According to DigiTimes, despite China's efforts to localize production of nearly all types of chips and processors and the United States' attempts to prevent Chinese entities from obtaining advanced American CPUs, GPUs, and ASICs, Chinese companies are still reluctant to switch to domestic alternatives. This applies to all types of semiconductors, from components for automotive applications and cross-domain applications to the most sophisticated processors required for artificial intelligence and high-performance computing.
There are several reasons for the reluctance to adopt Chinese-designed chips, including China's limitations in advanced chip manufacturing, the relatively small number of components produced by world-class companies in Europe, Japan or Taiwan that can offer proven and reliable alternatives, and the lack of mandatory government requirements.
The areas of artificial intelligence and high-performance computing are particularly tricky for China's chip designers and users. While U.S. sanctions restrict their access to state-of-the-art solutions like NVIDIA’s H100 or H200, domestic alternatives largely struggle to even compete with NVIDIA’s downgraded HGXH20 processors due to imperfect software. Worried about losing competitiveness, companies often choose downgraded substitute products or rely on other procurement methods such as smuggling. In addition, some Chinese cloud service providers lease overseas data centers to circumvent sanctions. In addition, with limited access to advanced manufacturing tools, it is unclear whether Chinese companies such as SMIC can produce enough artificial intelligence chips to meet China's needs.
In the automotive chip market, Chinese companies face the challenge of matching the expertise and reliability of established European and American integrated device manufacturers (IDMs) such as Bosch and NXP. The dominance of these global players and their ability to produce at scale creates huge obstacles for smaller Chinese companies.
More broadly, European and Taiwanese chip designers are further complicating the market landscape by offering technologically advanced, competitively priced chips that can be delivered reliably in volume. These substitutes make it difficult for Chinese chips to gain market favor.
Although China has made some progress in specific areas, such as display driver integrated circuits (DDIC), some orders have been diverted to domestic producers. However, the report notes that adoption remains limited and momentum is far from transformative. Despite efforts to build mature technological capabilities, which are critical for DDICs, global competitors still dominate the field with better products and production capabilities.
The report believes that the slow pace of development is unlikely to accelerate without substantial government intervention or substantial progress in domestic semiconductor technology. Chinese companies with computing performance requirements can still use the latest technology developed in the United States (although test results are less than ideal), which reduces demand for Chinese-developed AI processors. Companies in other industries are also reluctant to switch to domestic alternatives for various reasons. Therefore, it is expected that Chinese companies’ dependence on foreign chips will continue in the foreseeable future.