China continues to pour billions into semiconductors, with potential implications for chipmakers.

In the first half of 2024, the country invested $25 billion in chipmaking equipment, according to new data from SEMI, a global semiconductor industry association.

The figure is higher than the combined spending of South Korea, Taiwan and the U.S., which are among the leading world suppliers of chips and manufacturing equipment.

China has been the only country in the group to increase spending year-over-year.

Increased investment by the Asian giant in its domestic manufacturing capabilities could eat away at sales for top chip makers like NVIDIA Corp NVDA and supply chain manufacturers like ASML Holding NV ASML.

China Goes All-in On Domestic Production

The Chinese government has been investing heavily into developing the technology needed to gain independence from the global supply chain and reach advanced manufacturing levels.

Recent sanctions by the U.S. and other countries have cut off China from accessing integral technology needed to produce high-performance chips.

Sanctions have also included manufacturing equipment. Last week, the newly-elected Dutch prime minister was expected to block Chinese companies from receiving maintenance on chipmaking machines made by ASML.

The Netherlands-based company has already been banned from selling its most advanced machines to Chinese companies, following pressure from the U.S. on European and Asian manufacturers.

Earlier this week, an analysis found that China's Semiconductor Manufacturing International Corp. is only three years away from producing the most advanced chips for smartphones, currently made by Taiwan Semiconductor Mfg. Co. Ltd. TSM.

The Chinese company can produce chips with similar performance levels to those made by Taiwan Semiconductor in 2021. The news took Taiwan Semiconductor shares down over 5% on Tuesday.

China's $25 billion spending on chipmaking tools puts it on track to another record year, Nikkei Asia reported.

The country is also the biggest investor building semiconductor factories or "fabs."

SEMI is expecting investment into semiconductor manufacturing to rise globally as countries broaden efforts to localize a larger portion of the supply chain. 

Access to high-end semiconductors is now seen as key for guaranteeing national security interests and maintaining military and technological supremacy.

Efforts to secure semiconductor supply chains are reaching new levels. On Tuesday, Taiwan announced an initiative to tighten its access to neon gas, which is used in chip manufacturing.

“We are seeing China continue to buy all the equipment they can for their new mature-node chipmaking facilities,” said Clark Tseng, SEMI’s senior director of market intelligence. “Concerns over potential further [export control] restrictions also pushed them to pull in and secure more equipment they could buy in advance.”

The investments go beyond the country's top chip companies. There are at least more than 10 tier-two chipmakers that are also "aggressively buying new tools," said Tseng.

This is taking China to top other countries in spending growth as well. While the U.S., Taiwan and South Korea have slowed their spending on chipmaking tools in the first half of the year when compared to the same period of 2023, China continues to beat its own records.

The Chinese state is also way ahead of the U.S. in terms of public investment and subsidies for the sector, with investments several times the funding given the Biden administration so far.

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Is China Slipping Away From Chipmakers' Hands?

The global trend to strengthen domestic chip production could hurt companies that rely too much on China sales.

The country continues to be a major buyer for semiconductor companies, in spite of sanctions placed in recent years. For ASML, it has represented 49% of sales in the last two quarters. 

China continues to be a major market for Nvidia, despite restrictions that don't allow the company to export its top-of-the-line H100 chips there.

China sales grew for Nvidia during the second quarter to $3.7 billion, up 33.8% on the year and 47.2% above the previous quarter, Nikkei reports.

That's roughly 12% of Nvidia’s total sales for the quarter.

In 2023, China represented 27% of revenue for Intel Corp INTC and 15% for Advanced Micro Devices, Inc. AMD, according to CNBC.

Marvell Technology Inc MRVL remains the U.S. chip company with the highest China exposure, at 45% of revenue, according to a recent Zachs report.

For Micron Technology Inc MU, it's about 10%.

ETF action: VanEck Semiconductor ETF SMH, the largest semiconductor ETF by total assets, took a dive on Tuesday, and is down almost 7%. The same goes for iShares Semiconductor ETF SOXX.

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