Tuesday, 04 August 2020

US sanctions on Huawei: Divided we fall?

by Harry Baldock, Total Telecom
Tuesday 09 June 20

With the latest measures making it almost impossible for US-affiliated companies to work with the Chinese tech giant, will suppliers be forced to take sides?

On May 15th the US government introduced new sanctions on Huawei, tightening restrictions on the company’s use of American technology and threatening to drastically reshape the global technology supply chain.    The move is the latest in a long line of sanctions the US has placed on the vendor, which include adding the company to an ‘entity list’ last May which barred American companies from selling to Huawei and its affiliates unless the exporter held a specific license. In practice, however, last year’s sanctions could be comfortably navigated by simply purchasing chips manufactured outside the US, such as from the world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing (TSMC).   The newly updated sanctions…

On May 15th the US government introduced new sanctions on Huawei, tightening restrictions on the company’s use of American technology and threatening to drastically reshape the global technology supply chain. 
 
The move is the latest in a long line of sanctions the US has placed on the vendor, which include adding the company to an ‘entity list’ last May which barred American companies from selling to Huawei and its affiliates unless the exporter held a specific license. In practice, however, last year’s sanctions could be comfortably navigated by simply purchasing chips manufactured outside the US, such as from the world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing (TSMC).
 
The newly updated sanctions, however, would close off this possibility, having major consequences not only for Huawei, but for US companies and the semiconductor supply chain as a whole. 
 
 
Disrupting the ecosystem
 
Globally, US companies control the majority share of the semi-conductor market. Companies like Applied Materials currently supply equipment to around 40% of chipmakers worldwide, while software from companies like Cadence, Synopsis, and Mentor is used in around 85% of these businesses. Under the new sanctions, none of these businesses would be able to freely trade with Huawei, one of the largest companies in the world.
 
Similarly, these measures effectively neuter Huawei’s fabless semiconductor company HiSilicon, which currently relies on outside manufacturers to produce its chips.
 
As a result, these sanctions are going to have major consequences for industries in both China and the US. As John Neuffer, the president of the Semiconductor Industry Association put it, the decision will “create uncertainty and disruption for the global semiconductor supply chain.” These sanctions are a blow not just against Huawei, but the entirety of its supply chain, in which Huawei invests around $10 billion annually and supports countless jobs, including some 50,000 in the US. 
 
 
Fragmenting the supply chain
 
The most likely outcome of the sanctions seems to be that Huawei will be forced to create an alternative supply chain, with some analysts suggesting they may do so through reinvesting and retasking HiSilicon.
 
“The capital investment would be significant to bring a full fab up within HiSilicon, likely in the tens of billions of US dollars,” commented Will Townsend of Moor Insights and Strategy. “But Huawei has a demonstrated track record in making huge investments in research and development.”
 
Such a move would hardly be unexpected. Following the first wave of sanctions against Huawei, the vendor had already begun to bolster HiSilicon in order to reduce its reliance on American companies. Similarly, China as a nation has already committed to rapidly accelerating the growth of its own semi-conductor industry, pledging to produce 70% of all the semiconductors it uses domestically by 2025. The latest sanctions may simply push the country to reach chipset self-reliance even sooner.
 
On the production side itself, some semiconductor companies for whom Huawei is a key business partner will have a decision to make. SMIC, China’s largest contract chipmaker, for example, could take the decision to stand by Huawei and resist the sanctions, picking up some of the work now denied to HiSilicon. However, this itself would likely see the company also blacklisted by the US, so may not be an attractive option.
 
Ultimately, the simplest solution here seems to be that Huawei will turn to chipmakers outside the reach of US dependency for its chip-making needs, such as MediaTek, Spreadtrum, and Samsung. This could be a major boost for some of these companies, redefining their position in the semiconductor hierarchy.
 
Meanwhile, it could be the political ramifications of the sanctions that hit the US companies the hardest, with the Chinese government is likely to impose restrictions of their own on companies like Apple, Cisco, and Qualcomm, further ravaging the supply chain’s status quo on a massive scale. For example, according to media reports, 65% of Qualcomm’s revenue came from China in 2019, which could be in jeopardy if the sanctions result in China clamping down on US businesses.
 
And of course, there is 5G to think about. Already something of a battleground for the US and China, these sanctions could ultimately lead to 5G becoming even more diverse between the two countries. Some analysts are even predicting that if tensions continue standards may fragment altogether
 
“I think that geopolitics may undermine the "single global standard" for mobile,” said analyst Dean Bubley of Disruptive Wireless. “For the later stages of 5G (from [3GPP] Release 17 onwards), and then beyond that with the evolution of 6G, I think the US might be about to diverge from the last decade's consensus.”
 
 
A divided future?
 
In the short term, these isolationist sanctions are going to prove a significant financial burden for Huawei, as well as for the US companies who work with them, including those like Intel and Broadcom. But in the long term, it could cause a schism in the supply chain that will see China and the US relying almost entirely on different manufacturers for their tech, impacting competition and driving up prices for telcos for years to come.
 
If that happens, then the much-used phrase ‘technological Cold War’ would finally be fitting.
 
 
How are these sanctions set to affect the industry's supply chain as a whole? Learn from the operators at Total Telecom's free webinar: How can we ensure the resilience of the global network supply chain? Register here 
 
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