https://thediplomat.com/2025/11/semiconductors-chinas-industrial-policy-steamroller-in-motion/
Semiconductors: China’s Industrial Policy Steamroller in Motion
At the heart of China’s semiconductor policy is a hybrid industrial system that blends centralized strategic direction with decentralized market competition.
*Do U.S. technology transfer restrictions on semiconductors deliver tangible results in outcompeting China? Ask two semiconductor professionals, and you are likely to get two opposite answers. *
*Yes, leveraging bottlenecks on lithography and Electronic Design Automation (EDA) is likely to work, and key companies like Nvidia, TSMC, and ASML, embedded into mutually reinforcing ecosystems, will continue to innovate together faster than Chinese competitors. *
No, China’s intense state support for its semiconductor sector, its national determination, and the scale of its domestic market will ultimately enable it to catch up and overtake rivals in North America, East Asia, and Europe – as it has been doing in electric vehicles and could be on the path to achieve in biotech.
The semiconductor sector is the only one among the 10 “Made in China 2025” priority areas where the government’s targets have not been met. Analysts in the first camp see this as proof of the effectiveness of U.S. restrictions, while those in the second argue that China’s catch-up is only a matter of time. In particular, they note that Chinese firms are on the verge of dominating mature-node production, establishing cost and scale advantages that will displace competitors globally and create ripple effects.
the government deliberately fosters intense competition among firms and provincial governments to accelerate innovation and build scale. Local authorities function as venture-capital-style investors through guidance funds, while central authorities monitor outcomes and consolidate successful players into national champions.
While the significant overcapacity inherent to this approach poses serious challenges to China’s competitors, it is too often mischaracterized as a fundamental Chinese weakness. Many Chinese analysts see it differently. Overcapacity is intentional inefficiency, a strategic tool that ultimately strengthens industrial competitiveness and secures global market share. Today, redundancy is tolerated across clusters in Hefei, Wuxi, or Wuhan, but it is temporary. In the end, weaker firms are systematically weeded out, leaving globally competitive players to thrive.
That is what is occurring in China’s EV manufacturers now.
At this stage of its semiconductor ecosystem development, China seeks to replicate a hallmark of the BYD model – creating a vertically integrated ecosystem capable of supporting a vast network of specialized subcontractors, while sustaining innovation across the whole network. Achieving this requires concentrated investment through a nationwide pseudo-Integrated Device Manufacturer (IDM) model. While earlier phases encouraged decentralization, the current strategy emphasizes centralized mobilization of industrial and innovation resources, replicating the integration of design, manufacturing, and packaging under a unified strategic management logic.