A Huawei logo will be displayed in a retail store in Beijing, China on May 27, 2019.
Fred Dufour | AFP | Getty Images
Huawei was able to come up with an “almost total” cut of key semiconductors after the US severely limited the Chinese company’s ability to acquire critical components, according to one group of analysts.
The latter rule could be a huge blow to the technology giant, which already faced limited options to get the chips it needed.
If Huawei is unable to access the components it needs, billions of dollars in revenue is on the line from across its entire business.
“The U.S. move represents a significant tightening of restrictions on Huawei’s ability to acquire semiconductors. This will continue its ability to connect with smartphones and base stations, which are its core products,” said Dan Wang, a technology analyst. at Gavekal Dragonomics, a research firm, told CNBC.
Huawei was not available for comment when contacted by CNBC.
The details
In May, Washington amended the Foreign-Made Direct Products Act (FDPR), which requires foreign manufacturers using U.S. chipmaking equipment to obtain a license before selling semiconductors to Huawei.
On Monday, the Department of Commerce took further action. It added 38 Huawei branches to a blacklist called Entity List. U.S. companies are restricted from doing business with companies on the Entity List.
And Washington further amended the FDPR to include, inter alia, cases where American software or technology is the basis for a foreign-produced article that will be used in the “production” or “development” in any part, equipment or component produced, purchased or ordered by any Huawei entity on the blacklist.
The amended rule will apply if any Huawei entity on the blacklist acts as a “purchaser, interim recipient, ultimate recipient, or end user.”
These designations are important because they essentially increase the scope of what comes under U.S. sanctions.
‘Lethal blow’
Huawei is designing its own line of Kirin chips that go into its smartphones. It also designs a line of chips called Ascend that go into servers for its data centers that require its fastest growing division for cloud computing.
But the actual manufacturing is done by the TSMC of Taiwan, which has already said that from mid-September it will no longer ship chips to Huawei.
Following the initial amendment to the FDPR in May, Huawei already faced many limited options for purchasing chips.
The most viable, according to experts, was the purchase of the Taiwanese company MediaTek, which produces so-called ‘off the shelf’ chips for smartphones that Huawei could buy. Getting semiconductors from Chinese firm Unisoc was also an option. As potential production was moved to SMIC, China’s largest chip maker.
However, all options had serious problems. SMIC, for example, uses US equipment to make chips, while also being significantly behind TSMC in terms of technology.
But the recent move by the Department of Commerce is one of the most difficult moves against Huawei yet and threatens to further limit the company’s options.
“The move is the latest and potentially most serious attempt by the US government to diminish the company’s ability to acquire advanced semiconductors for all of its business lines,” Eurasia Group said in a note on Monday.
“A worst-case scenario, which is becoming more and more likely, could lead to an almost total cut of semi-judges to Huawei, a fatal blow to China’s main global technology company.”
Business cow ‘unravel’
The effect on Huawei could be dire, focusing on some of its key issues. Last year, Huawei’s consumer division, which includes smartphones and laptops, posted sales of 467.3 billion yuan or $ 66.93 billion in 2019, accounting for more than 54% of total revenue.
Changing Washington’s last rule could hit that right away.
Huawei may have enough chips to run out the rest of the year, but 2021 could be tricky.
“The new U.S. statement makes it even harder for Huawei to drill enough smartphone chips for 2021,” Neil Mawston, executive director of wireless device strategies at Strategy Analytics, told CNBC in an email.
Eurasia Group said Huawei has placed chips that “may allow it to stay in business, but these are unlikely to last more than a year or so.” Analysts note that there is also a risk that customers will shut down Huawei technology.
“Huawei’s customer base may also have determined that they need to move to another supplier, which means the company’s business could quickly unravel,” notes Eurasia Group.
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