Four years after the United States imposed stringent export curbs on advanced semiconductors, particularly those used in artificial intelligence (AI), data centers, and national defense, China’s pursuit of chip self-sufficiency has not only accelerated but also yielded significant, albeit uneven, progress. The US restrictions, aimed at curtailing Beijing’s technological and military advancements, have paradoxically pushed China to invest hundreds of billions of dollars into building a robust domestic semiconductor ecosystem, a goal previously outlined in its “Made in China 2025” plan.
A Strategic Pivot Driven by Sanctions
The Biden administration’s move to limit China’s access to cutting-edge chips, designed to widen the technological gap between the two economic giants, has instead galvanized Beijing. The Chinese government has responded by channeling substantial subsidies, tax breaks, and other financial incentives to foster local chip manufacturers. These efforts are intended to cultivate domestic alternatives to industry leaders like NVIDIA, renowned for its advanced Blackwell AI chips, and Taiwan’s TSMC, the world’s leading contract chipmaker for sophisticated semiconductors and developer of N2 chip-manufacturing technology.
Domestic Giants Show Growth Amidst Global Competition
SMIC, a cornerstone of China’s self-reliance strategy, reported record revenues of $9.3 billion (€7.8 billion) last year. HuaHong, the mainland’s second-largest chip foundry, has been operating at an impressive 106% capacity, a testament to surging demand, according to its fourth-quarter 2025 earnings report. These figures highlight the significant expansion of China’s domestic chip production capabilities.
The “Good-Enough” Revolution: Legacy Chips and Global Market Share
While China continues to lag behind the US in research, design, and innovation, and trails Taiwan and South Korea in advanced production, it has achieved notable breakthroughs in the realm of legacy chips. According to the Rhodium Group, a think tank specializing in China, Chinese firms now command approximately 30% of the global market for these essential semiconductors. Legacy chips, though not the fastest or most advanced, are the workhorses of the modern economy, indispensable for vehicles, industrial equipment, and consumer electronics. Chinese manufacturers’ ability to produce these chips on a massive scale is already impacting global markets.
John Lee, director of research consultancy East-West Futures, predicts that this expansion will drive down global chip prices, exerting pressure on non-Chinese vendors. “This is already happening in some sectors, such as silicon carbide wafers,” a critical material for high-power chips, he noted.
Progress in Advanced Chips: A Partial Catch-Up
China has also made strides in more advanced chip manufacturing, successfully producing 7-nanometer-class processors that now power Huawei’s latest smartphones. These chips are comparable to those TSMC released in 2018 for Western clients. However, they still fall short of the speed, power efficiency, and production cost of current 3-nanometer and 5-nanometer chips.
Tim Rühlig, senior analyst for Global China at the European Union Institute for Security Studies, described China’s advanced chip ambitions as encountering a “brick wall” due to technological limitations and US sanctions. “There is only so much that you can do without access to the US’s most advanced chipset,” Rühlig told DW, suggesting China might need “a decade or so” to bridge the gap.
Shifting Priorities: Practical AI and the Global South
Reflecting a strategic recalibration, China’s latest Five-Year Plan de-emphasizes outright chip dominance, instead highlighting AI and a “model-chip-cloud-application” framework that integrates advanced chips into a broader computing ecosystem. Beijing is increasingly focusing on practical, task-oriented AI for industrial applications that require less computational power, a niche where domestic chips can perform effectively.
While China’s chips and AI systems may not be at the absolute cutting edge, their strong performance at a significantly lower cost is driving rapid adoption across the Global South. Governments and companies in these regions are increasingly favoring Chinese over Western solutions. Market intelligence firm Trendforce reported that Chinese AI platforms, including DeepSeek and Alibaba’s Qwen, had captured roughly 15% of the global AI model market by late 2025. This presents a long-term challenge to the dominance of US tech giants like Microsoft and Google, which are projected to invest a record $700 billion in AI infrastructure this year, according to Goldman Sachs.
US Lead Faces New Challenges: Power Grids and Geopolitics
The US semiconductor industry also faces internal challenges. ICIS, a global market intelligence provider, warned that US data centers, reliant on high-end chips for AI, could be constrained by the nation’s strained power grid. In contrast, China’s rapidly expanding power sector offers a significant advantage. With an estimated 400 gigawatts of spare capacity projected by 2030, China can deploy data centers at scale, compensating for potential chip inefficiencies.
“Cheap energy is a very important factor, not necessarily for chips but for AI and other advanced technologies,” observed Ryu Yongwook, an assistant professor at the National University of Singapore. “Cheap energy in China goes some way to make up for its relative chip inefficiency.”
ICIS outlines three potential scenarios for the chip race: the US maintains its lead by addressing its power grid issues; the US continues to lead AI research while China’s AI systems expand in the Global South; or escalating geopolitical tensions lead to the emergence of two distinct AI ecosystems. Regardless of the ultimate outcome, the semiconductor industry is heading towards a future where Chinese competitors offer competitive pricing and rapidly close the sophistication gap, according to Lee.
