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Text | Bandai Jun
Five Microchip Giants Contend for a Single Production Line
NextFin News -- In the spring of 2026, the chief executive of a Shenzhen-based artificial intelligence chip startup relocated his temporary office to a budget hotel directly adjacent to SMIC’s Southern Semiconductor fabrication facility. His firm had successfully validated a new inference processor designed to compete directly with tier-one domestic alternatives, completing full software stack optimization. However, the startup's scheduled tape-out window was repeatedly deferred from the first quarter to the second, before ultimately being placed on indefinite hold. Confronted by investors demanding commercialization timelines, the executive was left without answers. The viability of his business model rested entirely on securing allocation from a single production line.
The broader marketplace remains focused on whether domestic architectures can successfully replace international benchmarks, yet a more critical structural vulnerability is overlooked: the severe capacity constraint governing advanced domestic manufacturing. SMIC’s N+2 process, an equivalent to 7-nanometer technology, represents the nation’s only operational infrastructure capable of mass-producing advanced AI processors. By the end of 2026, target monthly output for this node is projected at 70,000 wafers, translating to an annual yield of approximately 2.6 million AI chips.
This finite output must satisfy a massive pool of competing domestic entities, including Huawei, Cambricon Technologies, Hygon Information Technology, Horizon Robotics, Biren Technology, Moore Threads, and Alibaba Group’s T-Head. Market data for 2026 indicates total domestic demand has reached approximately 4.2 million units, leaving a deficit of 1.6 million processors. With alternative international foundries completely inaccessible due to tightening export controls and domestic mature-node capacity still scaling, the operational survival of the entire domestic AI sector hinges on this solitary manufacturing line.
Accelerating the expansion of advanced domestic semiconductor capacity faces severe physical, financial, and technical constraints. Foundry operators are restricted by three structural barriers that prevent rapid output growth. The first barrier involves advanced lithography equipment limitations; absent Extreme Ultraviolet (EUV) systems, production relies on complex Deep Ultraviolet (DUV) multi-patterning techniques, which multiplies manufacturing duration by two to three times compared to international leading-edge foundries. The second barrier is a steep cost differential, with advanced per-wafer manufacturing costs running 40% to 50% higher than historical international industry standards despite the foundry's comparatively limited annual revenue. The third barrier centers on yield rate maturity, as baseline yield rates only recently crossed the 50% economic break-even threshold, making rapid expansion an unsustainable financial risk until stability improves.
During a quarterly earnings call, SMIC Co-CEO Zhao Haijun acknowledged that capacity displacement effects within the semiconductor ecosystem are intensifying. Zhao noted that a structural siphon effect has emerged, with machine learning architectures aggressively absorbing the foundry’s premium advanced capacity. For fabless design firms, this implies that total available output is unlikely to expand near-term. Constructing an equivalent advanced fabrication line—spanning tool procurement, process qualification, and yield ramping—requires an estimated three to five years, locking in the current supply deficit for the foreseeable future.
The Allocation Matrix: Huawei Claims 43% Amid Fierce Microchip Rivalry
Under conditions where demand outstrips supply by 40%, the distribution of foundry capacity ceases to be a purely commercial transaction. Instead, allocation is dictated by a rigid hierarchy based on three distinct operational parameters: national strategic alignment, state-backed equity involvement, and regional government investment quotas.
"The distribution of domestic advanced capacity follows a non-market logic where strategic alignment and sovereign supply chain security take precedence over standard commercial terms."
Huawei Technologies occupies the center of this allocation ecosystem, securing an estimated 43% of advanced N+2 capacity via a locked five-year master supply agreement. This positioning reflects more than standard customer leverage; over the past three years, engineers from Huawei’s HiSilicon division have been embedded within the foundry's production facilities, contributing diagnostic and testing data that drove over 60% of the foundry’s advanced process yield improvements. This integrated operational relationship has tied the two entities together into a shared supply chain destiny.
Cambricon Technologies holds the second-largest allocation position, commanding approximately 9% to 11% of the premier N+2 node, while securing an additional 30,000 wafers per month of alternative advanced capacity at its Beijing-based joint-venture facilities. This allocation is heavily supported by regional state-owned capital blocks within the foundry's corporate governance structure, enabling Cambricon to maintain an order book valued at over 8 billion yuan.
Beyond these dominant players, remaining domestic chip designers face severe exclusion. Hygon Information Technology retains a modest allocation due to its role in national enterprise computing infrastructure, while Alibaba’s T-Head receives roughly 5% to 8% of residual capacity after transferring designs back from overseas foundries. Pioneering graphics processing unit (GPU) startups, including Biren Technology and Moore Threads, sit at the absolute margins of the allocation framework, struggling to secure consistent wafer starts despite possessing competitive architectural designs.
Structural Crowding: Thirteen Designers Struggle for Residual Silicon
The structural supply bottleneck has forced downstream buyers to alter their procurement behaviors. For example, internet conglomerate ByteDance allocated a 45-billion-yuan domestic hardware procurement budget, dividing 20 billion yuan to Huawei's Ascend ecosystem and 25 billion yuan to Cambricon, while simultaneously qualifying alternative secondary suppliers. This flat spending distribution among primary vendors signals to the market that top-tier buyers are diversifying their options due to capacity constraints, rather than boosting single-source volume.
In response to the capacity crunch, processing firms are pursuing defensive corporate strategies. Baidu’s AI chip spin-off, Kunlun Core, initiated an initial public offering (IPO) on the Hong Kong Stock Exchange targeting a valuation of 50 billion dollars. To insulate itself from market volatility, Kunlun Core inserted strict conditional clauses requiring IPO pre-voters and institutional investors to guarantee subsequent hardware procurement volumes valued at three to seven times their investment allocations. This aggressive customer-lock-in mechanism far exceeds the technology industry’s standard 50% to 100% purchase commitment threshold, effectively screening out passive financial investors in favor of guaranteed downstream buyers.
Concurrently, Kunlun Core is migrating its core production workloads away from international foundries such as Samsung Electronics to domestic lines to comply with tightening regulatory frameworks. This transition introduces considerable operational risk if its high valuation cannot be sustained by guaranteed domestic wafer allocations.
For tier-two hardware designers like Biren Technology, Moore Threads, TensTorrent, and Moore Elite, the operating environment is increasingly zero-sum. The combined annual shipment volume for these four niche competitors stood at 258,000 units, contrasted against Huawei HiSilicon’s solo output of 812,000 units during the same period. With 46% of advanced domestic capacity split among a dozen secondary designers, firms are surviving on intermittent production runs. Companies like TensTorrent have successfully captured residual orders from major internet platforms primarily because dominant market leaders face severe product backlogs. Similarly, Moore Threads relies on immediate rollouts of its specialized server architectures, while competing firms sustain operations on high initial gross margins to cushion the financial impact of prolonged fabrication delays.
Operational Signals: Anticipating Corporate Outcomes in the Supply Crisis
For industry analysts and institutional investors monitoring the domestic hardware ecosystem, standard metrics like architectural performance benchmarks or raw computation speed are no longer the primary indicators of corporate viability. Instead, structural survival depends entirely on a firm's position within the foundry allocation queue. Three operational signals offer insight into how the domestic AI chip landscape will evolve over the next eighteen months.
The primary indicator is the delta between a foundry's quarterly capacity expansions and its stated capital guidance. The domestic fabrication sector projects a capital expenditure budget of approximately 8.1 billion dollars, aiming to add roughly 40,000 advanced wafer starts per month. If actual quarterly tool installation rates fall below 80% of guidance for two consecutive quarters, it points to localized tool procurement friction. This would further constrict the available supply pool and accelerate the exit of lower-priority design firms.
The secondary indicator involves structural shifts within the foundry's top-five customer revenue concentration data. Because advanced capacity remains highly centralized, any appearance of a new fabless designer within these top disclosure tranches signals a major regulatory adjustment in national strategic prioritization.
The tertiary indicator is the verification of guaranteed wafer allocation within early-stage corporate financing announcements. Venture capital infusions that do not explicitly confirm secured advanced manufacturing capacity provide little operational value in the current market. If multiple tier-two design firms confirm recurring, contractually backed allocation windows within a single quarter, it indicates that production yields are stabilizing enough to allow supply to spill over beyond national champions. Until that structural equilibrium is reached, advanced domestic manufacturing capacity will remain a tightly guarded asset, dictating the ultimate consolidation of the domestic artificial intelligence sector.
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