By Ryan Vaswani, Senior Analyst, ATREG, Inc.
When it comes to the global race for technological supremacy, two of the biggest names today are Chinese companies working to rival their Western peers – DeepSeek and Huawei. Merely three months into 2025, each company has already announced breakthroughs that have startled and humbled Western observers – DeepSeek with its R1 model and Huawei with their Ascend 910C AI chip – both attesting to China’s ambitions (and capabilities) for semiconductor self-sufficiency. Amidst these developments sit Western chip companies, who for decades have supplied the Chinese chip market and reaped billions in the process. Today, these companies must re-assess their position and future in China as they try to avoid getting beaten at their own game.
Running out of road
To state the obvious, tensions are rising higher between China and the United States on a host of topics, semiconductors being one of the major fronts. Having initially laid down the gauntlet in 2018 during his first term, President Trump is looking to toughen semiconductor sanctions again in his second term, and the U.S. is continuing to enlist allies in Japan and the Netherlands to follow along. For its part, China is leveraging its control over rare materials such as gallium to restrict exports while simultaneously continuing to pump billions of dollars of stimulus money into its nascent chip sector in a bid to win market share and supply its own market.
In advancing export controls on advanced chips, the U.S. is making a bet that it can delay China’s ability to reach technological parity, but it is also drawing the ire of U.S. technology firms such as NVIDIA that want to profit off potential sales to the Chinese market. The result for leading-edge chip firms is that their best technology will likely be off limits for Chinese customers.
At the other end of the market, when it comes to mature node chips, China is pushing hard to promote homegrown chip champions in a drive for national security and to reduce the influence of foreign companies in the Chinese market. Already this year, the Financial Times reports that Chinese memory company CXMT has expanded its production of DDR5, the most advanced category of DRAM, eroding price margins for competitors including Samsung and SK Hynix. This same story is repeating across silicon carbide (SiC), mature node foundries, and other areas of chip development. For those acquainted with the solar industry, this should sound like a familiar story.
Western semiconductor firms operating in China now find their operations squeezed between these two forces, suffering from stringent government regulation at home that dampens or eliminates their ability to profit off their newest technologies, and finding that competition among their legacy products is getting fiercer as China invests heavily in homegrown companies who undercut on price. The road for revenue is getting narrower.
Driving towards delusion?
Flanked by these challenges, one might imagine that many Western firms, and especially American ones, would be searching for the exit. Instead, evidence points to the contrary. Micron announced in April 2024 that they would be expanding in China via a $600 million investment in their Xi’an fab, less than a year after China announced it would ban Micron’s chips from government purchases. GlobalFoundries announced that they were keen to explore manufacturing partnerships in China, despite the fact that they had been fined by the U.S. government for violating chip sanctions on China. Texas Instruments, AMD, Intel, and Qualcomm are other notable U.S. semiconductor firms that boast of operations in China and are working to maintain their presence in the region.
So how do we explain this? In simple terms, it’s hard to give up on such a large and lucrative market, even if the winds are shifting. Two factors in particular are in play here – technological advantages and transient politics. Starting with the former, one aspect of this situation that must give executives some relief is that there is certainty in the fact that Western chip technology is significantly better than Chinese alternatives and Chinese customers still want access. No executive can afford to give up on that reality. Where uncertainty is concerned regarding trade policies and government controls, companies are making a bet that “deglobalization” has limits and that China and the U.S. will find a way to make trade work.
Racing ahead
That tensions have focused so much on U.S. companies and policies should hint at who has the most to gain in the near term – Europeans. While challenges undoubtedly exist between Europe and China as well, the U.S. is in the middle of a full-speed decoupling of its foreign policy and trade alignment with Europe, leaving the European Union (EU) with ample reason – political and economic – to do deals with countries such as China.
Infineon’s CEO Jochen Hanebeck recently spoke to the “China for China” phenomenon, noting that their strategy was to localize production for some chips to factories in China and expand their back-end sites to meet demand. Netherlands-based NXP announced last December that it is focused on building out a Chinese supply chain for its customers there. In 2023, STMicroelectronics signed an agreement with China’s Sanan Optoelectronics to create a new 200mm SiC device manufacturing joint-venture in Chongqing, China.
Given that China has such a strong demand for electric vehicles (EVs) compared to other markets, and that is exactly where European IDMs have made many of their chip investments, it is no surprise that they are scrambling to maintain their market share and invest in localization to stay relevant and profitable into the near future. Europe’s automotive legacy may be undeniably eroding to Chinese innovation, but European semiconductor companies can still play a large part in providing chips for EVs.
Do not enter
How long Western IDMs can maintain their operations in China is the trillion-dollar question that no one can provide a firm answer to. What does seem clear, however, is that with every passing year, policy, and technological advancement, China is increasingly preparing for a future led by China’s own companies.
It will not be an easy or fast road to get there. Though advancements from the likes of Huawei and DeepSeek are notable, Chinese companies are still well behind in areas such as electronic design automation software and are heavily dependent on foreign semiconductor equipment with no access to ASML’s state-of-the-art EUV lithography machines.
Even so, it would be naïve to think that Western firms can hold their competitive advantages forever, especially considering some recent damning statistics. For starters, China is closing the R&D investment gap with the U.S. which has fallen to $130 billion – and this on top of an environment where the Trump administration seems set on scrapping the CHIPS & Science Act and limiting government programs designed to promote innovation. At the start of 2025, China’s third state-backed investment fund for their domestic chip industry began doling out $47 billion worth of funds, more than the size of the U.S.’s single CHIPS Act. To top it off, China counts more fabs (41) than any other country coming online between 2023 and 2027.
The reality is that China has at least three prominent levers to promote Chinese chip companies – stimulus, foreign restrictions, and intellectual property (IP) theft. Though China would vehemently insist that it doesn’t participate in the latter, anyone with experience of operating in China recognizes what frequent IP theft is and how difficult it can be to stop.
Pedal to the metal
Firms with an entrenched interest in staying in China aren’t waiting for governments to give them the greenlight. On the contrary, they are doubling down on their existing investments. This approach is arguably the most sensible, for if these companies hope to still benefit from the lucrative Chinese market, they must work aggressively to both keep their technological edge and move quickly to keep Chinese customers dependent for as long as they can before the walls close in around them and they are undercut by homegrown competition and national interest.
For Western chip firms who still want access to the Chinese market, there is a window of opportunity for companies who can navigate the geopolitical climate and provide differentiated technology that Chinese chip companies have yet to master. We believe that European semiconductor IDMs and foundries are best positioned to capture this opportunity in the near term.
In the long term, whether a decade, two, or further out, it seems certain that China will work exhaustively to ensure that its semiconductor fortunes are controlled by its own companies at every level. The road to that future is long and winding, but it is being paved at a faster rate than ever before.