From September 15, Chinese telecom giant Huawei will cut ties with vital semiconductor supplies. Without the chips, Huawei would not be able to produce the smartphones or 5G equipment on which its business depends, business analysts said.
In August, the Commerce Department announced sanctions on one of China’s most successful technology companies, when the United States introduced a new set of rules barring foreign chip makers that rely on U.S. technology from sending money to chips without a special license. Huawei sells any chip.
In recent weeks, suppliers from South Korea and Taiwan have said they will comply with sanctions and stopped supplying semiconductors to Huawei on Tuesday, the day new measures against the Chinese company took effect.
“Unfortunately, in the second round of U.S. sanctions, our chip manufacturers only accepted orders for May 15, and the production of these orders will also stop on September 15.” Yu Chengdong, CEO of Huawei’s consumer business last month Express. “Huawei faces the problem of not having a chip,” he further noted
Despite China’s efforts to become a global high-tech leader, the world’s factories are still unable to compete in one key area — making microchips, the nervous systems that run every Electronic device.
An important indicator of the complexity of a microchip is how many transistors can be placed on its surface. The smaller the size (measured in nanometers), the more advanced the microchip.
China’s best manufacturing process is believed to be capable of making 14-nanometer microchips, a few generations behind Samsung and Taiwan Semiconductor Manufacturing Company (TSMC). Samsung hit that mark in 2014. TSMC, the world’s largest contract chip maker, is already producing 5-nanometer chips.
While some of the most advanced semiconductor manufacturers are located outside the United States, the industry relies heavily on U.S. suppliers for everything from design software to manufacturing equipment.
Washington first placed Huawei on a trade blacklist in May 2019, citing national security concerns. However, the ban does not cover most foreign-made chips. In May, the U.S. extended a ban on Huawei from contacting non-U.S. suppliers, affecting China’s own semiconductor companies in the Chinese market.
“The dominance of U.S.-origin technologies in upstream sectors of the global semiconductor supply chain means that, no matter how they respond, Chinese ICT (information and communications technology) companies are fully subject to U.S. export controls,” Mercator China Institute (MERICS) According to John Lee, a senior analyst at
China’s chip attempts
China’s reliance on China’s foreign semiconductors has a long history. Its strategic planning related to this key industry dates back to the 1950s, when the State Council convened a group of scientists to develop a “1956-1967 Science and Technology Development Outline,” which identified semiconductor technology as a “key priority.”
In recent decades, from the “531 Development Plan” launched in 1986 to the multi-billion-dollar National Integrated Circuit Industry Investment Fund explicitly set up for the chip industry in 2014, China has devoted a large amount of national resources to its semiconductor business.
James Andrew Lewis, senior vice president and director of the technology policy program at CSIS, told CNBC last week that China is likely to overtake the U.S. in semiconductor investment by a ratio of 1,000 to 1.”
In 2016, Chinese state leaders also pointed out: “The fact that core technologies are controlled by others is our greatest hidden danger.”
Beijing has also encouraged U.S. chipmakers to form joint ventures with domestic firms in hopes of transferring key technology from foreign firms to Chinese firms. MERICS, a Germany-based think tank, said China’s pursuit of foreign technology has sometimes targeted entire industries.
City University of Hong Kong professor Douglas Fuller, who studies the technology industry, said China should not be seen as a failure. “Only four companies are ahead of SMIC in manufacturing services, two from Taiwan (TSMC and UMC), Samsung in South Korea and GF in the U.S./UAE,” Fuller said in an email.
As for mass production, there are only two places for leading technology: TSMC in Taiwan and Samsung in South Korea.
“Intel is even catching up. So, with the exception of Taiwan and South Korea, the rest of the world is behind the manufacturing technology frontier in the industry, including the U.S., Japan, Israel and all of Europe,” Fuller said.
Will Huawei survive?
It is unclear where Huawei will buy the chips. Taiwanese chipmaker MediaTek said last month that it had applied to the U.S. government for a license to continue supplying Huawei after the new U.S. rules took effect. Meanwhile, Huawei has reportedly been stockpiling chips for up to two years to keep its business running.
“In the short term, it’s hard to see any valid options for Chinese companies to be subject to U.S. semiconductor export controls,” said Lee, whose research focuses on the rise of digital technology in China.
For the future, analysts say the U.S. is unlikely to stop China from making basic semiconductors. Given enough time, the country’s huge consumer electronics market and decades of investment will eventually make it a chip maker.
“In the medium to long term, China will have the potential to replace U.S. technology and develop a complete domestic semiconductor supply chain (although whether it can catch up with foreign companies at the technological frontier is another question),” Li said in an email.
James Lewis, director of the Technology Policy Program at the Center for Strategic and International Studies (CSIS), wrote in May that Huawei has been hurt by the United States, but China will not let it fall because Huawei is too important.