China has begun requiring chipmakers to use at least 50% domestically manufactured equipment when adding new semiconductor production capacity, according to three people familiar with the policy. The rule is not publicly documented but is being enforced through the state approval process for new or expanded fabrication plants, with companies required to demonstrate compliance via procurement tenders.
The mandate marks one of Beijing’s most assertive moves yet to reduce dependence on foreign semiconductor technology, following U.S. export controls imposed in 2023 that restricted China’s access to advanced AI chips and critical chipmaking tools. While those controls blocked the most advanced equipment, the new rule is reshaping procurement decisions even in areas where foreign alternatives remain available.
Authorities reportedly apply flexibility for advanced production lines where domestic tools are not yet fully developed, but sources say officials ultimately aim for full localisation.
Policy Details: How the Rule Works
Chipmakers seeking government approval must show that at least half of the equipment used in new capacity expansion is sourced from Chinese suppliers. Applications that fail to meet the threshold are generally rejected, though exemptions are granted where supply constraints exist.
Officials have signalled that 50% is a minimum rather than a target. “Authorities prefer if it is much higher,” one source said, adding that the long-term goal is 100% domestic equipment use across fabs.
‘Whole Nation’ Push for Chip Independence
President Xi Jinping has repeatedly called for a “whole nation” effort to build a fully self-sufficient semiconductor supply chain. That push spans equipment, materials, software and talent, involving thousands of engineers and researchers across state-backed firms and research institutions.
The effort has been reinforced by massive state funding. Beijing has channelled hundreds of billions of yuan into the sector through the state-backed “Big Fund,” which launched a third phase in 2024 with 344 billion yuan ($49 billion) in capital.
Procurement data shows state-affiliated entities placed a record 421 orders for domestic lithography machines and parts this year, worth roughly 850 million yuan, highlighting the scale of the shift.
Winners and Losers
The policy is already reshaping China’s chip equipment landscape. Domestic suppliers such as Naura Technology and Advanced Micro-Fabrication Equipment (AMEC) are gaining ground in areas long dominated by foreign firms including Lam Research and Tokyo Electron.
Naura is now testing its etching tools on SMIC’s cutting-edge 7nm production line, following successful deployment at 14nm. It has also developed replacement components, such as electrostatic chucks, for foreign equipment that can no longer be serviced due to U.S. restrictions.
Meanwhile, foreign suppliers face a gradual squeeze out of the Chinese market, even where their tools remain technically superior, as procurement decisions increasingly reflect policy priorities rather than pure performance metrics.
Innovation and Financial Impact
The localisation push is accelerating innovation among Chinese firms. Naura filed a record 779 patents in 2025, more than double its filings in 2020 and 2021, while AMEC filed 259 patents.
That innovation drive is translating into strong financial performance. Naura’s revenue jumped 30% in the first half of 2025 to 16 billion yuan, while AMEC reported a 44% increase to 5 billion yuan. Analysts estimate China has now achieved roughly 50% self-sufficiency in photoresist-removal and cleaning equipment, a segment once dominated by Japanese suppliers.
Why It Matters
The 50% domestic equipment rule signals a decisive shift from defensive adaptation to proactive industrial policy. Rather than merely responding to U.S. export controls, Beijing is now using market access and state approvals to force structural change across its semiconductor ecosystem.
For global chip equipment makers, the policy represents a long-term strategic loss of the world’s largest semiconductor market. For China, it raises the odds of achieving technological independence but at the cost of potential inefficiencies and slower short-term progress in advanced chipmaking.
Analytical Take
This mandate reflects Beijing’s willingness to trade near-term efficiency for long-term sovereignty. By compelling fabs to work with domestic suppliers, China is effectively compressing years of trial-and-error learning into a few high-pressure cycles. The result is rapid iteration, rising patent activity and faster-than-expected progress in select tool categories like etching.
However, this strategy also risks creating a semi-insulated ecosystem where competition is policy-driven rather than market-driven. While that may accelerate catch-up in mature technologies, it could slow innovation at the frontier if domestic tools lag global best-in-class standards for too long.
Ultimately, the 50% rule suggests China has concluded that technological decoupling is no longer a risk to manage, but a reality to optimise around marking a new phase in the global semiconductor standoff.
What’s Next
Authorities are expected to gradually raise the effective localisation threshold as domestic tools mature, especially in mid-range chip production. More aggressive targets could follow in areas such as memory and specialty chips, where Chinese suppliers are advancing quickly.
Globally, the policy is likely to deepen supply-chain fragmentation, forcing foreign chip equipment makers to reassess their China strategies while accelerating parallel technology ecosystems on either side of the geopolitical divide.
With information from an exclusive Reuters report.
