China is entering a new phase in its race for semiconductor self-sufficiency: less “hype” about establishing new entities and more consolidation around national champions. In recent weeks, the country’s two major contract manufacturers — SMIC and Hua Hong Semiconductor — have announced significant moves to gain full (or near-full) control of key assets within the domestic ecosystem.
This move comes at a particularly sensitive time for the global industry. US-led export restrictions continue to limit China’s access to advanced equipment, forcing recalibrations in priorities: where to invest, which nodes to prioritize, and how to scale without relying on external vendors. In this landscape, size and integration are as critical as technology itself.
Two transactions to “straighten the house” and strengthen industrial muscle
On one hand, SMIC — China’s largest contract manufacturer — has proposed acquiring the 49% stake it does not yet control in one of its subsidiaries, in a deal valued at 40.6 billion yuan (approximately $5.8 billion), through issuing A-shares to several shareholders of the subsidiary.
On the other hand, Hua Hong has announced an agreement to acquire 97.5% of Shanghai Huali Microelectronics from its state-owned parent and sector-linked funds, in a move valued around 8.27 billion yuan (about $1.2 billion), also supported by a share issuance transaction.
At first glance, these cases may seem like internal reorganizations. But their significance extends further: they reflect a political and industrial direction that aims to concentrate resources, simplify structures, and reduce redundancies in order to better compete in a geopolitically pressured environment.
Strategy: consolidation before expansion
Over the past decade, China’s capacity growth relied on a repeated formula: new projects, new corporate entities, and funding tied to regional incentives. Today, the implicit message is different: less fragmentation and a greater focus on strengthening what already works.
The approach involves multiple layers:
- Governance and capital: consolidating subsidiaries facilitates investment allocation, decision-making speed, and clearer financial reporting to investors and authorities.
- Operational efficiency: reducing administrative and R&D overlaps, while increasing the capacity to coordinate large-scale production.
- Resilience: in an environment with restricted access to cutting-edge technology, the priority shifts to ensuring industry continuity and domestic supply security.
The key point is that, practically, this consolidation aims at a very specific goal: strengthening mature nodes (28 nm and above in much of the new capacity associated with the current cycle), where China can compete with less dependence on constrained equipment and where demand remains steady in critical sectors.
Why “mature nodes” matter more than they seem
Popular narratives often boil the chip race down to 3 nm, 2 nm, and EUV lithography. But the real economy functions differently: a large portion of global electronics — automotive, industrial, networking, consumer devices — still relies on mature nodes for controllers, power management, connectivity, display drivers, and many components that don’t need the latest tech to be strategic.
And here’s a relevant detail for AI-focused media: even as GPUs and accelerators grab media attention, the infrastructure enabling large-scale AI (servers, networks, storage, power, peripherals, controllers) often depends on chips that aren’t manufactured at the most advanced nodes. In other words: not all of the “AI stack” lives at the leading node, and controlling those “less glamorous” chips is also an industrial power move.
Expanding capacity at mature nodes allows China to better meet domestic demand, reduce exposure to external disruptions, and compete on price and volume in a market where supply stability has also become a competitive advantage.
Restrictions as a driver for a new phase
Export restrictions remain a major constraint on China’s technological ambitions. Without access to critical tools — like EUV lithography — progressing below certain nodes is more complex, costly, and slow. Nevertheless, China continues to push where possible: for example, Reuters recently reported that Huawei’s latest flagship smartphone would incorporate a chip made by SMIC using an improved 7 nm process, though still behind global leaders.
The combination of border limits and volume opportunities explains why the strategy shifted towards capacity, efficiency, and control. Consolidation doesn’t immediately break through the technological ceiling, but it enables better operation within restrictions with greater financial and organizational muscle.
At the same time, efforts to replace foreign equipment with domestic alternatives are strengthening. Reuters noted that China aims to require manufacturers to use at least 50% domestic equipment in new capacity expansions, according to sources familiar with the policy. Such measures align with the same pattern: resource concentration, state support, and channeling towards capable players willing to absorb costs and risks.
Global impact: increased segmentation and price pressure
As capacity at mature nodes in China accelerates, the most probable medium-term effect is competitive pressure in that segment: more supply tends to squeeze margins and intensify competition for “commodity” contracts. However, the market won’t move as a single block.
Many Western companies are diversifying supply chains for regulatory and geopolitical reasons, and not all customers are willing to shift production to China, even if prices are attractive. The result is leaning towards a more segmented world: China gaining more influence on its domestic market (and some international flows), while other regions protect supply for clients with strict requirements.
What’s clear is that a new stage is underway: China is shifting from rapid, dispersed expansion to a more pragmatic consolidation, designed to secure volume, continuity, and resilience in the industrial base that underpins, among other things, AI development.
Frequently Asked Questions
What does it mean that SMIC and Hua Hong are consolidating subsidiaries in the context of China’s self-sufficiency?
It means concentrating assets, funding, and operational capacity into fewer entities, making investment and coordination easier to strengthen the domestic supply chain.
Why does China prioritize mature nodes like 28 nm or higher if AI uses advanced chips?
Because most hardware supporting data centers and industrial electronics depend on chips at mature nodes (power, control, connectivity). These are strategic due to their volume and stability.
Does consolidation help China bypass technological sanctions?
Not entirely; it doesn’t eliminate restrictions on advanced equipment access, but it improves operational capacity within those constraints — more scale, efficiency, and a more direct channel for government support.
Could this strategy affect global prices for “mature” chips?
If capacity increases in China, it could boost competition and pressure prices and margins for mature processes, though geopolitical considerations will likely lead to market segmentation.
via: tomshardware