We’ve got chips: Huawei shrugs off U.S. ban

by Samuel Abasi Last updated on May 20th, 2019,

Huawei Technologies Co. has stockpiled enough chips and other vital components to keep its business running for at least three months as the U.S. curtails its access to American technology, people familiar with the matter said.

The Trump administration on Friday blacklisted China’s largest tech company — which it accuses of aiding Beijing in espionage — threatening to cut off the American software and semiconductors it needs to make smartphones and networking gear. But it’s been preparing for such an eventuality since at least the middle of 2018, hoarding components while designing its own chips, the people said.

Government officials also privately warned Huawei executives last year to explore non-American alternatives, the people said, asking not to be identified talking about internal affairs. The three-month cushion is a conservative internal estimate and the company could well sustain operations beyond that time-frame, they said.

The moves against China’s national champion may have devastating consequences for the rest of the world. Blocking the sale to Huawei of critical components such as semiconductors could cripple its operation, depress the businesses of American chip giants from Qualcomm Inc. to Micron Technology Inc. and retard the rollout of critical 5G wireless networks worldwide.

“The impact on Huawei will be extremely significant. An obvious impact is on the supply chain, but there is another layer of impact on confidence and its overall business,” said Cui Kai, a telecom analyst with consultancy IDC. “It will also have a negative impact on the 5G technology evolution around the world.”

Ken Hu, Huawei’s deputy chairman, responded to the U.S. decision in a memo to employees.

“This decision is the latest move in the campaign against Huawei, waged by the US government for political reasons,” he wrote. “The company has known this could be a possibility for many years. We have invested heavily and made full preparations in a variety of areas, including R&D and business continuity, which will ensure that our business operations will not be greatly affected, even under extreme conditions.

That U.S. maneuver coincides with sensitive trade negotiations between Washington and Beijing. Huawei executives reckon their company has become a bargaining chip and they will be able to resume buying from American suppliers if a trade deal is reached, the people said. That’s why they calculate a three-month stockpile may be enough to tide them over.

If Huawei’s calculation is wrong, the consequences would be dire. If the ban isn’t resolved along with the trade dispute, the company would be severely handicapped in its ability to provide advanced wireless networks. Much of its carrier and smartphone businesses — the two pillars of the company — would be at risk.

An outright ban on Huawei elevates fears in Beijing that President Donald Trump’s broader goal is to hamstring China, igniting a protracted cold war between the world’s biggest economies. In addition to a trade fight that has rattled global markets for months, the U.S. is pressuring allies and foes alike to avoid using Huawei in the 5G networks that will form the backbone of the modern economy.

At the heart of Trump’s concerted campaign is suspicion that Huawei aids Beijing in espionage while spearheading China’s ambitions to become a technology superpower. The Justice Department also accuses it of willfully violating sanctions on Iran, and last year engineered the arrest of the eldest daughter of Huawei’s billionaire founder. Huawei has repeatedly denied the allegations.

In the longer term, Huawei still has to assure its customers — many of the world’s largest telecommunications carriers — that it can not just build, but also maintain, their wireless networks. The U.S. ban hits the Chinese company just as it’s jockeying for a big chunk of the hundreds of billions of dollars that the likes of Vodafone Group and China Mobile Ltd. are devising around the world, laying the foundation for future technologies from autonomous cars to smart cities.

Huawei’s predicament underscores the extent to which China as a whole is reliant on foreign chip technology: the country imports more semiconductors today than oil. While Huawei and peers such as Tsinghua Unigroup are designing increasingly advanced architectures, they haven’t reached sufficient scale in production to make a dent in that annual inflow.

Still, Huawei has had business-continuity plans in place for years. Teresa He, president of Huawei chip-making unit HiSilicon, called the U.S. ban “crazy” and “groundless” in a letter sent to employees. While HiSilicon was seen as a backup plan for Huawei’s semiconductor needs, the ban will make it a primary supplier, she said in her letter.

Hu, in his memo to employees, wrote that the company is on the right side of history.

“No hardships or difficulties can stop us from forging ahead,” he said.

A China-based source at a U.S. tech company previously said that none of Huawei’s U.S. suppliers “can be replaced by Chinese ones, not within a few years, at least”.

As an example of Huawei’s reliance on U.S. firms, an expert pointed to the high probability that the tech giant uses chip design software from market leaders Cadence Design Systems Inc and Synopsys Inc.

Huawei designs its microprocessors and other chips for products including the Mate series flagship smartphones.

The U.S firms’ software is considered gold standard, used by manufacturers globally to perfect chip blueprints and test them before committing them to physical silicon, where a single mistake can set back a chip for months.

“It’s hard to replace,” said Mike Demler, a senior analyst with The Linley Group. “Cadence and Synopsys pretty much have all the ground covered for anything you would need,” he said.

“I’m sure there’s some equivalent that tries to fill the same roles from Chinese companies, but the Chinese just do not have a presence we’re aware of outside of the country.”

Cadence and Synopsys did not respond to requests for comment. Huawei said it cannot comment.

Specialized Chips, Lasers

Huawei also has exposure to U.S. suppliers of specialty lasers and modules such as NeoPhotonics, Lumentum and Finisar.

The lasers, which are used to send information in the form of light signals through fiber-optic cables, are critical to Huawei’s world-leading telecom network equipment business.

Firms like Finisar, which is being bought by II-VI Inc, and Lumentum have put decades of work into being able to make large quantities of lasers, said Philip Gadd, a retired chip executive who once ran Intel’s silicon photonics division.

“Even if the Chinese could do it, I don’t think they could come up to scale,” he said.

Finisar is trying to determine the impact of the Huawei ban, according to a person briefed on the matter.

Finisar and Lumentum did not return requests for comment. NeoPhotonics, which gets most of its revenues from four firms including Huawei, declined to comment.

Huawei has sought to develop its own capabilities in the field, in part by purchasing a former British Telecom research center in 2012 and startup Caliopa in 2012.

“The Chinese have been on an acquisition path,” said one silicon photonics executive. “They’ve been buying up bits and pieces wherever they could. A lot of the (U.S. government) restrictions have come too late.”

But Huawei relies on so-called chip “foundries”, especially Taiwan Semiconductor Manufacturing Co Ltd (TSMC), for the complex task of physically producing the chips that it designs. That is a common practice in the chip industry.

By contrast, many silicon photonics firms such as Finisar, still make their own chips.

March To Self-sufficiency

Huawei has been under pressure since early in the decade over U.S. allegations its gear could be a conduit for Chinese spying, a concern the company says is unfounded.

The United States has ratcheted up the rhetoric in the past year, calling on allies to bar the firm from next-generation 5G mobile networks while locking horns with China in a trade war.

Against this backdrop, Huawei has been a key part of China’s campaign to develop its own capabilities in chips and reduce reliance on imports from companies such as Qualcomm, Intel and Samsung Electronics .

Huawei’s chip division produced more than $7.5 billion worth of chips last year, its rotating chairman Eric Xu said. That compares with an estimated $21 billon worth of chips that Huawei acquired from outside vendors.

A Huawei spokesman said the company will use HiSilicon products to substitute banned American components where possible, but declined to provide more details.

HiSilicon’s He has described the self-sufficiency efforts as a “long march in the history of technology” that would pay off with the United State’s “crazy decision”. “All the spare tires we have been making, now is the time to use them!”

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