As of January 7, 2026, the global semiconductor landscape has reached a definitive tipping point. Beijing has officially transitioned from a defensive posture against Western export controls to an aggressive, "whole-of-nation" consolidation of its domestic chip industry. In a series of massive strategic maneuvers, China has funneled tens of billions of dollars into its primary national champions, effectively merging fragmented state-backed entities into a cohesive "Silicon Fortress." This consolidation is not merely a corporate restructuring; it is the structural foundation for China’s "EUV Manhattan Project," a secretive, high-stakes endeavor to achieve total independence from Western lithography technology.
The immediate significance of these developments cannot be overstated. By unifying the balance sheets and R&D pipelines of its largest foundries, China is attempting to bypass the "chokepoints" established by the U.S. and its allies. The recent announcement of a functional indigenous Extreme Ultraviolet (EUV) lithography prototype—a feat many Western experts predicted would take a decade—suggests that the massive capital injections from the "Big Fund Phase 3" are yielding results far faster than anticipated. This shift marks the beginning of a sovereign AI compute stack, where every component, from the silicon to the software, is produced within Chinese borders.
The Technical Vanguard: Consolidation and the LDP Breakthrough
At the heart of this consolidation are two of China’s most critical players: Semiconductor Manufacturing International Corporation (SHA: 688981 / HKG: 0981), known as SMIC, and Hua Hong Semiconductor (SHA: 688347 / HKG: 1347). In late 2024 and throughout 2025, SMIC executed a 40.6 billion yuan ($5.8 billion) deal to consolidate its "SMIC North" subsidiary, streamlining the governance of its most advanced 28nm and 7nm production lines. Simultaneously, Hua Hong completed a $1.2 billion acquisition of Shanghai Huali Microelectronics, unifying the group’s specialty process technologies. These deals have eliminated internal competition for talent and resources, allowing for a concentrated push toward 5nm and 3nm nodes.
Technically, the most staggering advancement is the reported success of the "EUV Manhattan Project." While ASML (NASDAQ: ASML) has long held a monopoly on EUV technology using Laser-Produced Plasma (LPP), Chinese researchers, coordinated by Huawei and state institutes, have reportedly operationalized a prototype using Laser-Induced Discharge Plasma (LDP). This alternative method is touted as more energy-efficient and potentially easier to scale than the complex LPP systems. As of early 2026, the prototype has successfully generated 13.5nm EUV light at power levels nearing 100W, a critical threshold for commercial viability.
This technical pivot differs from previous Chinese efforts which relied on "brute-force" multi-patterning using older Deep Ultraviolet (DUV) machines. While multi-patterning allowed SMIC to produce 7nm chips for Huawei’s smartphones, the yields were historically low and costs were prohibitively high. The move to indigenous EUV, combined with advanced 2.5D and 3D packaging from firms like JCET Group (SHA: 600584), allows China to move toward "chiplet" architectures. This enables the assembly of high-performance AI accelerators by stitching together multiple smaller dies, effectively matching the performance of cutting-edge Western chips without needing a single, perfect 3nm die.
Market Repercussions: The Rise of the Sovereign AI Stack
The consolidation of SMIC and Hua Hong creates a formidable competitive environment for global tech giants. For years, NVIDIA (NASDAQ: NVDA) and other Western firms have navigated a complex web of sanctions to sell "downgraded" chips to the Chinese market. However, with the emergence of a consolidated domestic supply chain, Chinese AI labs are increasingly turning to the Huawei Ascend 950 series, manufactured on SMIC’s refined 7nm and 5nm lines. This development threatens to permanently displace Western silicon in one of the world’s largest AI markets, as Chinese firms prioritize "sovereign compute" over international compatibility.
Major AI labs and domestic startups in China, such as those behind the Qwen and DeepSeek models, are the primary beneficiaries of this consolidation. By having guaranteed access to domestic foundries that are no longer subject to foreign license revocations, these companies can scale their training clusters with a level of certainty that was missing in 2023 and 2024. Furthermore, the strategic focus of the "Big Fund Phase 3"—which launched with $47.5 billion in capital—has shifted toward High-Bandwidth Memory (HBM). ChangXin Memory (CXMT) is reportedly nearing mass production of HBM3, the vital "fuel" for AI processors, further insulating the domestic market from global supply shocks.
For Western companies, the disruption is twofold. First, the loss of Chinese revenue impacts the R&D budgets of firms like Intel (NASDAQ: INTC) and AMD (NASDAQ: AMD). Second, the "brute-force" innovation occurring in China is driving down the cost of mature-node chips (28nm and above), which are essential for automotive and IoT AI applications. As Hua Hong and SMIC flood the market with these consolidated, state-subsidized products, global competitors may find it impossible to compete on price, leading to a potential "hollowing out" of the mid-tier semiconductor market outside of the U.S. and Europe.
A New Era of Geopolitical Computing
The broader significance of China’s semiconductor consolidation lies in the formalization of the "Silicon Curtain." We are no longer looking at a globalized supply chain with minor friction; we are witnessing the birth of two entirely separate, mutually exclusive tech ecosystems. This trend mirrors the Cold War era's space race, but with the "EUV Manhattan Project" serving as the modern-day equivalent of the Apollo program. The goal is not just to make chips, but to ensure that the fundamental infrastructure of the 21st-century economy—Artificial Intelligence—is not dependent on a geopolitical rival.
This development also highlights a significant shift in AI milestones. While the 2010s were defined by breakthroughs in deep learning and transformers, the mid-2020s are being defined by the "hardware-software co-design" at a national level. China’s ability to improve 5nm yields to a commercially viable 30-40% using domestic tools is a milestone that many industry analysts thought impossible under current sanctions. It proves that "patient capital" and state-mandated consolidation can, in some cases, overcome the efficiencies of a free-market global supply chain when the goal is national survival.
However, this path is not without its concerns. The extreme secrecy surrounding the EUV project and the aggressive recruitment of foreign talent have heightened international tensions. There are also questions regarding the long-term sustainability of this "brute-force" model. While the government can subsidize yields and capital expenditures indefinitely, the lack of exposure to the global competitive market could eventually lead to stagnation in innovation once the immediate "catch-up" phase is complete. Comparisons to the Soviet Union's microelectronics efforts in the 1970s are frequent, though China’s vastly superior manufacturing base makes this a much more potent threat to Western hegemony.
The Road to 2027: What Lies Ahead
In the near term, the industry expects SMIC to double its 7nm capacity by the end of 2026, providing the silicon necessary for a massive expansion of China’s domestic cloud AI infrastructure. The "EUV Manhattan Project" is expected to move from its current prototype phase to pilot testing of "EUV-refined" 5nm chips at specialized facilities in Shenzhen and Dongguan. Experts predict that while full-scale commercial production using indigenous EUV is still several years away (likely 2028-2030), the psychological and strategic impact of a working prototype will accelerate domestic investment even further.
The next major challenge for Beijing will be the "materials chokepoint." While they have consolidated the foundries and are nearing a lithography breakthrough, China still remains vulnerable in the areas of high-end photoresists and ultra-pure chemicals. We expect the next phase of the Big Fund to focus almost exclusively on these "upstream" materials. If China can achieve the same level of consolidation in its chemical and materials science sectors as it has in its foundries, the goal of 100% AI chip self-sufficiency by 2027—once dismissed as propaganda—could become a reality.
Closing the Loop on Silicon Sovereignty
The strategic consolidation of China’s semiconductor industry under SMIC and Hua Hong, fueled by the massive capital of Big Fund Phase 3, represents a tectonic shift in the global order. By January 2026, the "EUV Manhattan Project" has moved from a theoretical ambition to a tangible prototype, signaling that the era of Western technological containment may be nearing its limits. The creation of a sovereign AI stack is no longer a distant dream for Beijing; it is a functioning reality that is already beginning to power the next generation of Chinese AI models.
This development will likely be remembered as a pivotal moment in AI history—the point where the "compute divide" became permanent. As China scales its domestic production and moves toward 5nm and 3nm nodes through innovative packaging and indigenous lithography, the global tech industry must prepare for a world of bifurcated standards and competing silicon ecosystems. In the coming months, the key metrics to watch will be the yield rates of SMIC’s 5nm lines and the progress of CXMT’s HBM3 mass production. These will be the true indicators of whether China’s "Silicon Fortress" can truly stand the test of time.
This content is intended for informational purposes only and represents analysis of current AI developments.
TokenRing AI delivers enterprise-grade solutions for multi-agent AI workflow orchestration, AI-powered development tools, and seamless remote collaboration platforms.
For more information, visit https://www.tokenring.ai/.
