China’s New Chip Rule: Prove 50% Domestic Tools or No New Factory Approval

Beijing just dropped a new mandate for its semiconductor industry—and it's a hardline push for self-reliance.

The Hardware Hurdle

To get the green light for any new manufacturing capacity, chipmakers must now demonstrate that at least half of their production tools are made domestically. No proof, no approval. It's a direct move to cut dependency and force the supply chain home.

The Localization Clock is Ticking

The rule turns expansion plans into a sourcing puzzle. Companies are scrambling to audit their toolkits and find local suppliers—overnight. It's a brutal incentive system: invest in homegrown kit or watch your competitors build.

Beyond the Factory Floor

This isn't just about hardware. It's a strategic squeeze on the entire tech ecosystem, from materials to software. The goal is a closed-loop, China-controlled supply chain, immune to external pressure.

The 50% threshold is more than a number—it's a declaration. The era of easy global integration for China's chip sector is over, replaced by a calculated, state-driven sprint for sovereignty. For investors betting on a quick tech thaw, it's another reminder that geopolitics trumps spreadsheet models every time.

Chinese authorities tighten chipmaker approvals in efforts to change supply chains inward

The requirement gained speed after the United States tightened export rules in 2023. Those measures blocked sales of advanced AI chips and key semiconductor tools to China. While some foreign equipment from the U.S., Japan, South Korea, and Europe remains available, manufacturers are now choosing local suppliers even when alternatives exist. This is no longer about access. It is about compliance.

Applications that fail the sourcing test are often rejected. For advanced lines, the rules ease slightly because domestic gear does not fully cover every step. Even then, firms must show clear intent to localize over time. The policy stands as one of the strongest moves yet to cut reliance on foreign technology. It also reshapes purchasing decisions across the entire chip sector.

State-linked buyers are already responding. Public procurement data shows 421 orders for domestic lithography tools and components this year, valued at about 850 million yuan. That marks a sharp rise in demand for locally developed machines. To support this shift, Beijing continues to fund the sector through the Big Fund, which launched a third phase in 2024 with 344 billion yuan, equal to about $49 billion.

Domestic equipment makers gain ground under pressure

President Xi Jinping has framed chip independence as a “whole nation” effort. Thousands of engineers and researchers across companies and labs are involved.

Earlier this month, scientists reported work on a prototype machine capable of producing cutting-edge chips, an outcome Washington has tried to block for years.

A former employee at Naura Technology allegedly said that fabs once favored U.S. tools. “Before, domestic fabs like SMIC WOULD prefer U.S. equipment and would not really give Chinese firms a chance,” the person said. “But that changed starting with the 2023 U.S export restrictions, when Chinese fabs had no choice but to work with domestic suppliers.”

The policy is already reshaping results. In etching, a key step that removes material from silicon wafers, Naura is testing tools on a 7nm production line at SMIC, after earlier success at 14nm. One source said the mandate sped up progress.

“Naura’s etching results have been accelerated by the government requiring fabs to use at least 50% domestic equipment,” the person allegedly said.

Foreign suppliers like Lam Research and Tokyo Electron once dominated this segment. Now they are being partially replaced by Naura and Advanced Micro-Fabrication Equipment. Naura also supplies memory chipmakers with etching tools for chips exceeding 300 layers and developed electrostatic chucks to replace parts that Lam could no longer service after 2023.

Naura filed 779 patents in 2025, more than double its filings in 2020 and 2021, while AMEC filed 259. And Naura’s first-half 2025 sales ROSE 30% to 16 billion yuan, while AMEC reported a 44% jump to 5 billion yuan, according to Reuters.

Analysts now estimate China has reached 50% self-sufficiency in photoresist removal and cleaning equipment.

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