US ‘surgical’ attack on Huawei will reshape tech supply chain

US ‘surgical’ attack on Huawei will reshape tech supply chain

Huawei said on Monday that new US sanctions will put its survival at stake.

But industry executives and analysts predicted that Washington’s move to cut off Huawei’s supply of key computer chips will also have a significant impact on the wider technology supply chain.

“When they first blacklisted Huawei in May last year, it was a big political signal but the effect was limited,” said an executive at a Taiwanese computer chip company. “But the folks at [the Department of] Commerce have had a year to sharpen their knives. The new rules will make a real difference.”

On Friday the US commerce department said it would amend last year’s blacklisting to stop Huawei and its affiliates from buying computer chips that had been made or designed with US equipment. Any company that wishes to manufacture computer chips to Huawei’s designs with US tools now needs to apply for a licence.

US machines from the likes of Applied Materials and Lam Research are used by about 40 per cent of the world’s chipmakers, while software from the likes of Cadence, Synopsis and Mentor is used by 85 per cent, according to Credit Suisse, which said it would be almost impossible to find a fabrication plant, or fab, that could still work with Huawei.

“It will be difficult for any foundry in the world to avoid the impact of this,” said Chris Hsu, an analyst at Trendforce, the technology research firm.

Analysts believe that the new regime will neuter HiSilicon, Huawei’s semiconductor affiliate and China’s largest chip design company.

Taiwan Semiconductor Manufacturing, or TSMC, the world’s largest contract chipmaker, and Semiconductor Manufacturing International, or SMIC, its smaller Chinese rival, currently make the bulk of the HiSilicon-designed chips that go into Huawei smartphones and some of its networking gear.

“We expect both to halt their production of Huawei chips unless a resolution, settlement or loophole is found after a 120-day grace period that allows the foundries to finish the three to four month cycle time of in-process wafers as of May 15,” said Randy Abrams, head of Asian semiconductor research at Credit Suisse, in a note to clients on Monday.

Some industry experts wondered whether SMIC — China’s largest contract chipmaker, which just secured $2.2bn in new state funding on Friday — will respect the new US sanctions.

Arguing that Washington’s move will trigger a sharp escalation in the US-China struggle over technology supremacy, the Taiwanese chip executive said SMIC could “choose to stand with China” and take over at least some of TSMC’s business with HiSilicon.

Analysts said this would almost certainly land SMIC on Washington’s blacklist as well, blocking the path to the semiconductor manufacturing equipment it needs to meet China’s ambitious chip industry expansion plans.

Such a development could be part of a significant broader fallout of the America’s’ “surgical” attack on Huawei’s supply chains.

Geoff Blaber, a vice-president at CCS Insights, the technology research company, said: “There is a huge amount of nervousness that this is not just a tit-for-tat spat between the US and China, but is turning into a technological cold war.”

SMIC’s ability to replace TSMC as Huawei’s leading foundry is limited. HiSilicon’s Kirin chip is being made at three different TSMC fabs in 16 nanometre, 12 nanometre, 7 nanometre and 5 nanometre architectures, accounting for 20 per cent of the Taiwanese group’s production.

According to Mr Hsu, SMIC could theoretically replace the production at the more mature 12 and 16 nanometre technology, but has nothing to offer at TSMC’s more advanced capabilities.

A more likely option for Huawei would therefore be to turn to MediaTek for its smartphone chipsets. The Taiwanese chip design house has already helped dozens of Chinese companies including Xiaomi and Oppo become viable smartphone makers. Industry analysts said since MediaTek’s chips are not custom-made, the new US sanctions, which aim at chips made to Huawei design specifications, should not apply.

Last month Huawei had already mentioned MediaTek as a potential alternative source of chips — alongside China’s Spreadtrum and Korea’s Samsung.

But a much bigger problem for Huawei looms in the telecoms network business which helped it grow into a global technology juggernaut and which still accounts for 35 per cent of its revenue.

There is no alternative supplier in sight for the application-specific chips, or Asic, that power telecoms base stations. “Both HiSilicon and Huawei themselves have aggressively built inventory over the past year, so they will probably be able to finish current 5G orders in China,” said the Taiwanese semiconductor executive. “But beyond that, the future for their network business looks very dark.” 

Analysts were more sanguine about the impact on TSMC. Huawei was the world’s third-largest buyer of semiconductors last year behind Apple and Samsung, spending $20.8bn on silicon chips according to Gartner, and accounted for 14 per cent of TSMC’s sales.

But most analysts believe that TSMC will ride out the disruption relatively easily. “There are several other fabless companies that are in need of TSMC fab capacity,” said one analyst who declined to be named. “MediaTek will take up a lot of what is lost from HiSilicon, and others such as Nvidia will pick up some more.”

As a result, analysts said TSMC would lose no more than a single-digit percentage in revenue. “This will become visible at the end of the grace period, from mid-September,” Mr Hsu said. “Only by the fourth quarter will we be able to tell the true impact.”

Additional reporting by Kiran Stacey in Washington

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