• China is ramping up spending on chip manufacturing equipment, surpassing the combined expenditure of the U.S., South Korea, Taiwan and Japan in the first half of the year, according to an industry report Thursday.
• Such over-investment ultimately will lead to "inefficient or under-utilized capacity in the future," creating pricing pressures to its global industry peers, SEMI's senior director Clark Tseng said.
• The world could soon be facing the same problem of "over-capacity" with such legacy chips, according to NUS senior professor Alex Capri.

China is ramping up spending on chip manufacturing equipment, surpassing the combined expenditure of the U.S., South Korea, Taiwan and Japan in the first half of the year, according to an industry report Thursday.

The outsized investment is driven by Beijing's endeavors for chip self-sufficiency as it hopes to hedge against further risks of Western restrictions that could thwart its access to the critical technology. 

In the first half of 2024, China splurged a whopping $24.73 billion on procuring chip manufacturing equipment, according to data from SEMI, a global semiconductor industry association. That's more than the $23.68 billion spent by South Korea, Taiwan, North America and Japan combined, during the same period. The U.S. accounted for most of the spending in North America.

China's binge-buying has accelerated since the U.S. introduced tighter export restrictions in October 2022. Annual spending surged from $28 billion in 2022 to $36.6 billion in 2023, according to SEMI, which projects the figure to exceed $35 billion this year.

The hoarding is likely to extend into the second half of this year, Clark Tseng, senior director at SEMI told CNBC, but he anticipates a slowdown next year to "digest the capacity."

Economies of scale or excess capacity?

Such over-investment will ultimately lead to "inefficient or underutilized capacity in the future," creating pricing pressure for industry peers outside of China, Tseng said.

China has more experience in producing older-generation chips, which are built on nodes that are at least 20 nanometers. These chips are widely used in consumer electronics, cars and home appliances.

To some extent, China is "well on its way" to being able to produce legacy chips, Alex Capri, a senior lecturer at the National University of Singapore and research fellow at Hinrich Foundation, told CNBC.

The world could soon face overcapacity in legacy chips, as already seen in other industries like electric vehicles and solar panels. Companies have found it hard to compete with Chinese firms flooding the market with cheaper products.

But "China still has a long way to go" when it comes to more advanced and powerful chips, Capri said. Advanced chips have smaller transistors, allowing more of them to be packed onto a single semiconductor and yielding more powerful processing capabilities.

Capri noted U.S. export controls effectively cut China off from leading-edge manufacturing technology, known as extreme ultraviolet tools. The restrictions have created a bottleneck that could present a severe setback for China's efforts to progress into more leading-edge chip making.

"They are trying to figure out how to build it, but it's almost impossible," Capri said.

Still, he noted the exception of Huawei's Mate 60 Pro smartphone, which was launched last year carrying a 7-nanometer chip.

While it was a breakthrough for SMIC to manufacture the 7-nm chips without the EUV machines, he said "it was less efficient, much more expensive to do so [than with cutting-edge equipment]."

China is not going away

Capri said Chinese companies could be stockpiling chipmaking equipment in a "preemptive move" against potential risks that Washington could pile further export restrictions on the sector ahead of the U.S. presidential election.

The sweeping export curbs have not dethroned China as the largest revenue source for many of the world's largest semiconductor equipment manufacturers.

Last year, the Netherlands and Japan imposed export restrictions on cutting-edge semiconductor equipment to China in a move that aligned with Washington's interests to cut China off from the critical technology.

Dutch semiconductor equipment maker ASML has seen revenue share from its sales to Chinese clients more than double from 17% in the last quarter of 2022 to 49% in the second quarter this year.

Both Tokyo Electron and Screen Holdings derived more than 40% of their total revenue from China in the June quarter and expect sales to continue expanding.

In the second quarter, equipment sales to China stood at $12.21 billion, compared with $4.52 billion to South Korea, $3.9 billion to Taiwan and $1.61 billion to Japan, according to SEMI.