China’s 50% domestic chips tools drive lifts stocks, faces limits

Shares of China’s chip-making equipment providers have surged in recent days after media reports said Beijing has instructed semiconductor manufacturers to raise the use of locally made equipment to 50%.

Since a Reuters report on December 31 outlined Beijing’s push to lift the use of domestic chip-making equipment, shares of Shanghai-based SVG Tech Group have jumped 22.9% to close at 39.7 yuan (US$5.6) on Tuesday.

Shanghai Fudan Microelectronics has risen 12.5% to 82.88 yuan over the same period, while Suzhou Secote Precision Electronics has climbed 5.3% to 45.62 yuan. Naura Technology, one of China’s leading chip equipment makers, has gained 5.9% to 485.97 yuan.

Citing unnamed sources, Reuters said in that year-end report that chipmakers seeking approval to build or expand fabrication plants had been instructed to ensure that at least half of the newly installed equipment would be sourced domestically. The requirement, which is not publicly documented, is enforced through procurement tenders and reflects Beijing’s broader push to strengthen self‑sufficiency across the semiconductor supply chain.

The directive represents one of Beijing’s clearest moves yet to reduce dependence on foreign semiconductor technology, a strategy that gained urgency after Washington tightened export controls in 2023. Unlike earlier measures that focused on restricted tools, the 50% threshold also channels spending toward Chinese suppliers even when equipment from the US, Japan, South Korea and Europe can still be purchased.

Projects that fail to meet the benchmark are often rejected, although regulators retain discretion when supply constraints apply, the sources said. The rules are eased for advanced production lines and high‑end tools that lack domestic substitutes. Still, officials prefer for the local share to rise above the minimum, in line with a long‑term goal of entirely domestically equipped plants.

Chinese commentators are divided over whether Beijing can realistically achieve its goal. Some analysts are optimistic, arguing that the pace of substitution has already accelerated sharply, driven by policy support and rising demand from domestic fabs.

“As China’s chip-making equipment market has expanded in recent years, the share of domestically produced tools has also risen rapidly, emerging as one of the clearest trends in the semiconductor equipment sector,” says a columnist at ijiwei.com, a semiconductor‑focused news website.

The writer says industry data show that the overall localization rate rose to 35% in mid-2025 from 23% a year earlier and may have passed 50% already by the end of that year. However, he did not provide a breakdown of this figure.

“Naura has established a clear lead, backed by a broad technology platform and sustained high‑intensity research and development (R&D) investment,” he adds. “Shanghai Micro Electronics Equipment (SMEE), AMEC and the Chinese Academy of Sciences’ Institute of Optics and Electronics are forming a strong second tier.”

The ijiwei.com columnist is partly correct to argue that China has achieved a 50% localization rate, but the figure refers mainly to specific segments within front‑end wafer fabrication rather than the entire chip-making equipment supply chain.

Publicly available information shows that China’s self‑sufficiency in chip-making equipment remains uneven, broadly falling into three categories: 

(1) Established domestic segments (above 50% of localization)

• Etching: About 50%–60% at mature nodes; Advanced Micro-Fabrication Equipment (AMEC) says it has progressed toward 3‑nanometer‑class capabilities.
• Cleaning: Roughly 50%–60%, with firms such as ACM Research (Shanghai), a unit of the Nasdaq-listed ACM Research Inc, supplying at scale.
• Resist stripping: Above 80%, localized mainly for mature production lines.

(2) Transitional segments (10%–30%):

• Thin‑film deposition: Around 20%–30%, with Naura’s physical vapor deposition (PVD) tools near the lower end.
• Thermal processing: About 30%–40%, where Naura holds a leading position.
• Chemical Mechanical Polishing (CMP): Roughly 15%–25%, as Hwatsing Technology accelerates import substitution.

(3) High‑end bottlenecks (below 10%):

• Lithography: Less than 5%, with media reports saying that China has built an extreme ultraviolet (EUV) lithography prototype in Shenzhen.
• Coating and developing: Below 10%, constrained by precision limits.
• Ion implantation: Under 5%, with beam stability still a challenge.

In wafer fabrication, tools are used in a fixed sequence. Lithography transfers circuit patterns onto wafers, followed by coating and developing to form photoresist features. Thin‑film deposition adds material layers, CMP smooths the surface and etching selectively removes material before the cycle repeats across successive layers.

China’s main weaknesses instead lie in technologies that rely on powerful lasers, ultra‑precision machine arms and highly specialized chemicals. These technologies remain tightly controlled by the Netherlands’ ASML and a small group of American and European suppliers, limiting the pace at which domestic equipment makers can close the gap.

Technical barriers

Some Chinese commentators remain doubtful that China can achieve 50% self‑sufficiency in chip-making equipment in the short term, warning that policy targets risk running ahead of technological reality.

“Many domestic chip-making tools are still in trial use. In core areas such as stability, compatibility and precision, they are not at the level of imported equipment,” says a Jiangxi‑based columnist writing under the pseudonym Huaci Shuijing.

She recalls visiting a chip plant where cheaper domestic tools frequently stalled or malfunctioned at critical process steps.

“One domestic lithography tool took three days to debug because its optical precision was not sufficient, causing micrometer‑level pattern shifts,” she says. “Some engineers told me that China can use domestic equipment, but efficiency may drop by 20% to 30% in the short run.”

She says the transition to a 50% localisation rate may last for three years, a long period that some Chinese chip makers may not survive.

“Chipmakers now need to promise that at least 50% of their equipment budgets will go to domestic suppliers. If they miss that red line, the government will delay approvals or cut their subsidies and tax benefits,” says a Shandong‑based columnist using the pen name Pixel Chaser. 

“For chipmakers such as Semiconductor Manufacturing International Corporation (SMIC) and Hua Hong Semiconductor, it poses real short‑term challenges,” he says. “Their production lines need to be recalibrated and processes adapted to domestic tools, which could put upward pressure of about 5% to 8% on production costs.”

Meanwhile, media reports said SMIC and Hua Hong have recently stepped up internal restructuring to streamline operations and gain flexibility as access to foreign equipment and advanced tools remains constrained by US and allied export controls. 

The shift has also driven consolidation. Hua Hong has agreed to acquire its sister foundry Shanghai Huali Microelectronics for about US$1.2 billion, while SMIC plans to take complete control of a Beijing-based subsidiary for roughly US$5.8 billion.

Some observers say the deals point to a fresh consolidation cycle as Beijing’s self-sufficiency push accelerates, helping both firms expand capacity at mature nodes and simplify corporate structures while remaining focused on legacy chips.

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Follow Jeff Pao on Twitter at @jeffpao3