Huawei’s Chip Dreams in Crosshairs of Latest U.S. Assault

The latest U.S. assault against Huawei Technologies Co. Ltd. is aimed squarely at its HiSilicon chip design unit, a move that could force the embattled company to sharply scale back or even abandon one of its most promising businesses, analysts said.

On May 15, the U.S. Department of Commerce announced it would expand a previous decision that had already cut off Huawei from its U.S. suppliers unless they got permission from Washington. It said that rule not only applied to Huawei’s U.S. suppliers and other business partners, but also to any of Huawei’s foreign chip-making partners whose production lines include U.S.-made equipment.

The new decision included a 120-day grace period, in which chips from orders placed before May 15 can still be shipped to Huawei before the end of the period. However, analysts expect Huawei’s chances of reaching a deal with Washington could be low.

Although Washington didn’t provide more specifics, industry lawyers believe that the move was specifically targeting chip manufacturers, also known as foundries, such as global leader Taiwan Semiconductor Manufacturing Co. (TSMC), that make Huawei-designed microchips under contract.

Most of Huawei’s chips currently go into its own products, such as smartphones and telecom networking equipment. But some have said such chips could also become a lucrative new business if it someday chooses to sell them to outsiders.

To shield itself from the latest U.S. rule, Huawei could still buy similar chips from non-U.S. third-party designers like Taiwan’s MediaTek, even though that could hurt the quality of its offerings from 5G base stations gear to smartphones, analysts said. But prospects for HiSilicon, which has seen tremendous progress over the past few years, could be cast into serious doubt, they added.

Chip sensation

Huawei’s major products include smartphones and telecom networking equipment. Although it relies on third party chips to power most of those, it has gradually built up a team to design chips, initially for in-house use. That team at HiSilicon now has over 7,000 employees in offices around the world, including in Singapore, South Korea, Japan and Europe, according to the firm’s website.

China has made steady progress over the years in design of chips, also called integrated circuits, with HiSilicon as one of the nation’s leading players, said Jeff Pu, a Taiwan-based tech analyst at GF Securities. The firm’s Kirin series chips for smartphones can now rival competitors like global smartphone chip leader Qualcomm in various respects such as connectivity, Pu said.

After Washington initially blacklisted Huawei last year, barring it from buying U.S.-made chips from the likes of Qualcomm, Huawei started sourcing more chips from HiSilicon, whose sales surged as a result.

The unit’s global sales grew 54% to $2.67 billion in the first quarter of this year, with 90% coming from Huawei, according to a report by IC Insights. By comparison, Huawei’s total revenue grew by a slower 19% to 858.8 billion yuan ($120 million) for all of last year. HiSilicon’s strong growth helped it become the first Chinese mainland-based chipmaker to break into the world’s top 10 in terms of sales, behind companies from the traditional powerhouses of the U.S., South Korea and Taiwan.

Like many other chip designers, HiSilicon outsources the actual manufacturing of its chips to contract chipmakers. TSMC, the world’s largest and most advanced chip-making foundry, is HiSilicon’s biggest manufacturing partner, accounting for 14% of the Taiwanese company’s sales in the first quarter.

But the latest U.S. move has called the fabless production model into question since TSMC is now likely to be barred from working with HiSilicon without a U.S. government license.

“HiSilicon will basically cease to function if it loses access to all fabs using U.S. equipment or if it can’t use the latest software tools from the U.S.,” said Stewart Randall, a chip analyst at Shanghai-based consultancy Intralink. U.S. companies now dominate industries for the advanced equipment and software used to make high-tech microchips.

Partly anticipating tighter U.S. restrictions, Huawei has been shifting some of its chip orders from TSMC to mainland-based Semiconductor Manufacturing International Corp. (SMIC).

But SMIC may not be a reliable partner because it also depends on U.S.-made chip manufacturing equipment and software, observers pointed out. Many are speculating on whether SMIC will honor the U.S. rules, or risk Washington’s wrath by supporting a hometown champion like Huawei.

If it were to choose the latter, SMIC could have difficulty finding new suppliers in China. While the country has made progress in many high tech areas, it is still limited in its capability to make advanced manufacturing equipment and materials, said Chris Yim, a technology analyst at BOCOM International.

Even if SMIC were willing to take the risk, it might not help Huawei. The chipmaker’s technology is still far behind TSMC’s, said Szeho Ng, a chip analyst at China Renaissance. TSMC is already engaged in 5-nanometer production, while SMIC is still in 14-nanometer, he added, referring to a chipmaker’s ability to make more advanced chips by making their circuits smaller.

SMIC is trying to improve its capabilities by upgrading its equipment, and earlier this month announced it had secured more than $2 billion in new investment from two Chinese chip funds. Its current 14-nanometer technology will be incapable of making chips that HiSilicon would need for Huawei’s 5G phones set to enter mass production in the near future, said GF Securities’ Pu.

Third-party suppliers

If it loses access to TSMC and SMIC, Huawei could still procure chips that are not custom-made for the company from other third-party suppliers, American export control lawyers told Caixin.

Huawei is already in talks with such companies, including Taiwan’s MediaTek and the mainland’s UNISOC, as alternatives to keep its consumer electronics business afloat if HiSilicon can no longer make its own chips, Nikkei Asian Review reported earlier this month, citing anonymous sources.

Procuring such non-customized chips would test Huawei’s capabilities to integrate them into its products, and could also reduce their performance, Pu said.

The U.S. actions could intensify pressure on Huawei from elsewhere as well, as Washington pushes its allies to make similar moves. The U.K. government has launched a review into Huawei to reevaluate the country’s posture toward the Chinese company, and British officials have been asked to draft a plan to reduce Huawei’s involvement in 5G to zero by 2023, Bloomberg reported.

“You would expect more foreign governments announcing such moves in the future,” said Pu.