As East Asia pivots to premium AI servers, China seizes a massive tech gap

As demand for AI servers soars, leading Japanese and South Korean multilayer ceramic capacitor (MLCC) makers are shifting further upmarket, opening the door for Chinese competitors to gain share in lower-end segments despite lagging their rivals in advanced technology. MLCCs – often referred to as the “rice of the electronics industry” because of their ubiquity – are tiny electronic components that regulate and stabilise electrical currents in devices ranging from smartphones and electric vehicles to AI servers and data centres. In what Goldman Sachs has described as “the largest and longest cycle in history”, leading Japanese and South Korean manufacturers are being inundated with orders for high-end MLCCs used in AI servers, fuelling expectations of capacity expansion and higher prices. “The sharp increase in power consumption in AI servers, alongside rising chip complexity, is driving demand for MLCCs that combine miniaturisation, high capacitance, thermal resistance and long-term reliability,” said Kazunori Ito, director of equity research at Morningstar. “The price erosion that typically accompanies intensifying competition is likely to be considerably more muted than in a normal year,” Ito said. “Indeed, high-end MLCC suppliers have announced a succession of price increases from 2026 onward, and we expect this trend to persist for some time.” According to a recent note by Citrini Research, the market for server MLCCs was worth about US$1.3 billion in 2025, compared with a total global MLCC market of roughly US$15 billion. However, demand is expanding rapidly, with AI server MLCCs expected to grow by about 80 per cent. Japan’s Murata Manufacturing, the world’s largest MLCC producer, and South Korea’s Samsung Electro-Mechanics (SEMCO) currently dominate the high-end segment for AI servers, while Japan’s Taiyo Yuden trails the two leaders by a significant margin, according to Ito. Murata, which has been operating at about 95 per cent capacity utilisation this quarter, recently announced an additional 80 billion yen (US$550 million) investment to expand production of server-grade MLCCs. SEMCO has likewise said its second-quarter production priorities include advanced industrial components such as ultra-high-capacitance MLCCs. As industry leaders move up the value chain, Chinese manufacturers are seeking to consolidate their position in the mid- and low-end markets. China has spent years cultivating domestic alternatives to the dominant Japanese and Korean suppliers. Local manufacturers including Guangdong Viiyong Electronic Technology, Chaozhou Three-Circle Group and Guangdong Fenghua Advanced Technology have expanded rapidly in consumer-grade MLCCs. Nearly half of China’s consumer-grade MLCCs, widely used in smartphones and tablets, were expected to be supplied by domestic producers, up from just 25 per cent in 2024, according to a Frost & Sullivan report published earlier this year. “As leaders move upmarket toward AI/server demand, lower-tier players can gain share in more commoditised segments,” Citrini Research said. At the same time, Chinese manufacturers are attempting to move into higher-value products to capture part of the AI opportunity. Viiyong, which aims to become one of the world’s top three MLCC producers with annual output of 1.2 trillion units by 2030, is preparing to launch new production facilities focused on high-capacitance MLCCs for 5G telecommunications, automotive applications and AI infrastructure. Three-Circle has also said it has achieved breakthroughs in high-end MLCC technology, including dielectric layers about one micrometre thick and structures exceeding 1,000 stacked layers, advances that could support future applications in AI data centres. Even so, Chinese producers remain well behind the industry leaders. Murata surpassed the one-micrometre threshold years ago and can now manufacture dielectric layers thinner than 0.5 micrometres. Leading manufacturers such as Murata, SEMCO and Taiyo Yuden remain “several generations ahead” of Chinese competitors in producing small, high-capacitance MLCCs, according to Morningstar’s Ito. “Given these technological and qualification barriers, we believe it will be challenging for Chinese MLCC suppliers to penetrate high-end segments such as automotive and AI servers within a five-year time frame,” he said. Nevertheless, domestic suppliers are expected to make gradual gains. Frost & Sullivan forecast that the localisation rate for industrial MLCCs in China – including those used in AI servers, edge-computing devices and industrial automation systems – would rise from 7.1 per cent in 2024 to 17.4 per cent by 2029.