The Fruits of State Subsidies China's Semiconductor Industry Is Shrinking, but Investments in Equipment Are Growing – and Soon in EDA as Well?

Related Vendors

FAULHABER Drive Systems

Wuxi InfiMotion Technology Co., Ltd.

In the first half of 2025, investments in the Chinese semiconductor industry overall decreased by 9.8 percent compared to the previous year. However, spending on production equipment in chip manufacturing simultaneously increased by over 53 percent despite the general decline.

Equipment is currently the only sub-sector of the Chinese semiconductor industry that continues to grow despite the global downturn. The reason is China's efforts to counter semiconductor and technology embargoes from Washington and to produce its own chips in higher performance classes as quickly as possible.

Although China began systematically modernizing its domestic industries about a decade ago, the push toward high-tech is now accelerating significantly. Most analysts attribute the current equipment boom to increasing external pressure from the United States, which countries like the Netherlands (ASML) and Japan have reluctantly joined at Washington's urging.

Export control – the double-edged sword

The export controls imposed by the USA and its Western allies on semiconductors, lithography machines, and EDA software act like a double-edged sword. On the one hand, they temporarily restrict China's access to cutting-edge technologies, but at the same time, they have triggered a new investment boom in China, which in the long term favors the catch-up efforts of Chinese chip and equipment manufacturers compared to their Western competitors.

Large state investment funds in the People's Republic, led by the national "Big Fund," as well as local special funds, are specifically channeling capital into research and development of chip manufacturing equipment along the entire supply chain. New in the current round of "Big Fund III" is a stronger focus on particularly high-performance chips.

A wave of new chip factories in China is driving up demand for equipment. This combination of strategically well-directed financial injections and very strong demand is currently giving many Chinese manufacturers a better chance to catch up technologically with foreign competitors.

Clearing bottlenecks out of the way

After previously distributing its investments generously across various sectors, the Beijing government is now focusing more on targeted efforts to eliminate existing "bottlenecks" in domestic industries. At the same time, technological breakthroughs are to be enabled, the Chinese market research agency Huashang Guangdian Keji (CINNO) writes in an analysis of the semiconductor market.

"This development model based on the principle of 'sanction – pressure – breakthrough' is fundamentally changing the global landscape for semiconductor equipment. China is transforming from a passive recipient to an active innovator. While there are still bottlenecks in key technologies such as lithography systems, sustained investments in research and development, as well as coordinated innovations along the entire supply chain, are strengthening the foundations for future technological breakthroughs," writes CINNO.

This pattern becomes very clear when looking more closely at the individual segments where investments have flowed this time. For instance, strong growth was recorded in the "third-generation semiconductor materials" segment. These received 16.2 billion yuan (around €1.9 Billion/$2.1 Billion), accounting for 27.3 percent of total investments in materials equipment.

It is evident from such details that China is no longer content with manufacturing relatively simple "legacy chips" as before, but is increasingly aiming to produce new SiC and GaN chips. These will be needed for RF devices for 5G and 6G base stations, control units for electric drives, and other future technologies. Additionally, compared to previous years, investments in the "electronic specialty gases" segment have noticeably increased, accounting for 19.3 percent of all investments in the "materials" category this time. This also indicates a strategic shift in China's production toward higher-quality, more powerful chips.

The beneficiaries of the subsidies

Even the regional distribution of investments within the country reveals China's strong push toward modernization to insiders. For example, the inland province of Hubei was able to advance to fifth place among the leading investment recipients for the first time, as the regional government there is promoting a world-class "Science and Technology" cluster in the semiconductor sector. Among other developments, new capacities for modern memory chips are currently being established there.

In terms of regions, Jiangsu, Shanghai, Zhejiang, and the capital Beijing occupied the top four spots. Semiconductor clusters are also rapidly expanding there, where Chinese state-owned enterprises and start-ups, together with research institutes and the regional government, are working on developing the "new, high-quality productive forces," the promotion of which Beijing has declared a matter of national security in response to the US sanctions.

It is this combination of continued substantial investments in the Chinese semiconductor industry, even amidst a cyclical weakness in the global chip industry on the one hand, and the emergence of a unique innovative ecosystem on the other, that is driving an increasing number of technological breakthroughs by domestic Chinese semiconductor manufacturers.

Competition for Western equipment manufacturers

Chinese equipment manufacturers are also making significant technological progress. Companies like NAURA Technology and AMEC (Advanced Micro-Fabrication Equipment) have, in the view of many observers, now reached international top standards in key areas such as etching systems and thin-film coating equipment. Both are state-owned enterprises and can therefore count on the particular favor of the central government in Beijing.

New players, such as Huawei's equipment subsidiary SiCarrier, are also making a strong push into the market. Due to the investment surge in China, these companies are currently growing faster than many Western competitors. In areas where significant gaps still exist in the Chinese semiconductor supply chains, targeted investments are now set to intensify following a realignment of the "Big Fund III." The Big Fund is China's centrally managed investment program aimed at expanding its semiconductor industry with capital from public and private investors.

The current gaps also include the production of their own lithography machines, with the aim of one day overcoming the dominance of the Dutch company ASML and Japanese providers. A third segment where even more investments are now expected compared to before is the field of software for chip design (EDA or Electronic Design Automation), where U.S. companies like Cadence and Synopsys are currently leading.

From Beijing's perspective, EDA is another Achilles' heel of the Chinese semiconductor industry that urgently needs strengthening. The third edition of the Big Fund is still preparing its first major investments, but initial speculations have already leaked into the Chinese trade press. If the targeted capital of 344 billion yuan (approximately 41 billion euros) can be fully allocated, "Big Fund III" would be the largest Chinese semiconductor fund ever. The mandate is clear: China aims to achieve technological self-sufficiency in an increasing number of critical areas of semiconductor manufacturing and reduce its dependency on U.S. imports as quickly as possible. (sb)