China has emerged as the world’s largest spender on chipmaking equipment, pouring an unprecedented $25 billion into the sector in just the first half of 2024. This staggering figure surpasses the combined expenditures of South Korea, Taiwan, and the United States, underscoring China’s determination to localize chip production and mitigate its reliance on foreign technology amid escalating concerns over potential Western trade restrictions.

A $50 Billion Push to the Top

China’s monumental investment reflects its strategic vision for the future of the semiconductor industry. The country is on track to spend a total of $50 billion by the end of 2024, a level of spending that reveals the confidence of Chinese chipmakers in the market’s future demand and the health of the global semiconductor industry. This surge is fueled by a need to ensure a steady supply of chips critical to a myriad of industries, from consumer electronics to automotive manufacturing.

Over a dozen new semiconductor fabrication plants (fabs) are expected to come online in China between 2024 and 2025, further solidifying its lead in chip production capacity. This boom is not limited to industry giants like Semiconductor Manufacturing International Corp. (SMIC) and Hua Hong Semiconductor. Smaller and mid-sized players are also ramping up their investments, ensuring that China maintains its position as the world’s largest market for chip manufacturing equipment.

Defying Global Trends

In stark contrast to the rest of the world, China is the only major market to have increased its spending on fab tools compared to the previous year. While countries like Taiwan, South Korea, and the United States have scaled back their investments amid a global economic slowdown, China has continued to push forward, undeterred by economic headwinds.

This surge in spending has had a profound impact on the global semiconductor supply chain. Major chipmaking equipment manufacturers, including U.S. companies Applied Materials, Lam Research, and KLA, as well as Japan’s Tokyo Electron and the Netherlands’ ASML, have all reported significant revenue increases from their Chinese clients. For instance, nearly half of ASML’s revenue now comes from China, a testament to the country’s growing influence in the semiconductor industry.

The Industry’s Capital Intensity

China’s aggressive investments have driven the semiconductor industry’s capital intensity—measured by the ratio of capital expenditures to sales—above 15% per year for four consecutive years since 2021. This metric is crucial for understanding the industry’s supply-demand balance and the sustainability of its growth trajectory.

Despite the challenges, the outlook for the semiconductor industry remains robust, driven primarily by rising demand for memory and AI-related chips. While sectors like automotive and industrial chips have experienced moderate growth, the overall industry continues to expand, driven by technological advancements and increasing digitalization.

Looking Ahead

As China continues to flex its financial muscle in the semiconductor sector, global spending on chipmaking equipment is expected to rise, particularly in regions like Southeast Asia, the Americas, Europe, and Japan. These areas are ramping up their chipmaking capacities to compete with China’s rapid expansion.

While China’s spending spree is expected to normalize over the next two years, its impact on the global semiconductor landscape is undeniable. The country’s investments are reshaping the industry, setting new benchmarks for capital intensity, and challenging other nations to keep pace.

For more details, you can read the full article on Tom’s Hardware.