U.S. Restrictions on TSMC's Production Capacity in Mainland China May Only Strengthen Competitors
Economic Daily News Editorial, September 4, 2025
The U.S. Department of Commerce has announced that by the end of this year it will revoke the Validated End-User (VEU) license granted to Taiwan Semiconductor Manufacturing Company (TSMC) for its Nanjing fab. The license previously allowed TSMC to import American equipment and components more quickly. Going forward, all related exports will require case-by-case approval. This measure is widely seen as an escalation of American semiconductor controls, ostensibly to restrict mainland China’s access to mature process capacity. Yet the practical effect may be unexpected: by limiting the ability of foreign firms such as TSMC and Samsung to expand mature process production in the mainland, Washington may inadvertently create greater market opportunities for domestic chipmakers—an outcome potentially misaligned with American interests.
Unlike advanced nodes below 7 nanometers, mature processes do not directly determine high-performance computing or defense applications. However, they serve a vast market across automotive electronics, industrial controls, consumer devices, and communications equipment. By cutting off foreign fabs in mainland China from upgrade pathways on security grounds, the United States effectively channels demand to domestic manufacturers such as Semiconductor Manufacturing International Corp. (SMIC) and Hua Hong Semiconductor. This not only boosts their capacity utilization but also accelerates their accumulation of experience in production management and customer service. In other words, Washington’s strategy to block mature process supply chains may instead strengthen the mainland’s foundry resilience.
Take SMIC as an example. While it has achieved 14-nanometer production, its revenues and capacity are still primarily supported by nodes at 28 nanometers and above. With TSMC’s Nanjing fab constrained by the loss of its VEU license, many Chinese clients, prioritizing supply security, are likely to shift orders to domestic suppliers. This forced reallocation provides immediate revenue gains and, more importantly, creates economies of scale, giving local foundries more resources and data to invest in process optimization. Once mainland Chinese fabs dominate domestic demand for mature nodes, the long-term effects may be deeper than the United States anticipates.
The policy also accelerates opportunities for mainland China’s domestic equipment sector. For years, American, Japanese, and European firms have dominated key segments such as etching, deposition, and polishing. With foreign fabs restricted, local foundries will increasingly rely on domestic tools. For instance, Advanced Micro-Fabrication Equipment Inc. The mainland’s AMEC deep reactive ion etching systems, once limited to power semiconductors and packaging, may now be deployed at SMIC’s mature process lines. Similarly, Hwatsing Technology’s chemical mechanical planarization (CMP) tools, long overshadowed by American and Japanese suppliers, could gain mass-production validation through orders from SMIC and Hua Hong. These examples illustrate that revoking the VEU not only fails to halt the mainland’s equipment substitution but may act as a catalyst for faster localization.
As foreign fabs face investment and capacity constraints in mainland China, Beijing and local governments are likely to concentrate capital on domestic firms. Previously, Chinese companies factored cost and efficiency into decisions, often relying on foreign foundries. If even TSMC and Samsung are curbed in mature process production, the “gray zone” of supply security disappears entirely. State capital and industrial funds will inevitably funnel resources toward SMIC, Hua Hong, and domestic equipment and materials suppliers—further strengthening the mainland’s overall supply chain resilience.
The U.S. strategic logic is to halt mainland China’s progress in advanced nodes. But the policy undercuts foreign fabs’ role as a balancing force in the mainland, instead giving domestic industry a faster path to dominance in mature processes. In effect, while Washington aims to weaken the mainland’s industry, it may be helping to complete the mainland’s self-sufficiency at mature nodes.
Taiwanese and South Korean firms must also reassess their positions. The revocation of TSMC Nanjing’s VEU license poses significant challenges: in the short term, it may have to scale back investment; in the long run, it risks losing a portion of the Chinese market. Samsung’s mature capacity in mainland China could face similar difficulties. Restrictions on foreign firms’ ability to upgrade in the mainland hand SMIC and Hua Hong greater potential to monopolize domestic demand.
By revoking the VEU license to curb foreign mature-node capacity, Washington intends to block mainland China’s technological progress. Yet the side effect may be to create larger market gaps that domestic firms like SMIC can quickly fill, while local equipment such as AMEC’s etching tools and Hwatsing’s CMP systems gain accelerated adoption. In the short term, the policy may slow foreign capacity expansion in the mainland. In the long term, it may backfire against American interests, as the mainland becomes more self-reliant in mature process production. With policy outcomes diverging from strategic objectives, Washington may need to reconsider its semiconductor control framework.