U.S. vs. Huawei: Everybody Loses

Summary Bullets:

• The U.S. Department of Commerce’s (DoC) move to prohibit Huawei from buying components manufactured using U.S.-made foundry machines and silicon design tools has major implications for Huawei’s continued operations.

• However, it will also bring immediate negative effects on component suppliers (some U.S.-based), impact competition among ICT vendors, and produce uncertainty going forward.

New sanctions announced by the U.S. DoC on May 15 prohibit foundries using U.S.-made machines and software from selling chips to Huawei. In practical terms, this means that Huawei’s key silicon suppliers – Taiwanese TSMC and Chinese SMIC – would likely need to halt production of Huawei subsidiary’s HiSilicon chip designs. The immediate prospect for Huawei is especially bleak considering that the great majority of the world’s foundries use U.S.-sourced hardware or software in some parts of their process.

The current situation leaves Huawei with very few choices – in the near-term it can try to weather the storm, relying on its stockpile of parts to continue manufacturing and fulfilling its obligations to customers. Simultaneously it can look to expand its list of silicon suppliers, or try to find a loophole in the DoC’s decisions. The long-term solution may be more daunting: building an all-Chinese (or at least non-U.S.) silicon supply chain. That is an expensive and arduous process, even for a company as big and diverse as Huawei. On the other hand, the Chinese government could use its influence to pool domestic companies into funding and developing a silicon foundry business independent from foreign suppliers.

The DoC ruling also potentially raises the stakes in an already fraught trade relationship between the U.S. and China. In a best case scenario, the two countries could ultimately agree on a comprehensive trade agreement that enables Huawei to continue with its current supply chain. Or the new sanctions could be a precursor to further U.S. punitive measures as Huawei becomes a pawn in ongoing trade negotiations. China could also respond in kind – possibly banning certain U.S. technology imports. Thus, the rift between two countries’ tech ecosystems could continue to deepen. Such a “technology cold war” would – in simple terms – inflict great harm for all players in the global tech industry, including those involved in building telco equipment.

The cost of developing a “China-only” silicon supply would be felt not just in currency, but in delayed technology development. Chinese system vendors, telcos, and their customers would have to bear the multi-billion bill for such a development, not to mention delays in major projects, such as 5G deployments, that this will entail. Emergence of a new, massive foundry business would mean that global silicon component vendors and foundries – both Chinese and non-Chinese – would see lower sales, while their fixed cost bases would mostly remain the same. This would lower profitability and increase the cost of chips they deliver to all their clients – all of which would eventually trickle down to system vendors, operators, and consumers. In short, while Huawei will feel the impact first and foremost, most, if not all, companies involved in supplying and building telco equipment ecosystem will suffer negative consequences from the DoC ruling.