China’s pursuit of semiconductor self-sufficiency in artificial intelligence has yielded notable technical achievements while revealing persistent structural limitations that continue to shape global supply chain dynamics and technological competition
China’s ambitions in artificial intelligence semiconductor manufacturing represent one of the most significant technological and geopolitical developments of the current decade. As global AI chip demand surges—with projections indicating market growth from USD 34.92 billion in 2024 to USD 89.40 billion by 2027—China’s domestic semiconductor capabilities have evolved considerably, yet remain constrained by fundamental technological and supply chain dependencies. This analysis examines China’s current position within the global AI chip ecosystem, evaluating both achievements and persistent challenges that define its competitive trajectory.
The landscape reveals a complex picture of progress tempered by constraints. While Chinese firms have demonstrated remarkable innovation within existing technological boundaries, they continue to operate several generations behind leading-edge capabilities, creating strategic vulnerabilities that underscore the interconnected nature of global semiconductor supply chains and the persistent influence of export control regimes on technological advancement.
Current State of China’s AI Semiconductor Capabilities
China’s foundational semiconductor manufacturing capacity centres on Semiconductor Manufacturing International Corporation (SMIC), the nation’s largest contract chipmaker, which has achieved notable technical milestones despite operating under significant constraints. SMIC successfully manufactured 7-nanometer chips using double patterning techniques with existing DUV equipment, circumventing the absence of advanced EUV lithography systems. This achievement, while technically impressive, comes with substantial operational limitations—the double patterning process is both time-consuming and expensive, restricting volume production capabilities.
The manufacturing reality reflects these constraints in market outcomes. Analysts expected Huawei to ship only 7 million MatePro phones in 2023, potentially expanding to 40 million units, volumes that pale compared to competitors using advanced manufacturing processes. SMIC remains officially capable of 7-nanometer production, requiring less advanced technology than TSMC’s 3-nanometer capabilities, highlighting a multi-generational gap in manufacturing sophistication.
Despite these limitations, Chinese semiconductor firms have demonstrated adaptive capabilities. SMIC recently announced its capacity to produce chips at the 5-nanometer node, though progress faces delays with 5nm advancement occurring gradually through N+1, N+2, and N+3 processes due to equipment constraints. This incremental approach reflects both technical ingenuity and the fundamental limitations imposed by restricted access to cutting-edge manufacturing equipment.
Strategic Government Initiatives and Investment Patterns
China’s semiconductor development strategy operates through coordinated government investment and policy frameworks designed to achieve technological self-sufficiency. The approach encompasses both direct financial support and systematic market development initiatives aimed at creating viable domestic alternatives to international suppliers.
Huawei plans to commence mass production of the Ascend 910C, its newest AI chip, in the first quarter of 2025, with SMIC manufacturing the chip on its N+2 process. This development represents the practical implementation of strategic partnerships between China’s leading technology firms and domestic manufacturing capabilities, demonstrating progress in translating government investment into commercial products.
The investment strategy has yielded measurable market responses, particularly in equity valuations that reflect both domestic market confidence and speculative positioning around technological independence. Cambricon Technologies shares surged 383% in 2024, outperforming NVIDIA and TSMC, driving market valuation to $37 billion. This performance, while impressive in financial terms, requires contextual assessment against operational fundamentals.
Cambricon achieved its first quarterly profit in Q4 2024, with net profits ranging between ¥240 million and ¥328 million, marking a turnaround after substantial earlier losses. However, the company experienced a more than 40% decline in revenue for the first half of 2024, illustrating the volatile nature of early-stage market development and the challenges of competing against established international alternatives.
Technical Challenges and Competitive Positioning
China’s AI semiconductor development faces fundamental technical challenges that extend beyond manufacturing capabilities to encompass design architecture, performance optimisation, and ecosystem integration. These constraints significantly impact competitive positioning relative to established market leaders.
Manufacturing limitations create cascading effects throughout the development pipeline. SMIC only began large-scale production of 14-nanometer chips in 2022, with mature production remaining at the 28-nanometer process, maintaining a one to two generation disadvantage. This technological gap compounds in AI applications where computational efficiency and power consumption directly correlate with manufacturing process sophistication.
Chinese AI chip designers have responded through architectural innovation and specialisation strategies. Horizon Robotics released the Journey 2 in 2019 as the first automotive AI chip made by a Chinese company, utilising self-developed Brain Processing Unit (BPU) 2.0 architecture capable of over 4 TOPS compute performance while consuming 2 watts. This specialisation approach allows Chinese firms to compete effectively in specific market segments while acknowledging broader performance limitations.
The competitive landscape reveals both progress and persistent disadvantages. While Chinese firms have demonstrated capacity for innovation within existing constraints, performance gaps remain substantial in high-end applications. China will have more than 1 million A100-caliber or better chips from NVIDIA by the end of 2024, illustrating continued dependence on imported solutions for critical AI infrastructure despite domestic development efforts.
Supply Chain Dependencies and Export Control Impacts
China’s AI semiconductor ambitions operate within a global supply chain framework characterised by concentrated expertise and complex interdependencies. Export control measures have created additional constraints that significantly influence development strategies and capability trajectories.
Equipment access represents the most significant constraint on Chinese semiconductor advancement. SMIC cannot access EUV lithography due to US export restrictions, forcing reliance on alternative technical approaches that increase production complexity and costs while limiting ultimate performance potential. This equipment dependency extends beyond individual components to encompass entire technological ecosystems required for advanced semiconductor development.
The implications extend throughout Chinese semiconductor supply chains. SMIC’s gross margins dropped to 18% and net margins to 9.1% in 2024 due mainly to high depreciation expenses from ongoing capacity buildouts, reflecting the capital-intensive nature of semiconductor manufacturing and the additional costs imposed by technological workarounds necessitated by equipment constraints.
Despite these challenges, Chinese firms have demonstrated adaptive strategies that leverage available technologies while developing alternative approaches. The double patterning technique employed by SMIC exemplifies this adaptation, achieving advanced node production through existing equipment at the cost of efficiency and scalability.
Geopolitical Implications and Strategic Competition
The development of China’s AI semiconductor capabilities occurs within broader strategic competition frameworks that encompass technological sovereignty, economic security, and geopolitical positioning. These dynamics significantly influence both development strategies and market outcomes.
Chinese semiconductor development reflects systematic efforts to reduce strategic dependencies while building domestic technological capabilities that can support broader economic and security objectives. The emphasis on AI chip development specifically recognises artificial intelligence as a critical domain for technological competition and economic advancement.
International responses to China’s semiconductor development have created additional complexity through export controls, technology transfer restrictions, and alliance-building initiatives designed to maintain technological advantages. These measures have simultaneously constrained Chinese development while incentivising alternative approaches and accelerated domestic investment.
The strategic implications extend beyond bilateral competition to encompass global supply chain stability and technological standardisation. As Chinese firms develop alternative technological approaches and market solutions, questions arise regarding compatibility, interoperability, and the potential fragmentation of global technology ecosystems.
Industry Outlook and Technological Trajectories
China’s position in AI semiconductor manufacturing will likely continue evolving through incremental advancement constrained by fundamental technological dependencies, while strategic investment and market development create opportunities for competitive positioning in specific application domains.
Manufacturing capabilities will probably advance gradually through the implementation of alternative technical approaches and continued process refinement, though significant gaps with leading-edge capabilities are likely to persist absent changes in equipment access or breakthrough innovations in manufacturing techniques.
Market development within China offers substantial opportunities for domestic firms, particularly as government policies prioritise domestic sourcing and technological independence creates demand for viable alternatives to international suppliers. This protected market environment may facilitate capability development and commercial viability that subsequently enables international competition.
The trajectory suggests continued technological competition characterised by parallel development paths rather than convergence, with Chinese firms pursuing specialisation strategies that leverage available capabilities while working to address fundamental constraints through alternative approaches and systematic capability building.
China’s AI semiconductor development represents a complex interplay of technological ambition, strategic necessity, and practical constraints that will continue shaping global semiconductor markets and technological competition. While significant achievements demonstrate Chinese innovative capacity and strategic commitment, persistent limitations underscore the sophisticated nature of advanced semiconductor development and the enduring importance of global supply chain interdependencies in determining competitive outcomes.
