Big impact expected from new U.S. export control rule targeting Huawei’s chip division HiSilicon

In the latest U.S. move that strategically targets Huawei, the U.S. government is targeting the Chinese company’s HiSilicon chip business, which is key to Chinese ambition of dominating the semiconductor sector. With the latest U.S. strategic move, Huawei is set to lose access to chip making tools.

In what could be the most damaging move against the Chinese company, U.S. officials told reporters that HiSilicon chip business functioned as a “tool of strategic influence” for the Chinese Communist Party.

On its part, Huawei Technologies Co Ltd denounced U.S. allegations and termed the new measures “arbitrary and pernicious.”

Established in 2004, Huawei’s chip division, HiSilicon creates chips mostly for its parent company and for the bulk of its existence, it has been an afterthought in the global chip business which is dominated by tech giants from the United States, Japan and South Korea.

In recent years, HiSilicon has emerged as central to Huawei’s rise as a dominant player in the global smartphone business as well as in the emerging 5G telecom equipment business.

HiSilicon’s Kirin smartphone processor is considered to be on par with those created by Qualcomm Inc and Apple Inc.

In March Huawei disclosed, 8% of its 50,000 5G base stations sold in 2019 had no U.S. technology components and instead used chipsets from HiSilicon.

As reported by us earlier, the U.S. government had enacted an export control rule which was aimed at blocking HiSilicon’s access to two crucial tools: chip design software from U.S. firms including Synopsys Inc and Cadence Design Systems Inc as well as the manufacturing prowess of “foundries,” led by Taiwan Semiconductor Manufacturing Co Ltd.

PRESSURE ON HISILICON

With these moves, HiSilicon “will be in a situation where they’re not able to manufacture chips at all, or if they do, then they’re not leading edge anymore,” said Stewart Randall of Shanghai-based consultancy Intralink which tracks China’s chip industry.

Without access to its own processors, Huawei is likely to lose its edge over domestic smartphone rivals, said analysts. Huawei’s international sales have already taken a hit following a ban on using Google’s software.

According to industry sources, Huawei has stockpiled chips and the new rules will only come into force after 120 days. U.S. officials have also noted that licenses could potentially be granted for certain technologies and that HiSilicon can also keep using design software it has already acquired.

Despite this, the new rule will place HiSilicon in a tough spot given that globally, most chip factories, including China’s leading foundry, Semiconductor Manufacturing International Corp, purchases gear from equipment makers, led by U.S. firms Applied Materials Inc, Lam Research Corp and KLA Corp.

IMPACT OF THE NEW RULE

The new rule requires licenses for companies using U.S. machinery to build chips that are designed specifically for Huawei and be delivered directly to it.

Huawei however could potentially skirt the new U.S. rule by looking at alternatives. However this will not be simple. While there are alternatives to American machines, including Japan’s Tokyo Electron Ltd which makes gear that competes with Applied Materials, replacing U.S. technology is not as simple as swapping out a machine.

“You almost have to think about it like a heart transplant,” said VLSI Research Chief Executive Dan Hutcheson, noting that chip production lines are finely calibrated systems.

According to Doug Fuller from Chinese University at Hong Kong, Huawei has a few options: it could slip around the rule by having suppliers ship directly to Huawei customers.

Aware of this workaround, U.S. officials have said they would be more vigilant regarding such slippage.

Alternatively, Huawei and the Chinese government could also invest in chip production capabilities that does not require U.S. technology and tools, by investing in nascent Chinese startups and buying from Japanese and Korean companies, even if it means sacrificing quality.

Huawei could also buy from overseas suppliers, including Samsung Electronics.

“There’s talk of Huawei just turning to Samsung processors,” for its smartphone, said Fuller.

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