China Quietly Ties New Chip Fabs to 50% Domestic Equipment, Pressuring Global Toolmakers

Chinese chipmakers planning new factories or expansions are being confronted with a new, unwritten condition from officials: If at least half of the machines that will etch, deposit, clean and inspect their wafers are not made in China, the project may not go ahead.

In recent months, authorities have quietly begun telling semiconductor manufacturers that any new production capacity inside the country must use at least 50% domestically supplied equipment, people familiar with the process have said. The requirement is not written into law or published regulations, but is being enforced through China’s opaque project approval system that controls access to land, tax breaks and state-backed funding.

The move, first reported by Reuters on Dec. 30, marks one of Beijing’s most concrete steps yet to cut reliance on foreign chipmaking tools and build a parallel supply chain, even as the United States and its allies tighten export controls on advanced technology to China. Because China has been the world’s largest buyer of semiconductor equipment since 2020, the shift threatens billions of dollars in future sales for U.S., European and Japanese toolmakers and accelerates the emergence of two rival technology ecosystems.

A quiet metric with real consequences

Officials are applying the 50% threshold to applications for new fabs and capacity expansions across the country, according to multiple industry and government-adjacent sources cited in the Reuters report and subsequent coverage. The bar is measured by the value of tools listed in procurement tenders that chipmakers must submit with their project plans.

“Authorities prefer if it is much higher than 50%,” one source involved in fab planning said in comments reported by Reuters. “Eventually they are aiming for the plants to use 100% domestic equipment.”

Projects that fall short of the 50% mark are typically rejected or sent back for revision, people familiar with recent approvals say, unless there are clear gaps where no usable Chinese alternative exists. Officials have shown more flexibility for cutting-edge production lines where domestic tools are still immature, particularly in advanced lithography. By contrast, the rule is said to be enforced more strictly for mature nodes, such as 28-nanometer and above, where local suppliers have made bigger inroads.

Although the policy has not been formally announced, it is backed by powerful financial incentives. Large chip projects in China are rarely entirely private; they usually rely on discounted land from local governments, tax concessions, cheap loans from state banks and capital from national and provincial semiconductor funds. By embedding the equipment requirement in approval procedures, Beijing has effectively linked compliance to those benefits.

Beijing’s self-reliance push

The effort dovetails with President Xi Jinping’s long-running call for “self-reliance and self-strengthening in science and technology” and a “whole nation” push to overcome foreign “strangleholds” in critical sectors.

A new, third phase of the National Integrated Circuit Industry Investment Fund—widely known as the Big Fund—was set up in May 2024 with registered capital of 344 billion yuan (about $47.5 billion) and an explicit focus on equipment and materials as well as chip production.

Chinese officials and analysts have for several years circulated targets to reach roughly 50% self-sufficiency in semiconductor equipment by the middle of the decade, up from low double digits earlier. The unwritten 50% rule now gives local cadres and project gatekeepers a simple metric to measure progress.

Domestic toolmakers stand to gain

The most visible beneficiaries are China’s emerging equipment champions.

Naura Technology Group, based in Beijing, has climbed into the ranks of the world’s top 10 chip tool vendors by revenue. The company, which makes etch, deposition, cleaning and thermal treatment tools, has reported rapid growth in recent years. Its revenue for 2024 was projected at $3.8 billion to $4.4 billion, up as much as 44% from the previous year, and it has disclosed hundreds of new patent filings annually.

Naura’s systems are already deployed in logic and memory fabs across China. Industry sources say Semiconductor Manufacturing International Corp. (SMIC), the country’s largest foundry, uses domestic etch tools on some 14-nanometer lines and has been testing Naura equipment on an early 7-nanometer production line. Memory producer Yangtze Memory Technologies Co. (YMTC) is also reported to use Chinese etch tools in high-layer NAND production.

Another key winner is Shanghai-based Advanced Micro-Fabrication Equipment Inc. (AMEC), which specializes in etch equipment. The company has reported growth rates above 40% in revenue and strong demand from local chipmakers. Domestic suppliers are also gaining share in cleaning tools, photoresist removal systems and some deposition equipment, where industry estimates now put localization at around 50% in China.

Foreign suppliers face a “double squeeze”

At the same time, the new mandate puts pressure on foreign firms that have dominated the sector for decades.

China has been the largest market for U.S. tool giant Applied Materials Inc., accounting for roughly 30% to 37% of its revenue in 2024 and 2025. Lam Research Corp., another major U.S. supplier focused on etch and deposition, has in some quarters derived about 35% to 40% of sales from China. Dutch company ASML Holding NV, the only producer of extreme ultraviolet (EUV) lithography machines, said China accounted for about 36% of its total sales in 2024, though exports of its most advanced tools are restricted by the Dutch government.

Analysts estimate that more than $18 billion a year in revenue for Applied Materials, Lam Research and inspection specialist KLA Corp. is now at medium-term risk as Chinese fabs are steered toward domestic tools. That comes on top of U.S. export controls that already limit what those firms can ship into the country.

Since October 2022, the U.S. Commerce Department’s Bureau of Industry and Security has rolled out several rounds of rules curbing exports of advanced AI chips and certain chipmaking equipment to China. A major update in October 2023 tightened parameters, expanded the scope of covered tools and added foreign direct product provisions that can subject some foreign-made equipment to U.S. licensing if it incorporates American technology.

Washington has also pressed allies to enact parallel measures. The Netherlands has restricted ASML’s exports of EUV and some high-end deep ultraviolet (DUV) lithography systems to China, while Japan has implemented controls on a range of advanced semiconductor tools.

Most recently, the United States granted one-year approvals for 2026 to Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co. and SK Hynix Inc. to keep importing U.S.-origin equipment to their factories in China, but primarily for maintenance rather than significant capacity expansion.

The result is a double squeeze for foreign toolmakers: home-country governments are narrowing what they can sell, while Beijing is narrowing what local customers are allowed to buy for new projects.

Exemptions now, localization over time

For now, China still relies heavily on foreign suppliers in some of the most complex categories, especially advanced lithography, high-precision metrology and some ion implantation tools. A December 2025 investigation reported that a state-backed team in Shenzhen had assembled a prototype EUV system capable of generating extreme ultraviolet light, with an internal target of producing chips with domestic EUV lithography around the end of the decade, though experts caution the timeline is uncertain.

Chinese officials are therefore granting exemptions to the 50% rule where no competitive local technology exists, industry sources say. Fabs pursuing more advanced nodes are expected to rely on foreign lithography and some inspection tools, but are being encouraged to increase domestic content in other steps to keep overall local share above the threshold.

At older nodes, which are widely used in automotive microcontrollers, power management chips and industrial electronics, local officials reportedly insist on far higher levels of Chinese content, taking advantage of the fact that domestic tools are more mature for these processes. Over time, that could result in most of China’s large installed base of mature-node capacity running predominantly on Chinese-made equipment.

Trade and investment implications

The policy raises questions under international trade rules, although any challenge would likely be slow and difficult given the absence of a publicly disclosed law. The World Trade Organization’s agreements include transparency requirements and generally discourage local content mandates, but enforcement relies on member complaints and formal dispute procedures.

The approach also reflects how industrial policy is commonly implemented in China: through internal guidance, cadre performance assessments and administrative discretion, rather than through formal statutes alone. That gives Beijing flexibility to adjust thresholds over time or make quiet exceptions, but can leave companies with limited visibility into how rules will be applied.

For global chipmakers weighing investments in China, the new environment adds another layer of complexity. Any new fab or expansion in the country must now navigate both U.S.-led export controls and China’s localization push, while rival hubs in the United States, Europe, Japan, South Korea and Southeast Asia offer generous subsidies but often higher operating costs.

For Beijing, the calculation appears clear. Each new piece of capacity built with a majority of Chinese tools reduces dependence on foreign suppliers and provides guaranteed demand for its own companies, even if foreign systems would perform better in some cases. For Western governments, the long-term risk is that as their own firms lose share in the world’s largest equipment market, political support for maintaining restrictive export regimes could erode.

The next decisive test will likely come not in a courtroom or at a summit table, but on the factory floor. As new production lines in China ramp over the next few years, the mix of logos on the tools surrounding each wafer lot will show how far Beijing’s quiet 50% mandate has gone in reshaping the foundations of the global chip industry.