To assess the impact of China’s semiconductor industrial policies on the global supply chain, DSET has released a new policy report titled “Let a Hundred Flowers Blossom: Local Competition and the Rise of Chinese Semiconductor Capacity.” The report, authored by DSET Non-Resident Fellow Ming-Yen Ho, a PhD candidate in Business and Public Policy at the University of California, Berkeley, draws on longitudinal data from Chinese semiconductor firms—including wafer output, official subsidies, and government involvement—to analyze the rapid expansion of China’s chip manufacturing capacity and its growing presence in the global market.
Following DSET’s previous publication “The Great Siege: The PRC’s Comprehensive Strategy to Dominate Foundational Chips,” this new report continues to examine China’s national strategy in semiconductors and offers actionable policy recommendations.
Across both reports, DSET highlights that China’s large-scale subsidies for foundational semiconductor production are crowding out Taiwanese firms and threatening the balance of the global supply chain. If left unaddressed, this trend may increase global reliance on China for key technologies. DSET has engaged with U.S. policy circles and think tanks to advocate for a joint response among democratic technology allies—including the U.S., EU, South Korea, and Japan—calling for coordinated supply chain agreements that incorporate joint tariffs, outbound investment restrictions, collaborative R&D, and intra-alliance capacity coordination.
Local Competition Drives China’s Semiconductor Expansion
Recent reports indicate that Chinese President Xi Jinping has openly questioned whether every local government must invest in emerging industries such as AI and EVs, highlighting concerns over industrial overcapacity. The “Let a Hundred Flowers Blossom” report addresses this issue directly.
According to Ho, China’s overcapacity is not the result of a unified central strategy, but rather the outcome of fragmented incentives in China’s political economy and competition among local governments to boost GDP. The report’s title reflects how numerous local governments have promoted semiconductor development as a symbol of regional success.
Drawing from detailed data on wafer production and subsidies, the report analyzes how China’s manufacturing expansion is affecting supply chains in Taiwan and other allied countries. It shows that while the central government sets national development targets and fosters national champions, local governments aim to build self-sufficient regional ecosystems and outcompete neighboring provinces.
Ho notes that while the government has poured unprecedented resources into the semiconductor sector, dispersed subsidies have often misallocated resources—keeping uncompetitive firms alive while productive firms remain underfunded.
Despite inefficiencies, this decentralized model retains a degree of market-driven competition. Local governments often prioritize output and market share over profitability, leading to high-profile failures. Still, efficient firms under competitive pressure continue to innovate, reduce costs, and break into global markets.
From Subsidies to Investment: A Shift Toward Market-Driven Models
Ho further observes that China’s decentralized innovation model is evolving. The government is shifting from subsidies to equity-based investments through local government-guided funds managed by professional VC firms, particularly in Shenzhen and Shanghai. These VCs are responsible for due diligence and performance, marking a move toward more market-oriented policymaking.
The report argues that for the U.S., Japan, and EU to effectively respond to China’s rise in semiconductor manufacturing and technological capacity, they must understand the decentralized structure underpinning China’s expansion—not simply attribute it to top-down state control. China’s capacity surge comes not only from national champions like SMIC and Huahong, but also from numerous locally backed manufacturers supported by municipal governments.
A New Phase: Re-Centralization of Industrial Policy
However, this fragmented growth model is not ideal for China’s central authorities. Local competition has made it difficult to concentrate national resources on globally competitive firms. In response, Beijing has begun recentralizing control—tasking Huawei with building a vertically integrated, indigenous chip supply chain composed of state-backed national champions.
The third phase of China’s National Integrated Circuit Industry Investment Fund (commonly known as the “Big Fund”) has significantly reduced local government participation, retaining only Beijing, Shanghai, and Guangdong. Additionally, China has launched a major consolidation effort to reduce the number of semiconductor equipment suppliers from over 200 to around 10.
President Xi’s remarks during a July 2025 central work meeting, as reported by People’s Daily, signal growing dissatisfaction with the decentralization model, which is seen as inefficient in mobilizing national resources. Ho concludes that China’s current challenge lies in recentralizing decision-making without undermining the flexible innovation incentives driven by local competition.
Policy Recommendations: Precision Controls and Allied Agreements
The report recommends that democratic allies respond to China’s “Hundred Flowers” industrial model with multilateral coordination. Key policy proposals include:
- Targeted Export Controls
In the short to medium term, since Chinese firms still rely heavily on imported equipment and materials for mature nodes (14–65nm), expanding export controls in these areas could meaningfully hinder capacity growth. While controls on EDA tools may restrict PRC design firms’ access to advanced foundries, their marginal effect on blacklisted companies like HiSilicon and Cambricon may be limited. - Joint Supply Chain Agreements
Although the U.S. is investigating unfair trade practices in China’s mature-node chip sector, European IDMs continue investing and forming joint ventures in China, creating gaps in allied strategy. DSET recommends that the U.S., EU, Taiwan, South Korea, and other like-minded nations establish coordinated agreements that include:- Joint tariffs and outbound investment restrictions;
- A democratic free trade framework within trusted supply chains;
- Capacity coordination and collaborative R&D on advanced and specialized nodes;
- Assurances that strategic sectors (e.g., defense, telecom, aerospace) are supplied by trusted foundries;
- Public R&D programs to support mature-node innovation in logic and analog chip differentiation.
Tariff Measures Must Not Undermine Allies
The U.S. government is currently investigating semiconductor imports under Section 232, which could lead to tariffs on products from Taiwan. DSET CEO Dr. Jeremy Chih-Cheng Chang cautions that, in light of the findings in the “Let a Hundred Flowers Blossom” report, the U.S. should prioritize strengthening semiconductor cooperation with Taiwan over imposing tariffs. Such collaboration is a far more effective approach to addressing the challenges posed by China’s semiconductor expansion.
