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Morgan Stanley: China Semiconductor Localization Analysis Summary

Key Findings:

1. GPU Localization

   • Current Self-Sufficiency: 34% (2024).
   • Projection: 82% by 2027.
   • Key Players: Huawei (strong growth expected from its new Ascend GPU), Cambricon, and SMIC’s 7nm/5nm processes.
   • Challenges: SMIC’s capacity expansion timeline depends on DUV tool inventory depletion.

2. Cloud AI TAM:

   • Expected growth from US$17bn (2024) to US$48bn (2027), supported by China’s AI demand surge post-DeepSeek launch.

3. Market Context:

   • China’s Semiconductor Self-Sufficiency: 24% (2024), driven by:
     • Government subsidies,
     • Inventory cleanup by companies,
     • Capacity increases in memory chips.

Investment Insights:

• EW/Neutral: SMIC, Empyrean Technology (faces risks like US export controls and EDA localization delays).
• Outlook:
  • LCD, logic, and memory chips show strong localization progress.
  • Equipment imports fell 10% YoY (Mar 2025), but geopolitical factors like US sanctions and bans on tool sales restrict further gains.
  • Analog semiconductors remain a long-term beneficiary.

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Regulatory & Disclosure Notes:

• Equity research complies with US/China securities regulations.
• Morgan Stanley disclaims responsibility for investment decisions made solely based on this report due to geopolitical risks and export controls (e.g., US sanctions on chip tools).

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Actionable Takeaways:

• China’s GPU/self-sufficiency growth accelerated due to localization efforts.
• Watch for SMIC’s 7nm capacity expansion and Huawei’s AI chip adoption timelines.
• Market reliance on imports remains a hurdle despite moderate declines (e.g., US tools down ~35% YoY).

End of summary.