SMIC Gains Ground as China Replaces Foreign Chips and Builds Its Own Supply Chain

Domestic orders put pressure on SMIC's factories

Chinese customers now account for more than 50% of Semiconductor Manufacturing International Corporation's orders for 8-inch wafers, according to co-CEO Zhao Haijun. Some customers making power semiconductors have increased their monthly wafer orders tenfold in two years, helping keep production capacity at China's largest contract chipmaker tight through at least October.

As of August 9, 2025, those figures capture a wider shift in China's semiconductor industry. Domestic chipmakers are taking business from foreign competitors, with some companies experiencing a tenfold increase in market share over two years. Chinese buyers are increasingly finding local suppliers for components used in vehicles, industrial equipment and consumer electronics.

Zhao, who jointly leads SMIC, described the growing ability of Chinese customers to supply products previously bought from overseas companies:

a growing number of Chinese clients can perfectly replace foreign rivals with domestically produced chips.

SMIC's experience places two developments alongside each other: Chinese companies are becoming more competitive in many widely used chips, while the country's access to the equipment needed for the most advanced processors remains restricted. Progress is uneven across the industry, from power components to artificial intelligence processors.

China is also trying to make more of the tools, chemicals and materials its factories need. That effort extends beyond replacing an imported chip with a Chinese product. It seeks to reduce dependence at each stage of production, so domestic manufacturers can keep operating when foreign governments restrict sales.

Government support, demand from Chinese customers and trade tensions are driving this expansion together. SMIC's busy production lines show how those pressures are translating into orders, even as Chinese manufacturers continue to face gaps in advanced technology.

Where Chinese suppliers are winning business

Power semiconductors are among the clearest examples of the shift described by Zhao. These components manage electrical power inside equipment. Some SMIC customers in this sector now place monthly wafer orders ten times larger than they did two years earlier.

A wafer is a thin disc of semiconductor material on which many chips are manufactured before they are separated. A rise in wafer orders means customers are asking a factory to produce more chips. The increase in monthly orders at particular companies sits alongside the broader growth in market share reported for some Chinese suppliers.

Automotive chips are another priority. China is pushing for complete self sufficiency in power semiconductors and automotive chips, with an ambition to use only domestically made chips in vehicles in the near future. Local suppliers are also becoming competitive in industrial and consumer electronics applications.

Chinese demand gives SMIC a substantial base of customers as the company expands production. More than half of its orders for 8-inch wafers now come from domestic clients, and the pressure on capacity is expected to continue through at least October.

Manufacturers in these markets need chips suited to their products, which may have different requirements from the processors used for demanding artificial intelligence calculations. China's ability to replace foreign suppliers therefore varies by application. The strongest gains described by SMIC concern sectors where domestic products can already meet customer needs.

Why wafer size matters

SMIC supplies large volumes of chips made on 8-inch wafers and is increasing production on 12-inch wafers. It is also helping customers move to the larger format as part of efforts to improve manufacturing efficiency and product performance.

The measurements describe the diameter of the disc used in production. A larger wafer provides more surface area on which to manufacture chips. Moving a customer's product to a different wafer format requires changes in the manufacturing process, which helps explain why the transition is ongoing.

Wafer diameter and manufacturing process size describe different things. The first measures the disc used by the factory. Terms such as 7nm or 2nm identify generations of chip manufacturing technology. SMIC's expansion in wafer production and its work on more advanced processes are related parts of its business, but they address different production needs.

For Chinese customers, access to both established and newer production capacity supports the effort to supply more components domestically. For SMIC, the immediate challenge is meeting strong demand while assisting customers with the move to larger wafers.

China's effort reaches beyond chip factories

China's semiconductor investment covers raw materials, chemicals, manufacturing equipment, chip design and production. The objective is to build a domestic supply chain that is less exposed to restrictions imposed overseas and can compete across more parts of the global industry.

Lithography is one of the most difficult areas. Lithography machines help transfer the tiny circuit patterns needed to make chips onto silicon wafers. Dutch company ASML is the world's only supplier of extreme ultraviolet lithography machines, known as EUV systems, which are used to manufacture the most advanced chips.

Export restrictions prevent Chinese companies from obtaining that technology. Manufacturers and equipment developers must therefore work with other methods while trying to improve domestic tools.

SiCarrier, a company linked to Huawei, is reportedly developing alternatives to ASML equipment. Its efforts remain at an early stage and are currently limited to less advanced technology at 28nm. The Shenzhen government and major Chinese technology companies are supporting these initiatives through research investment and recruitment of skilled workers.

The scale of that task is substantial. China's domestic lithography equipment is described as being 15 to 20 years behind the world's best. That gap limits the country's ability to manufacture the most advanced chips used in artificial intelligence and high performance computing, even while local suppliers advance in other markets.

Huawei's push into essential chemicals

Huawei is also building capabilities in chipmaking chemicals through its involvement with Zhuhai Cornerstone Technologies. The company aims to supply crucial materials across the production process, including photoresists and polishing slurries.

Photoresists are materials that react to light and help form circuit patterns during manufacturing. Polishing slurries help smooth surfaces as a chip is built. Both are part of the precise sequence of steps needed to turn a silicon wafer into working electronic components.

Companies from Japan, the United States and Europe dominate the global supply of these materials. Chinese investment in local alternatives addresses a different dependency from the shortage of advanced lithography equipment, but it serves the same objective: keeping factories supplied when access to foreign products becomes uncertain.

Zhuhai Cornerstone Technologies' ambition to provide materials across the process illustrates the breadth of the domestic effort. A chip factory needs suitable equipment and dependable chemicals together. China's attempt to localize both reflects the vulnerabilities exposed by export controls.

The technology gap varies by product

SMIC has demonstrated the ability to manufacture chips using a 7nm process and is reportedly working toward 5nm. TSMC and Samsung are moving toward mass production at 2nm, placing the leading edge of manufacturing beyond SMIC's demonstrated capabilities.

The gap matters most for advanced chips used in smartphones, artificial intelligence and high performance computing. These products depend on manufacturing processes and equipment that remain difficult for Chinese companies to access or reproduce under existing export restrictions.

Chinese manufacturers still face substantial challenges before they can fully rival TSMC, Samsung and Intel across advanced technologies. Their growing competitiveness in automotive, industrial and consumer electronics chips gives them a stronger position in other parts of the market.

Memory and chip design also show progress. Yangtze Memory Technologies Corp., known as YMTC, leads China's industry in 3D NAND flash memory. This type of memory stores data using structures arranged in layers.

Huawei's HiSilicon division has developed artificial intelligence chips that rival Nvidia products in some tests. Their absolute performance may still fall short of foreign alternatives, but the gap is narrowing. Huawei is continuing to invest in the next generation of chip designs while other companies work on equipment and materials.

The outlook described for the industry includes the possibility of closing gaps in several key areas within five to ten years. No specific timetable is given for achieving complete self sufficiency or matching the most advanced foreign manufacturing technology.

Export controls are changing purchasing decisions

The United States has imposed strict controls on advanced semiconductors and chipmaking equipment, seeking to preserve its technological advantage and limit China's access to capabilities with potential military or strategic uses.

Nvidia and AMD have both been affected. Restrictions targeted Nvidia's H20 and AMD's MI308, chips used for artificial intelligence and data centers. The United States subsequently eased some restrictions, allowing those products to be sold in China again.

Chinese demand, however, is increasingly being served by domestic alternatives. For SMIC and other local companies, that shift means a change in United States policy may have less influence on purchasing decisions than it would have had when customers depended more heavily on foreign suppliers.

Zhao said strong domestic demand was helping protect SMIC from external shocks. He estimated that the financial effect of United States tariffs would be less than 1.3% of the company's total revenue.

China is investing billions of dollars in semiconductor companies and the wider network of equipment, materials and skilled workers. Export controls have increased the urgency of that effort, while the size of the domestic market gives manufacturers customers for the products they develop.

Security scrutiny and tariff threats add pressure

The Cyberspace Administration of China recently summoned Nvidia officials over concerns about possible backdoors in the H20 chip. A backdoor is a hidden means of gaining access to a system. The scrutiny reflects Chinese concerns about data privacy and national security as foreign artificial intelligence products return to the market.

Donald Trump has also threatened tariffs of 100% on all semiconductors made outside the United States unless companies build factories there. Such a measure, if enacted, would add another financial pressure to an industry already dealing with export controls and investment restrictions.

These policies could accelerate the development of separate supply chains centered on China and the United States. Companies making chips would then need to consider where they manufacture, which customers they can supply and which equipment they can buy.

The recent developments follow a sequence of restrictions, partial reopening and continued scrutiny:

• United States controls restricted sales of advanced chips and equipment to China, including Nvidia's H20 and AMD's MI308.
• Some restrictions were later eased, allowing those chips to return to the Chinese market.
• Chinese authorities summoned Nvidia officials to address security concerns about the H20.
• As of August 9, 2025, SMIC expected production capacity to remain tight through at least October.

Nvidia and AMD have nevertheless posted strong financial results, and their share prices have risen substantially over the past year. Their performance sits alongside the longer term challenge of retaining access to Chinese customers while complying with changing government rules.

What the shift means for global suppliers

China is becoming both a major customer and a stronger competitor for international semiconductor companies. As domestic suppliers win orders, foreign manufacturers face competition in markets where Chinese buyers previously depended more heavily on imported products.

Multinational companies must balance sales in China with export controls and shifting political demands. Chinese companies are concentrating on innovation, domestic supply and the ability to operate within those restrictions. Both sides are investing to reduce dependence on the other.

SMIC's experience shows why competition in this industry cannot be measured by the most advanced processor alone. Orders for power and automotive chips can drive rapid growth even while a manufacturer remains behind the leading edge. Equipment and chemical suppliers can also change the industry's balance by helping local factories become less dependent on overseas inputs.

Government support, a large pool of engineering talent and a substantial domestic market give Chinese companies resources for further development. Continued investment across design, manufacturing and materials could support advances that benefit customers in China and elsewhere.

The same political pressures create a risk of fragmentation. Separate production networks could affect global innovation and economic growth as companies adjust to different market access rules and duplicate parts of their supply chains. China's gains are already changing competition, while its remaining technology gaps keep foreign tools and advanced manufacturing at the center of the dispute.

Key Points

• Chinese customers account for more than 50% of SMIC's orders for 8-inch wafers, according to co-CEO Zhao Haijun.
• Some power semiconductor customers increased monthly wafer orders tenfold in two years, with SMIC expecting tight capacity through at least October.
• China is pursuing complete self sufficiency in power and automotive chips while investing in domestic equipment, chemicals and materials.
• SMIC has demonstrated 7nm manufacturing and is reportedly working toward 5nm, while TSMC and Samsung move toward mass production at 2nm.
• SiCarrier and Zhuhai Cornerstone Technologies illustrate efforts to replace foreign equipment and essential chipmaking materials.
• Restrictions on Nvidia's H20 and AMD's MI308 were eased, but domestic competition, Chinese security scrutiny and tariff threats continue to affect the market.
• Zhao estimated the financial impact of United States tariffs on SMIC at less than 1.3% of total revenue.