Why China's Semiconductor Industry is Confidently Pushing Forward Without Nvidia Chips

An in-depth analysis of China's strategic response to US semiconductor sanctions and its unexpected path to innovation.

The Memory Semiconductor Challenge

The global memory semiconductor market, particularly DRAM, has maintained a stable tripartite structure dominated by Samsung, SK Hynix, and Micron. However, China's CXMT has emerged as a formidable fourth player, rapidly narrowing the market share gap to within 2-3% of Micron.

While CXMT still lags behind technologically by 2-3 generations compared to Micron and 3-4 generations behind Korean leaders, its strategic importance to China's self-sufficiency goals has made it a "national champion" enterprise. The company's progress in HBM production illustrates this determination:

• Plans to mass produce HBM2 in the second half of 2024
• HBM3 production scheduled for 2025
• HBM3e production targeted for first half of 2027

The Military-Specification Imperative

A critical factor in China's semiconductor strategy is the military's specific requirements. The People's Liberation Army requires military-specification (mil-spec) memory for its servers, creating a guaranteed market for domestic producers. This mirrors the United States' approach of supporting Intel through Defense Department contracts to maintain mil-spec chip capabilities.

CXMT has become indispensable to China's defense infrastructure, as alternative domestic memory suppliers cannot meet the military's requirements. This strategic importance ensures continued government support, even if the company might not be commercially viable otherwise.

The Foundry Revolution

While memory semiconductors get significant attention, China's most substantial progress might be occurring in the foundry sector. The global foundry market ranking has seen dramatic changes:

Chinese foundries have rapidly ascended the rankings, with SMIC reaching third place and Huahong Group entering the top six. This progress is particularly notable in legacy and mid-tier processes (10nm and above), which remain crucial for communication chips, power semiconductors, industrial applications, automotive MCUs, IoT sensors, and image sensors.

The Balloon Effect: How Sanctions Backfired

US restrictions on advanced semiconductor equipment created an unexpected "balloon effect" – instead of stifling China's industry, pressure found release in alternative directions. Unable to pursue cutting-edge processes, Chinese foundries redirected massive investment into legacy and mid-tier chip production.

The government's triple subsidy system accelerated this trend:

1. Subsidies to foundries for construction
2. Subsidies to encourage using domestic equipment
3. Subsidies to companies purchasing the resulting chips

This created a thriving ecosystem where domestic equipment manufacturers like Naura and AMEC gained valuable testing grounds and iteration opportunities that would have been unavailable without restrictions.

The DeepSeek Breakthrough: Software Innovation

The most striking example of China's innovative response to restrictions comes from DeepSeek (深度求索). Facing limitations on obtaining high-end Nvidia GPUs, the company achieved remarkable performance with downgraded chips through software optimization.

DeepSeek's breakthrough involved three key innovations:

• Precision Reduction: Moving from 32/64-bit to 4/8-bit precision for intermediate calculations, dramatically reducing memory requirements
• Error Management
• Memory Optimization: Developing dual-pipe technology to maximize input/output bandwidth despite limitations