China accelerates its chip materials industry driven by AI

The global wave of investment in artificial intelligence is having a less visible impact than the surge in GPU manufacturers’ stocks or the construction of new data centers: it is reshaping the supply chain of semiconductor materials in Asia. China, which for years depended on Japanese, Taiwanese, South Korean, European, and U.S. suppliers across several critical process layers, is narrowing that gap just as demand for chips, memory, servers, and data center equipment is once again stressing factories in the region.

The news is not that China has caught up with Japan in all advanced materials. That leap has not yet occurred. Japan remains very strong in silicon wafers, photoresins, ultrapure chemicals, gases, encapsulation materials, and equipment linked to delicate processes. The real change is elsewhere: demand driven by AI, trade restrictions, and the need to replace foreign suppliers are giving Chinese material manufacturers a huge domestic market to grow, improve quality, and scale up.

This move also comes at a time of manufacturing expansion across Asia. Recent private indicators show that China, Japan, South Korea, Taiwan, and Vietnam maintained positive industrial activity in June, supported by demand for chips, computers, and other tech goods related to AI. China’s private manufacturing PMI, from RatingDog, was at 51.7 in June—above the 50 threshold that separates expansion from contraction—while Japan’s manufacturing PMI rose to 54.8, with the fastest growth in new orders in over two years.

AI turns materials into a strategic issue

When talking about AI chips, most attention is focused on NVIDIA, AMD, TSMC, Samsung, SK hynix, or Micron. But semiconductors start and end not just with chip design. Before and after, there is a chain of materials without which nothing exists: wafers, photoresins, special gases, wet chemicals, CMP slurries, dielectric materials, substrates, films, interposers, packaging materials, and high-purity consumables.

That layer was less visible because it seemed stable. Japan had dominated many categories for decades through experience, quality, and industrial trust. China imported what it couldn’t produce at the required level. Geopolitical pressure and the AI boom have changed incentives. If local chip and packaging production grows, the supply of materials must also expand locally.

SEMI reported in May that the global semiconductor materials market reached a record of $73.2 billion in 2025—boosted by more complex processes, demand for advanced nodes, investment in high-performance computing, and HBM memory manufacturing. This growth isn’t confined to wafers: packaging materials are also rising, with AI driving larger and more complex architectures.

The pressure is clear: as AI accelerators grow, they consume more specialized materials. IDTechEx points out that advanced packaging has become a central platform for HPC because performance now depends not only on transistor density but also on memory bandwidth, IO density, power delivery, thermal management, and the integration of more dies within the same package.

China is catching up, but Japan remains in the game

The headline that China is catching up to Japan should be understood with nuances. In extremely high-purity materials and critical processes, barriers remain enormous. It’s not enough to produce “something similar.” In semiconductors, small variations in purity, roughness, defects, uniformity, or thermal behavior can ruin performance and yield. That’s why it takes years for clients to qualify new suppliers.

Japan maintains a strong position because it controls accumulated knowledge and trusted relationships with global manufacturers. Companies like Shin-Etsu, SUMCO, JSR, Tokyo Ohka Kogyo, Fujifilm, Resonac, Mitsubishi Chemical, or Ajinomoto continue to be present at key points in the chain. For example, in advanced packaging, ABF substrates and related materials remain areas where Japan retains technical dominance.

However, China has an advantage it lacked a decade ago: large-scale domestic demand and political urgency. U.S. and allied restrictions have not only limited access to advanced chips and equipment but have also pushed Chinese companies to reduce dependency across the entire supply chain. This benefits local suppliers, even if initially they don’t match Japanese quality standards.

An example is 300 mm wafers. China aims to increase the use of domestically produced wafers, with companies like Xi’an Eswin Material Technology, National Silicon Industry Group, and Hangzhou Lion Microelectronics scaling up capacity to serve local manufacturers. Industry reports say China aspires to cover a much larger share of its domestic wafer demand, though it still relies on foreign suppliers for cutting-edge segments.

This dynamic echoes other phases of technological industrialization: initially replacing part of supply in less demanding applications, then increasing volume, improving quality, and finally competing in more sophisticated layers. While it doesn’t always succeed, China’s scale, funding, and strategic pressure make it a formidable contender.

The Asian manufacturing resilience driven by AI orders

The macro environment supports this. The conflicts in Iran and tensions in the Middle East have increased risks of higher energy costs, logistical delays, and raw material pressures. Still, demand for AI-related goods is acting as a cushion for several Asian manufacturing economies.

China posted its seventh consecutive month of private sector expansion in June. Japan experienced six months of improvement, with a PMI of 54.8, marking its best quarter since 2014 according to the final S&P Global figure cited by InvestingLive. South Korea also continued expanding, though at a slower pace due to falling export demand and rising costs. Taiwan and Vietnam also registered positive manufacturing activity in June, according to private surveys mentioned earlier.

The industrial outlook is significant: AI is offsetting some geopolitical damage. Orders for chips, servers, memories, data center equipment, connectors, substrates, and materials do not eliminate risks but help sustain factories that otherwise would be more vulnerable to weak consumer demand or trade uncertainty.

The challenge is that this expansion faces bottlenecks. Supply delays, longer lead times, and rising costs may eventually translate into higher prices. While AI fuels demand, it doesn’t eliminate logistical fragility.

Advanced packaging: opportunities where Chinese materials still have room to grow

The next battleground is not just chip manufacturing but packaging. Modern AI accelerators integrate logic, chiplets, HBM, interposers, and complex substrates, increasing the importance of materials that were once secondary: ABF, silicon interposers, glass substrates, RDL, dielectric materials, adhesives, advanced solders, and thermal solutions.

Santiago & Company states that the bottleneck for AI has shifted from wafer fabrication toward physical integration: advanced packaging, HBM, ABF substrates, and testing capacity. Their analysis indicates that around 90% of the global CoWoS and HBM supply in 2025 was concentrated among leading AI chip designers, though only about 12% of advanced logic dies were used.

This underscores the importance of materials. If China aims to advance in AI without relying entirely on external supply chains, it can’t just improve foundries. It needs manufacturing materials, packaging materials, memory, substrates, testing, and cooling. It’s currently growing rapidly in some areas, while in others, Japan, Korea, Taiwan, and Western suppliers still hold a difficult-to-erosion advantage.

IDTechEx predicts that advanced packaging for HPC will grow around 30% annually between 2026 and 2037. They highlight trends such as larger packages, panel-level packaging, interposers and glass substrates, hybrid bonding, and co-packaged optics—all of which depend on highly specific materials with increasingly strict quality demands.

For Chinese manufacturers, this presents both opportunity and challenge: demand is growing enough to open space for new suppliers, but the technical bar is rising simultaneously.

A less visible race than the GPU wars

The competition between China and Japan in materials will not make headlines like the GPU race or restrictions on advanced chips but could be equally significant. A semiconductor industry is not just about designing processors; it’s about securing every critical layer: materials, equipment, processes, packaging, testing, memory, and energy capacity.

Japan maintains a solid position thanks to quality, specialization, and relations with global clients. China is gaining ground through scale, investment, and strategic necessity. AI accelerates both: increasing the total market, filling factories, and turning materials once seen as “industrial” into geopolitical assets.

The question is not whether China will surpass Japan in all chip materials by 2026—that doesn’t seem the most likely scenario. The real question is how many categories will stop relying almost entirely on Japanese suppliers in the coming years.

And in this area, change is underway. AI is transforming what was once a technological need into an industrial priority for Chinese materials.

Frequently Asked Questions

Why does AI drive Chinese chip materials manufacturers?
Because demand for accelerators, memory, servers, and data centers increases consumption of wafers, chemicals, gases, substrates, and packaging materials. China aims to meet more of this demand with local suppliers.

Has China already surpassed Japan in semiconductor materials?
Not overall. Japan remains very strong in advanced and high-purity materials. China is closing the gap in some categories thanks to scale, investment, and substitution efforts.

Which materials are most important for AI chips?
300 mm wafers, photoresins, gases, ultrapure chemicals, CMP slurries, ABF substrates, interposers, packaging materials, and thermal solutions.

Why is advanced packaging so relevant?
Because AI chips combine logic, HBM, and other dies in complex packages. Performance depends on how these components are physically integrated, not just on process nodes.

What role does Japan play in this chain?
Japan maintains a strong position in critical materials like wafers, photoresins, chemicals, and packaging components. Its challenge is to defend this advantage against growing Chinese local suppliers driven by domestic demand.