The Chip War: How China’s Focus on Legacy Chips Could Undermine US Dominance

In the ongoing geopolitical and economic rivalry between the US and China, semiconductors have emerged as the battlefield of choice. While US export restrictions have successfully slowed China’s progress in cutting-edge chip technology, Beijing’s pivot to legacy chips presents a long-term challenge that could reshape global supply chains and industrial dynamics.

China’s Strategic Move in the Chip Ecosystem

Legacy chips, often overshadowed by advanced semiconductors, are critical to industries ranging from automotive manufacturing to consumer electronics. Their importance was starkly highlighted during the pandemic-induced supply chain disruptions, which caused delays in car production and a global scramble for these mature nodes.

China’s aggressive investment in legacy chip production is striking. According to Morgan Stanley, the nation spent $41 billion on wafer fabrication equipment in 2024 — representing 40% of the global total. This spending reflects not just stockpiling in response to tightening US restrictions but also deliberate capacity-building by Chinese firms such as Semiconductor Manufacturing International Corporation (SMIC) and Hua Hong Semiconductor. SMIC’s capital expenditure surged to $7.5 billion in 2023, a threefold increase compared to pre-pandemic levels.

This strategy mirrors China’s success in other industrial sectors, such as solar panels, where state-backed initiatives, competitive pricing, and long-term planning have cemented the country’s dominance.

The Global Market Share Shift

Chinese foundries are steadily increasing their share in mature chip nodes, climbing from 14% in 2017 to 18% in 2023, according to Bernstein. Domestic demand has played a significant role in this growth, with Chinese customers sourcing 53% of their mature chip supply from local manufacturers in 2023, up from 48% in 2017.

This shift is likely to accelerate as geopolitical tensions and US restrictions drive Chinese companies to seek homegrown alternatives. The US “small yard, high fence” strategy, aimed at safeguarding advanced chip technologies, may inadvertently encourage the proliferation of Chinese-made legacy chips.

Implications for Global Players

The rise of China’s legacy chip industry poses risks to US firms like Texas Instruments and GlobalFoundries, which compete in this segment. With Chinese manufacturers benefiting from economies of scale and state support, American companies could face pressure on margins and market share.

Moreover, the expansion of Chinese legacy chip production may create vulnerabilities in the global semiconductor supply chain. While advanced chips drive innovation in AI and high-performance computing, the ubiquitous legacy chip powers everyday devices and vehicles, making their supply equally critical.

MY ANALYSIS

China’s focus on legacy chips underscores its ability to exploit less visible but strategically vital segments of the market. While the US remains dominant in advanced semiconductor technologies, this imbalance is not assured to last indefinitely. A diversified strategy — balancing restrictions with competitive support for domestic producers — may be necessary to maintain a resilient supply chain.

I believe the key takeaway here is that legacy chips are not merely a secondary battlefield—they are foundational to global industrial stability. Washington and its allies must recognise the long-term implications of ceding dominance in this space.

China’s approach also illustrates a broader lesson in industrial strategy: patience and state-backed investment can yield significant dividends over time. For investment professionals, this presents an opportunity to monitor companies in the semiconductor value chain that are well-positioned to leverage these shifts, particularly in allied markets such as Japan and Europe, which could act as counterbalances to China’s growing clout.

In the chip war, as in all economic rivalries, the balance of power may hinge on the ability to anticipate and adapt to these evolving dynamics. For investors and policymakers alike, staying ahead of this curve is paramount.