Encircling the West: The PRC Gains Ground in Legacy Chips

Executive Summary:

• Beijing is on course to dominate innovation in and production of legacy semiconductor chips, which strategists see as a way to push back against U.S.-led containment in critical technologies. These chips, used everywhere from vehicles to defense, offer a scalable and resilient path for latecomers to build industrial leverage without needing frontier innovation.
• The Chinese domestic industry relies on vast state subsidies and fosters internal competition that leads to brutal price wars between firms. This ultimately allows manufacturers to undercut overseas competitors and drive them out of business, thereby capturing the global market share and reshaping supply chain dependencies.
• This strategy prioritizes market dominance over profitability, part of a broader shift from growth-centric to security-driven industrial planning.
• Chinese experts hold up Japan’s past missteps as a key lesson, and advocate remaining aligned to market demand to avoid stagnating.

In February 2025, Peking University scholar He Pengyu (何鹏宇) published an article titled “Why China Must Establish a Competitive Advantage in Traditional Chips” (中国为什么要在传统芯片上形成竞争优势) (Tencent News/Wenhua Zongheng, February 24). He argues that legacy chips should be viewed as strategic assets: technologically adaptable, economically essential, and geopolitically consequential. While not a prominent figure in the semiconductor policy community, He is among the first to make a comprehensive and analytically rigorous attempt to explain the People’s Republic of China’s (PRC) sustained and largely understated focus on foundational chip technologies. His essay fills a critical gap in a policy landscape where official strategies are rarely transparent, effectively articulating the underlying logic of Beijing’s long-term industrial maneuvering for leadership in mature-node technologies.

He’s arguments have rapidly gained traction online, resonating with analysts and observers who recognize the strategic importance of a domain long overlooked in mainstream policy debates (China News, February 25; Huxiu, April 16). While media headlines focus on the pursuit of artificial general intelligence, computing power, and advanced-node innovation, Beijing is quietly pursuing a parallel strategy. PRC strategists are pushing for dominance in areas the West deems peripheral, drawing from a Maoist principle, “using the countryside to encircle the city” (以农村包围城市). By investing heavily and coordinating state support, the PRC is turning what appears to be a technological backwater into a platform for countering U.S. chokepoints, leveraging the underestimated to challenge the overemphasized. The country aims to become the world’s largest producer of legacy chips by 2027. He’s lens—and evaluating it against empirical realities—is essential for grasping the broader contours of the PRC’s semiconductor ambitions.

At the Bleeding Edge of Legacy Chip Innovation

To He Pengyu, legacy chips (often defined as those with nodes at the 28-nanometer (nm) scale and above) are not outdated remnants of earlier industrial cycles. They constitute the majority of global semiconductor consumption. Legacy chips are the technological backbone for large-scale, stable, and security-relevant systems. He argues that the Western tendency to equate innovation exclusively with leading-edge chips obscures a broader industrial logic in which mature-node chips continue to evolve and dominate.

The misconception that legacy chips are technologically obsolete has led many outside the PRC to underestimate their innovative potential. Traditional chips are integrated into emerging industrial applications, from electric vehicles and smart grids to defense and dual-use systems such as missiles, satellites, and radar. Their deployment across such varied contexts has spurred continuous innovation in chip architecture, power efficiency, and materials science (CSIS, March 3, 2023; DSET, April 1). In recent years, the adoption of silicon carbide (SiC) and gallium nitride (GaN) in power electronics has enabled mature-node chips to meet higher thermal and performance requirements. Both materials were promoted in the 14th Five-Year Plan (NDRC, March 2021, p.12). [1]

The centrality of legacy chips is reflected in their economic value. He argues that these semiconductors account for roughly 70 percent of global chip production by volume and remain irreplaceable in automotive electronics, industrial automation, white goods, and telecommunications. The U.S. Department of Defense has previously estimated that 99.5 percent of its capabilities rely on legacy chips (Wilson Center, December 22, 2023). Demand for such chips is large-scale, recurring, and diversified, creating favorable conditions for industrial upgrading, economies of scale, and resilient market returns.

This centrality was laid bare in the supply disruptions the United States experienced during the COVID-19 pandemic. A 2022 report by the U.S. Department of Commerce revealed that the most acute disruptions occurred not in advanced chips, but in legacy semiconductors at the 40-nm node or larger—components which are still essential across industrial and consumer sectors (Commerce, January 25, 2022). While U.S. firms continued producing these chips, they could not meet domestic demand. This shortfall was evident in the automotive sector. A single electric vehicle contains over 1,700 semiconductor chips, most of them being legacy components (Automotive News, August 11, 2022). As automakers miscalculated pandemic-era demand and reduced orders, consumer electronics manufacturers absorbed the limited chip supply. By mid-2022, this misalignment had forced North American automakers to cancel the production of over 4.3 million vehicles. As a result, the United States missed out on a full percentage point of GDP growth, according to the government’s report. This underscores the importance of legacy chips to economic stability and national competitiveness, as well as the national security vulnerabilities incurred by reliance on their offshore supply.

Market trends are currently validating He Pengyu’s analysis. Over the next three to five years, PRC firms are projected to contribute nearly 50 percent of new global capacity in legacy semiconductor manufacturing. This transformation is fueled by vast state support in the form of industrial planning and focused investment initiatives, which have exceeded $150 billion since 2014, according to some estimates (Economist, March 13, 2024; BIS, December 6, 2024). In 2023, the PRC commanded a 34 percent share of this segment, trailing Taiwan’s 43 percent, while the United States lagged at just 5 percent. By 2027, projections indicate that the PRC will surge to 47 percent, overtaking Taiwan, which is expected to fall to 36 percent, and leaving the United States effectively stalled at 4 percent (TechNews, February 11).

Strategic Opportunity for Latecomers

For He Pengyu, the legacy semiconductor sector represents a strategic terrain where latecomers like the PRC can build capability, scale, and influence. Unlike the heavily monopolized and IP-saturated landscape of leading-edge semiconductors, legacy chips provide more pathways for technological advancement that do not require catching up to the global frontier on its own terms. Instead, performance benchmarks can be recalibrated to align with domestic market demands and existing industrial strengths.

Flexibility in performance criteria, whether in cost efficiency, thermal resilience, power management, or product lifecycle stability, allows PRC firms to innovate. Mature technologies can be adapted to meet the demands of high-growth sectors such as electric vehicles, the Industrial Internet of Things (IIoT), and renewable energy systems. In this view, maturity is not a constraint but a foundation for scalable innovation. Leveraging volume production and vertical integration, PRC firms can iterate rapidly and optimize performance, transforming mature nodes into competitive platforms (36Kr, January 9; DSET, April 1).

PRC consolidation in the legacy chip sector also leads to spillover effects, stimulating production across the rest of the semiconductor stack. Local suppliers of silicon wafers, photomasks, and electronic design automation (EDA) tools have secured footholds that previously eluded them. According to He, this self-reinforcement cycle, in which legacy chip demand drives upstream innovation, has become a hallmark of the PRC’s industrial strategy. Unlike traditional models of technological catch-up through frontier imitation, this approach aims to build sovereignty from the industrial middle outward.

He sees much to praise in the PRC’s efforts, though he also offers a warning, using Japan’s earlier experience as a historical analogue. In the 1970s and 1980s, Japan’s semiconductor industry grew by aligning with the demands of the consumer electronics boom. Japanese firms leveraged cost-effective CMOS technology and built manufacturing capabilities to create chips for calculators, gaming devices, and early personal computers (PCs). [2] Although they did not initially lead in design, they eventually surpassed U.S. producers in volume and reliability. He frames this not as an isolated episode but as a replicable developmental pathway—provided the PRC can avoid the pitfalls that led Japan’s trajectory ultimately to falter. By the 1990s, Japanese firms had overcommitted to technological advancement for its own sake, losing sight of evolving market needs. Too much focus on frontier technology allowed competitors to undercut their existing technologies, eroding their market share. He advises that the PRC’s domestic industry should stay closely aligned with market demand while steadily advancing production capabilities to avoid repeating missteps.

Price Warfare: Legacy Chips as an Economic Weapon

The importance of legacy chips has become more pronounced in the context of U.S.-PRC technology rivalry. Early rounds of U.S. export controls and entity listings primarily targeted advanced technologies such as extreme ultraviolet (EUV) lithography tools, high-end graphical processing units (GPUs), and AI accelerators. This fostered the perception that mature nodes were of secondary concern. An effect of this oversight was the rise of a relatively uncontested space in which PRC firms could scale rapidly.

PRC policymakers increasingly view traditional chips as both a defensive buffer and a strategic countermeasure to Western containment. Their reasoning rests on three arguments. First, legacy chips are indispensable to economic stability and technological resilience, underpinning industries like automotive and energy. Second, their ubiquity makes them inherently resistant to sanctions and export controls. Third, Beijing can gain leverage over the United States by undercutting Western competitors and dominating this market segment. This latter approach sees domestic firms engage in a brutally competitive “price war” (价格战)—a phenomenon seen across different sectors in the last few years and that is now evident in mature-node chip manufacturing (Baijiahao, December 18, 2024).

A price war in the PRC domestic industry has resulted in a rapidly expanding domestic ecosystem capable of sustaining production, even amid minimal profitability and structurally unsustainable business models. This has been seen in other sectors, too. A typical example comes from Lei Jun (雷军), the CEO of tech giant Xiaomi, who sees price wars as an inevitable part of market competition. He emphasized that companies like Xiaomi are never afraid of engaging in price wars and leverage their low costs to stay competitive (China News, April 29, 2024). The finances of Hua Hong Semiconductor (华虹半导体) provide a good example of how this approach can play out within the chip sector. The company’s 2025 first-quarter revenue grew over 18 percent year-on-year to renminbi (RMB) 3.9 billion ($540 million), even as its net profits plummeted nearly 90 percent (JRJ, May 12). In the PRC’s strategic calculus, financial sustainability often takes a backseat to broader industrial and geopolitical objectives. Profitability is secondary to market dominance as state-backed campaigns prioritize long-term displacement of Western competitors through prolonged, coordinated economic pressure.

For years, the National Integrated Circuit Industry Investment Fund—also known as the “Big Fund” (大基金)—has injected capital into key players like the Semiconductor Manufacturing International Corporation (SMIC, 中芯国际) and Hua Hong Semiconductor to accelerate localized production (Yiling Press, February 27; DSET, April 1). This scale advantage is particularly evident in segments such as power management chips, microcontrollers, and display driver chips, where PRC firms consistently price their products 20–40 percent lower than their Western counterparts. For example, Guangzhou Nansha Wafer Semiconductor (广州南砂晶圆半导体) has slashed the price of six-inch silicon carbide (SiC) wafers from the international benchmark of $1,500 to just $500. This price war has had dramatic consequences: U.S.-based SiC leader Wolfspeed, unable to compete, has reported consecutive losses, seen its share price collapse by 96 percent over three years, and has been forced to sell one of its fabrication plants (Nikkei Asia, February 25; (DSET, April 1). SMIC, meanwhile, has captured market share in consumer electronics and automotive chips by offering 28-nm products at just 60 percent of the prevailing market price, pushing competitors like Samsung and Micron to scale back production in an effort to stabilize the market (Yiling Press, February 27).

Firms in other countries have not been able to mount an effective response. As most major global foundries are preoccupied with the “arms race” for advanced nodes, they have underinvested in the mature segment, according to Bosch China President Xu Daquan (徐大全). As a result, renewed shortages for mature-node processors could arise soon. Xu argues that this presents an opportunity for domestic manufacturers in the PRC to fill the gap if they move decisively (36Kr, January 9).

Conclusion

He Pengyu’s analysis, echoed across PRC academic and policy circles, implies that achieving dominance in legacy chip production is a necessary—though not sufficient—step toward achieving broader technological sovereignty. This strategy is predicated on PRC firms entrenching themselves as indispensable players in global markets. Accompanying this push is a recognition that strategic reciprocity may be needed, including selective market denial and policy levers to counter U.S.-led technological containment.

Potential pitfalls nevertheless persist in such a strategy. The shadow of Japan’s trajectory haunts He’s argument, reflecting an awareness that technological leadership cannot rest on scale alone. Japan’s decline, rooted in its detachment from market needs and an overcommitment to frontier technologies, stands as a cautionary tale. The PRC, he warns, must maintain a disciplined focus on market demand, manufacturing resilience, and strategic flexibility.

The PRC’s approach to legacy chips is conceived as a durable and scalable platform for advancing industrial maturity, not an endpoint. It allows Beijing to buy time, accumulate expertise, and gradually shift the locus of competition. For now, the priority is consolidating a sector where geopolitical scrutiny is lower and global dependence remains high. If sustained through policy support and market-responsive execution, legacy chips may well prove to be the foundation, not just of production capacity, but of a future bid for global semiconductor leadership.

Notes

[1] The full title of the document is “The Outline of the 14th Five-Year Plan for Economic and Social Development (2021–2025) and Long-Range Objectives through the Year 2035 of the People’s Republic of China” (中华人民共和国国民经济和社会发展第十四个五年规划和2035年远景目标纲要).

[2] CMOS stands for “Complementary Metal-Oxide-Semiconductor” and refers to a dominant technology used to manufacture chips.