutch company ASML currently dominates this technology.

CSIS also describes a reported EUV machine developed at a secure laboratory in Shenzhen by former ASML engineers, using parts obtained from older machines through secondary markets. No date for dependable commercial production was given. Turning a development project into machinery that factories can operate reliably remains a major task.

Burn-Jeng Lin, dean of the College of Semiconductor Research at National Tsing Hua University, says the most advanced processors depend on cooperation throughout the global supply chain. In his assessment, complete localization would make production slower, more expensive and less competitive.

Miller also warns that mutual restrictions on semiconductor materials would cause major disruption. Describing how far the United States and China have moved toward that situation, the semiconductor historian said:

The U.S. and China haven't reached that point yet.

Taiwanese suppliers face a market changing before complete separation becomes possible. Chinese rivals can win more business in established processes and selected materials while factories continue buying foreign products elsewhere. Profitability will depend increasingly on which products remain difficult to replace, how quickly local alternatives improve and whether customers value performance enough to keep paying for it.

Key Points

• Chinese equipment suppliers increased their domestic market share from 25% in 2024 to 35% in 2025, according to CSIS.
• Shanghai Wafer Works earned RMB26.7 million in the first half of 2026, compared with an annual profit of RMB360 million five years earlier.
• SMIC and CXMT are investigating more domestic materials suppliers, initially concentrating on established manufacturing processes.
• Foreign companies retain strong positions in wafers measuring 8 and 12 inches and in several demanding materials.
• Huawei is pursuing greater AI computing power by connecting more domestic processors, while Chinese companies still seek Nvidia chips for training.
• China's advanced lithography projects have no stated date for dependable commercial production, and global supply relationships remain essential.