To US officials worrying about semiconductor makers sending NVIDIA’s most advanced Blackwell processors to China, the ‘Hanxin chip’ scandal must sound like Ancient History.
Back in the early 2000s, to great domestic fanfare, Chinese computer scientist Chen Jin, a researcher at Shanghai Jiao Tong University, announced he had developed a new digital signal processing (DSP) microchip called the ‘Hanxin 1’, which would have been the first DSP chip to have been wholly developed in China.
The Chinese government, eager to develop an indigenous hi-tech industry, greeted the news with great delight. Chen was appointed Dean of Microelectronics and The Financial Times estimated that the project had received around 114 million yuan (£7.5 million) in public support.
However, all was not what it seemed. State investigators later found that the ‘Hanxin 1’ was in fact a Motorola chip with its original markings sanded off. The deception quickly unravelled, and the project collapsed.
The fallout was severe. According to Xinhua, Mr Chen, the project lead, was ordered to repay state funding and was subsequently banned from conducting further state-funded research.
At the time, the episode was framed in the western media as a cautionary tale about the risks of rapid state-led innovation: high ambition, significant funding, but limited technological maturity.
Silicon China crisis
Two decades later, the scandal looks less like an isolated fraud and more like an early signal of the ambition that now defines China’s semiconductor strategy: closing the technology gap with global leaders while the rest of the world debates how far that convergence should be allowed.
China’s rise as the world’s manufacturing hub during the 1990s and 2000s embedded it deeply in global electronics supply chains. Yet, despite assembling much of the world’s electronic devices, it remained heavily dependent on foreign semiconductor technology.
In an attempt to reduce this dependency, the Chinese government made semiconductors a national strategic priority.
In 2015 the government launched its ‘Made in China 2025’ strategic plan which aimed to upgrade the manufacturing capabilities of Chinese industries from labour intensive workshops to a technology-intensive powerhouse.
Initiatives such as the National Integrated Circuit Industry Investment Fund channelled vast state-backed financing into domestic chip design, fabrication, and equipment capabilities.
Fine China
A central pillar of China’s strategy has been the development of domestic semiconductor champions. Semiconductor Manufacturing International Corporation (SMIC) emerged as the country’s most advanced foundry, while firms such as Huawei’s HiSilicon built significant capabilities in chip design, particularly for telecommunications and mobile devices.
Last year, Goldman Sachs Group and Nomura Holdings estimated China’s overseas sales of semiconductors, computers, and other products closely related to artificial intelligence accounted for about half of China’s export growth. In the month of April alone, Chinese shipments abroad increased to $359 billion, meaning companies were reeling in roughly $500 million on average every hour.
Yet, despite progress, China’s semiconductor ecosystem remains uneven. While it has achieved strength in mature-node production and certain design segments, it continues to lag behind global leaders in cutting-edge logic and memory technologies.
Advanced manufacturing equipment and extreme ultraviolet (EUV) lithography, dominated by firms such as ASML, remain largely inaccessible due to export restrictions, constraining China’s ability to scale leading-edge production.
One major problem for China has been that its semiconductor ambitions have increasingly collided with tightening export controls from the United States and its allies.
In 2022, Washington started to impose export restrictions on advanced chips, semiconductor manufacturing equipment, and high-end AI accelerators produced in the US in an attempt to preserve US technical dominance.
The move has significantly reshaped procurement strategies for firms operating in or exporting to China.
An NVIDIOUS situation
Companies such as NVIDIA and Intel have had to redesign product lines to comply with evolving rules, while equipment suppliers face licensing barriers when selling advanced fabrication tools into the Chinese market.
For NVIDIA this meant designing lower-specification AI chips, including the H20, for the Chinese market to comply with US export controls. However, successive changes to those rules have repeatedly forced the company to redesign products and reassess its China strategy.
“The U.S. has based its policy on the assumption that China cannot make AI chips,” NVIDIA CEO Jensen Huang told investors on an earnings call last year. “That assumption was always questionable, and now it’s clearly wrong.”
Last year Trump told a White House briefing that NVIDIA had a “super-duper advanced” new Blackwell chip which he would not allow to be exported to China but that he was willing to make a deal with the Chinese government over a “somewhat enhanced – in a negative way – Blackwell.”
For China, the response has been a dual strategy: accelerate domestic substitution while continuing to import where possible, particularly in mature-node chips that remain essential for automotive, industrial, and consumer electronics manufacturing.
Beijing has continued to direct significant state and provincial funding into semiconductor fabrication plants, packaging facilities, and research institutes.
Large-scale fab projects have proliferated across regions such as Shanghai, Shenzhen, and Wuhan, often supported by local government incentives, discounted land, and preferential financing.
According to reports, Huawei is building advanced fabrication facilities in Shenzhen targeting 7-nanometer commercial-scale production as early as this year while SMIC has repeatedly pushed foreign equipment past its rated specifications to achieve manufacturing nodes that the export controls were specifically designed to prevent.
Upstream (without a paddle)
Despite rapid expansion, China’s semiconductor sector remains constrained by upstream dependencies. Advanced lithography systems, precision etching equipment, and high-purity materials are still dominated by a small number of global suppliers, including ASML, Applied Materials, and Lam Research.
However, the capital intensity of advanced semiconductor manufacturing remains a structural constraint. Leading-edge fabs require sustained multi-billion-dollar investment cycles, highly specialised talent pools, and complex supply chains spanning thousands of inputs, many of which remain internationally sourced.
Even where domestic alternatives exist, performance gaps persist in yield rates, process consistency, and tool precision. This creates a procurement challenge for multinational firms operating in China, who must balance local sourcing requirements with global quality and compliance standards.
At the same time, China has made notable progress in adjacent areas such as mature-node manufacturing, packaging, and testing, where it now plays a significant global role.
China in their hand
The semiconductor sector in China is now shaped as much by geopolitics as by market demand. Export controls, investment restrictions, and supply chain diversification strategies have all increased uncertainty for firms operating across China-linked procurement networks.
For global technology companies, China remains both an indispensable manufacturing base and a constrained sourcing environment. Many continue to rely on Chinese facilities for assembly, packaging, and mature-node production, while shifting advanced design and fabrication elsewhere.
At the same time, domestic Chinese firms face growing pressure to localise inputs, substitute foreign equipment, and accelerate indigenous innovation. This has created a procurement environment defined by redundancy planning, dual sourcing strategies, and increased inventory buffering across critical materials and components.
China’s semiconductor industry is no longer defined by whether it can manufacture chips, but by how quickly it can reduce its dependence on the handful of foreign technologies that still sit beyond its reach. Export controls may have slowed that process, but they have also reinforced Beijing’s determination to invest even more heavily in domestic capability.
For procurement leaders, the implications are already clear: semiconductor sourcing has become as much a geopolitical exercise as a commercial one, requiring greater emphasis on resilience, supplier diversification, and regulatory awareness.
In retrospect, the Hanxin affair was not simply a story of scientific fraud. It reflected a country determined to build a semiconductor industry before it possessed the technical foundations to do so. Twenty years later, the ambition remains unchanged, but the capabilities are vastly different.
Whether the United States and its allies can indefinitely preserve their lead in advanced semiconductor technology remains an open question. What is already clear is that the debate has moved far beyond one counterfeit chip. Today, the contest is over who will control the technologies that underpin artificial intelligence, advanced manufacturing, and the next generation of the global economy.
This article originally appeared in the July/August issue of Procurement Pro
