Semiconductor Manufacturing International Corp., the country's top contract chipmaker, is asking its customers -- namely chip developers who use its production services -- to help it screen, verify and adopt local suppliers of wafers, chemicals, gasses and other materials in the production processes of their chips. The move has been picking up speed since last year.
Similarly, ChangXin Memory Technologies (CXMT), China's leading maker of DRAM, has started an aggressive campaign to vet local suppliers to replace foreign ones, citing national policies.
SMIC was added to the U.S. Entity List, a trade blacklist, in late 2020 and has been exploring domestic supply alternatives to ensure continuity of production.
The latest localization drive goes beyond efforts to use more domestic chipmaking equipment, a segment that was directly hit by tighter U.S. regulations, and extends to the supply of hundreds of chemicals, materials and gasses, potentially pushing foreign suppliers out of the market.
Materials are just as critical to chipmaking as the production tools themselves. Chipmakers are generally hesitant to switch to new sources and new chemical formulas because any changes could lower the production yield, or the share of usable chips produced from a given number of wafers. Washington is hoping allies such as Japan will impose more restrictions on China's access to advanced materials.
Chip industry executives told Nikkei Asia that established chipmakers usually give new chemical and material makers two chances to submit samples for verification. But in China now, local suppliers have almost unlimited chances, because chipmakers are so keen to reduce their reliance on foreign supplies, three people briefed on the matter said.
"There are subsidies not only for these materials and chemical makers. Chipmakers who use local suppliers can also get credits," one of the sources said. "The biggest change from the U.S. constantly tightening export controls is there is a strong push to purge foreign suppliers if there are local alternatives."
Chipmakers are maintaining ties with foreign chip chemical suppliers to avoid any sudden harm to production quality, another chip industry executive said. But the strong incentives are nevertheless giving a leg up to Chinese material suppliers who previously had little chance to serve the semiconductor industry.
Wafer maker National Silicon Industry Group, for example, is a growing competitor to industry leaders ShinEtsu Chemical, Sumco, and Globalwafers.
China is also increasing its domestic sourcing of key materials like sputter targets, polishing pads, slurry and ultra-purity chemicals and gasses, all crucial elements in chip manufacturing and all previously dominated by foreign suppliers such as 3M, DuPont and Sumitomo Chemical.
Some little-known material and chemical makers have emerged as national champions.
The push is being applied first to less advanced 55-nanometer and 40-nanometer chip production processes but will eventually move into 28-nanometer and beyond, sources briefed on the matter said.
The move comes as China pushes automakers to sharply increase their use of domestic chips.
Foreign chip companies in various parts of the supply chain have already been hit by China's localization drive.
Many foreign providers of chip packaging and testing services have exited the Chinese market due to strong local competition. More than five such companies -- ASE Tech Holding, Qorvo, Powertech, Western Digital and King Yuan Electronics -- have sold majority stakes in their China operations since 2021. China outsourcing sector for chipmaking packaging and testing services is already the second largest in the world after Taiwan's.
"It's cruel that once China manages to have local solutions, it immediately edges out foreign suppliers, especially now they take supply security into account," a chip packaging executive whose company sold its China plants told Nikkei Asia.
Clark Tseng, senior director of market intelligence at SEMI, a chip industry trade body, said Chinese suppliers have been offering lower to midrange chipmaking chemicals, materials, and gasses to domestic chipmakers for years, and that some of these suppliers are even capable of serving global chipmakers in Asia. Given the latest push, he said, pressure on foreign players will likely grow.
"We're seeing a push in China to use more local chip materials whenever possible," Tseng said. "Going forward, foreign chip chemical or material makers will likely need to either deepen their partnerships with local players to maintain their market share or focus more on higher-end products for the Chinese market."
SMIC declined to comment for this story. CXMT did not respond to Nikkei Asia's request for comment.