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JUMBO SHEEN
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Amid the sustained boom in AI computing power and accelerated capacity expansion of advanced packaging and mature manufacturing processes, the 15th Five-Year Plan has designated full-chain independent controllability of semiconductors as a core mission for fostering new quality productive forces. Coupled with capacity downsizing by overseas industry giants and technological restrictions forcing the industrial chain to pursue self-reliance, domestic semiconductor substitution is no longer a gradual industrial upgrade. Instead, driven by the combined forces of policy, market and industry cycles, it represents an undisputed trillion-dollar hard technology track and a core strategic pillar for China to achieve independent high-end manufacturing and consolidate industrial security.
The sector is currently marked by concentrated release of opportunities, persistent long-term challenges, and tiered advancement of import substitution. This article dissects the near-term tangible opportunities and long-term core investment value of the domestic semiconductor substitution track from four dimensions: the logic of industrial dividends, tiered substitution opportunities, key risks and challenges, and medium-to-long-term deployment rhythm.
I. Four Core Opportunities of Domestic Substitution
(I) Market Demand Tailwind: Dual Engines of AI Computing Capacity & Mature Process Bring Vast Import Substitution Potential
1. Long-term incremental rigid demand driven by AI computing power.
Demand for AI servers, HBM, advanced packaging and power semiconductors has surged. Domestic enterprises including CXMT, Yangtze Memory, XMC and BOE are ramping up large-scale capacity expansion. The total investment in capacity expansion for domestic wafer fabrication and packaging & testing will reach nearly RMB 45 billion in 2026, and local production lines explicitly prioritize domestic equipment and materials in procurement. Overseas equipment vendors have extended delivery lead times to 12–24 months with constant price hikes. Domestic wafer foundries have proactively adopted domestic equipment to offset supply shortages. The upward price cycle for memory products, advanced packaging and power devices persists, keeping domestic manufacturers fully booked and enabling them to complete import substitution deployment ahead of schedule.
2. Extensive substitution potential in mature processes with high certainty of short-term revenue realization.
Mature processes of 28nm and above are widely adopted in consumer electronics, industrial, automotive and power management chips, constituting the core capacity of domestic wafer fabs. Currently, the localization rate of cleaning, etching and thin-film equipment for mature processes has exceeded 50% and even hit 80% in some segments. Wet electronic chemicals, polishing slurries and sputtering targets are supplied in mass volumes, delivering rapid revenue growth. The power semiconductor sector is undergoing explosive growth. Soaring demand for 800V high-voltage power supplies for AI computing clusters has filled order books of domestic IDM manufacturers, with market share continuously concentrating on local leading enterprises.
3. The world’s largest domestic market prioritizes local products for procurement.
China boasts the world’s largest semiconductor consumption market. Driven by supply chain security requirements, leading wafer fabs, packaging & testing houses and computing hardware suppliers have formulated evaluation mechanisms to favor domestic products in purchasing. Firms such as Montage Technology, CR Micro and Anji Technology receive regular due diligence visits from foreign investors, while domestic chips gain access to niche markets both at home and abroad.
(II) Long-term Strong Backing from Policies and Capital with Continuous Increased Financial Support for the Industry
1. Targeted national long-term funds to tackle upstream bottlenecks
The Phase III National IC Fund totals RMB 344 billion with a 15-year operation term. Seventy percent of its capital targets two bottleneck sectors: semiconductor equipment and core materials, in contrast to the previous two phases which focused on manufacturing and chip design. Local matching industrial funds (such as Shenzhen’s RMB 5 billion Semiconductor Fund) keep launching, offering sustained subsidies for corporate R&D and production line verification.
2. Diverse tax and procurement incentives cut corporate costs
IC preferential tax policies were upgraded in 2026, featuring long-term corporate income tax exemptions for mature-process manufacturers, higher super-deduction ratios for R&D expenses, and tariff and VAT exemptions for high-end R&D raw materials. These measures greatly ease the heavy R&D burden of this capital-intensive industry. Regional authorities have also rolled out subsidies for first-set domestic equipment and the adoption of home-grown materials.
3. Top-tier strategies anchor the long-term theme of industrial self-reliance
The 15th Five-Year Plan identifies full-chain independent controllability of semiconductors as a core task for developing new quality productive forces. The domestic market presents a landscape of "macro headwinds alongside clear structural growth themes". Capital keeps flowing into semiconductors and AI tracks. Semiconductor Equipment ETFs have exceeded RMB 15 billion in assets under management, surging more than fivefold since the start of the year, with the secondary market continuously supporting corporate capacity expansion and technological research.
(III) Window of Global Industrial Cycle: Scaled-back Operations of Overseas Giants Create a Grace Period for Domestic Development
1. Reduced capital expenditure by overseas players eases near-term competitive pressure
Weak global demand for consumer electronics has prompted Micron, Samsung and TSMC to cut mature process capacity and slash R&D spending on general equipment. They have halted all-out price competition against domestic enterprises, granting local firms a grace period for technological iteration and customer qualification verification.
2. Restructuring of global supply chains makes independent controllability a mandatory requirement
Continuous overseas export restrictions on equipment and materials have forced China to build a closed-loop domestic industrial chain. The monopolies held by Japanese and Korean memory manufacturers as well as European and American equipment suppliers are weakening. Domestic enterprises are accelerating the construction of an internal circulation system for components, complete equipment and supporting materials, with joint breakthroughs achieved by upstream and downstream players (examples include Shanghai Simgro expanding silicon wafer output and Shengjisheng developing supporting consumables).
3. Advanced packaging and Chiplet create differentiated tracks for curve overtaking
As Moore’s Law slows down, the industry focus has shifted to advanced packaging, HBM and glass substrate packaging. Compared with advanced wafer processes, this track features relatively lower technical barriers. China’s three major packaging and testing enterprises, namely JCET, TFME and Huatian Technology, are running at full capacity. Parallel breakthroughs have been made in panel-level packaging and glass substrate materials, forming new growth tracks independent of high-end EUV lithography equipment.
(IV) Tiered Breakthroughs Across Industrial Chain to Unlock Sustained Growth in Multiple Sub-sectors
1. Tiered Opportunities in the Equipment Segment
1) Mature process equipment (cleaning, etching, thermal processing): Large-scale rollout with the highest revenue certainty;
2) Metrology, ion implantation and thin-film equipment: In mass verification phase with the greatest import substitution flexibility;
3) Advanced packaging and testing equipment: High growth driven by AI computing power, with ample room for localization rate improvement.
2. Gradated Substitution in the Materials Segment
Full-scale replacement of g/i-line photoresist, polishing materials and wet chemicals; mass delivery of KrF photoresist; steady penetration of silicon wafers, electronic specialty gases and sputtering targets into 14–28nm production lines. New packaging materials such as diamond heat sinks and glass substrates have emerged as fresh investment themes.
3. Opportunities in Chip Design, IP and EDA Segments
Import substitution of computing chips, memory controllers and power analog chips is accelerating. Domestic EDA vendors including Huada Empyrean have developed full-process tools compatible with mature processes to match the demands of domestic wafer fabs. Self-developed IP cores are gradually replacing licensed overseas IP to reduce reliance on foreign chip architectures.
II. Five Core Challenges Facing Domestic Substitution
(I) Noticeable Generational Gap in Cutting-edge Technologies, with Long-standing Bottlenecks in High-end Segments
1. Cutting-edge process equipment carries the highest technical barriers
EUV lithography machines are completely unavailable to domestic manufacturers. Domestic DUV equipment for 28nm nodes lags ASML’s products by 2–3 generations with insufficient stability and mass production efficiency. The localization rate of high-end electron beam metrology and ion implanters stands below 5%, while domestic equipment coverage for advanced processes under 14nm is less than 30%.
2. Severe shortcomings in high-end material supporting supplies
ArF photoresist, high-end 12-inch ultra-thin epitaxial silicon wafers and core raw materials for ultra-high-purity electronic specialty gases are heavily reliant on Japanese and U.S. suppliers. Localization of EUV photoresist is almost non-existent. Overseas players still monopolize fine chemical monomers and high-purity powders upstream of materials. Even if finished materials enter mass production, risks persist regarding raw material supply.
3. Software and underlying ecosystems are subject to foreign control
Three U.S. giants monopolize 90% of the global EDA market. Domestic EDA tools are only compatible with mature processes and lag foreign counterparts by 5–8 years in advanced process compatibility and simulation performance. Overseas vendors dominate licensing of server X86 architectures and high-end general-purpose IP cores, posing immense challenges for building self-reliant underlying industrial ecosystems.
(II) Lengthy production line verification cycles, high barriers to client adoption and slow commercialization progress
1. Ultra-low fault tolerance and exorbitant switching costs in chip manufacturing
Replacing a single piece of equipment or material at a wafer fab requires stability verification ranging from several months to several years. Any impurity or defect may scrap an entire wafer, resulting in losses of tens of millions of RMB. Leading production lines prefer foreign products with decades of verified reliability and remain extremely conservative when adopting new domestic alternatives. Even with policy incentives, the rollout pace stays sluggish.
2. Certification barriers form enduring competitive moats
Certification for semiconductor materials and equipment generally takes 1 to 3 years. Companies must sustain heavy capital and manpower investment to support production line testing, making rapid volume ramp-up unachievable in the short term. Top overseas suppliers secure long-term customers through consistent, stable supply, leaving domestic firms to gradually penetrate secondary and tertiary production lines first.
(III) Incomplete industrial chain supporting system, with a full closed-loop supply chain yet to be established
1. Insufficient localization of core components
Domestic equipment still relies heavily on imports from Europe, the U.S. and Japan for internal core parts including RF power supplies, precision valves, vacuum assemblies and optical lenses. Component localization lags behind complete machine manufacturing. Even after mass production of finished equipment, the supply chain remains exposed to the risk of supply disruptions.
2. Inadequate upstream and downstream collaboration
Equipment suppliers, material manufacturers and wafer foundries operate as separate entities without sound joint R&D mechanisms. Material firms lack high-precision domestic testing equipment and thus cannot optimize processes with precision; equipment vendors lack process parameters tailored to domestic materials, restricting their technology iteration speed.
(IV) Persistent talent shortage and insufficient supply of interdisciplinary high-end professionals
Semiconductors are an interdisciplinary field integrating materials science, precision machinery, optics, chemical engineering and microelectronics. The training cycle for high-end talents engaged in R&D, process development and mass production lasts 8 to 10 years. Leading overseas enterprises have built up talent reserves over decades. Domestic universities have limited capacity to train relevant professionals, while the industry’s expansion pace far outstrips talent cultivation output. Rising remuneration costs for top-tier professionals restrict enterprises’ overall investment in research and development.
(V) Sustained technological blockades and market competition suppression from overseas industry giants
1. Constantly tightening geopolitical controls
The United States, Japan and the Netherlands have imposed export restrictions on semiconductor equipment, materials and components. Export licenses for advanced process equipment, high-end photoresists and high-purity raw materials are subject to stringent reviews, cutting off direct access to overseas cutting-edge technologies for domestic players. Technological catch-up can only rely on independent R&D, which extends the timeline for technological breakthroughs.
2. Overseas enterprises take defensive moves to squeeze market space
Global industry leaders consolidate their market share through price cuts, next-generation technological upgrades and long-term exclusive customer agreements. Meanwhile, they refuse to share process parameters and technical licenses with domestic firms to erect technical barriers. In the mature process segment, they adopt cutthroat price competition to erode profit margins of domestic manufacturers and limit their available R&D budgets.
III. Conclusion
1. Short term (2026–2031, key investment cycle in the coming five years)
Large-scale import substitution will be realized for mature process equipment, semiconductor materials, power chips and advanced packaging & testing, with steady earnings delivery. High-end equipment, ArF photoresist and EDA tools will stay in continuous verification and small-batch trial introduction, amid intensive technological research.
2. Medium and long term (5 to 10 years)
China will gradually fill gaps in core advanced process equipment, high-end materials and underlying EDA/IP products. However, full self-sufficiency for cutting-edge segments including EUV lithography machines and EUV photoresist will demand an even longer time frame.
3. Core logic
The most definite short-term opportunities lie in mature tracks, AI computing supporting facilities and advanced packaging. Major challenges are concentrated on cutting-edge technology gaps, lengthy verification cycles, incomplete upstream supply chains, talent shortages and overseas technology blockades. These factors determine that domestic substitution will be a long and gradual progress rather than an all-round breakthrough in the short run.
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