Caixin
Oct 30, 2020 03:12 PM
BUSINESS & TECH

In Depth: Huawei Eyes ‘Not Made in America’ Chip Supply Chain as Stockpiles Dwindle

As the U.S. turns the screws ever tighter in its relentless crusade to strangle Huawei Technologies Co. Ltd., the company is taking what could well be its final gamble by trying to turn back the clock to a time before the American technology it relies on so heavily entered its supply chain.

To that end, the company that has come to symbolize China’s global tech ambitions is currently racing to create a “not made in America” supply chain that doesn’t require any U.S.-made technology, with a target date of 2022 or earlier to reach that milestone, sources familiar with the effort told Caixin.

Such a campaign is still fraught with difficulties, as it still relies on technology supplied by other American allies like Japan and Western Europe, which are also subject to pressure from the administration of U.S. President Donald Trump. And even if it succeeds, Huawei will only be able to make products based on older technology that would effectively kill its cutting-edge smartphone business — an area where it was briefly the world leader before losing momentum under the weight of the U.S. campaign.

Huawei’s older telecom networking equipment would also come under threat, since its only state-of-the-art 5G equipment depends on advanced microchips that a “not-made-in-America” supply chain would be unable to replicate. But the company has relatively few choices these days, and is largely in survival mode following several rounds of U.S. sanctions aimed at its 5G telecom business.

“The will to survive is lifting us up to look for a way out,” said Huawei founder Ren Zhengfei on a visit to Shanghai’s Jiaotong University, one of several leading Chinese universities he has recently visited in the company’s “not made in America” campaign. He has made other recent calls on Fudan University, also in Shanghai, Tsinghua University in Beijing and the Chinese Academy of Sciences, to look for other potential partners, sources familiar with the effort told Caixin.

Huawei chart-1

Chip sourcing

One of Huawei’s most important tasks will be finding partners that can provide the key microchips that lie at the heart of most of its products.

Such chips have been at the center of the U.S. campaign due to their critical nature for most of Huawei’s wares. The initial U.S. sanctions announced in May 2019 cut off supplies from the likes of U.S. giant Qualcomm, considered the world’s leading maker of the most advanced smartphone chips. This year the U.S. used its influence to cut off alternate smartphone chip supplies from companies like TSMC, which was the manufacturing partner for Huawei’s own HiSilicon chip design unit; and Taiwan’s MediaTek, which also makes 5G smartphone chips.

The company’s newest Mate 40 smartphone could well be the last from Huawei’s premium product line due to limited chip supply as a result of the U.S. campaign, Richard Yu, head of Huawei’s consumer division, said at an event in August. Pressure on that part of its business led to a 22% drop in Huawei smartphone shipments in this year’s third quarter, as the company lost its title of world’s top brand to Samsung, according to new data released on Friday by market research firm IDC.

In anticipation of losing its access to such advanced technology, Huawei has been stockpiling chips for more than a year. Smartphones are the most vulnerable, as each of the millions of handsets Huawei sells each month require such chips. Huawei’s other main line of telecom networking equipment is less vulnerable, since the volume of chips it needs for its 5G base stations is relatively smaller — numbering in the tens or hundreds of thousands.

 Read more 
In Depth: Huawei Has a Sanction-Proof Pile of Processors, but They Won’t Last Long

At a September event, Rotating Chairman Guo Ping said the company had stockpiled enough components to let it keep servicing customers for its core networking products like base stations — at least for a while. But it was less confident about its ability to continue making smartphones, and many observers believe it could run out of chips for those products in the first half of next year.

Huawei chart-2

Building local partners

A group of companies have been working hard since May to create Chinese production lines capable of producing chips with 28-nanometer technology without using U.S.-made equipment, two workers from China’s domestic chipmaking materials sector told Caixin. Those lines include equipment from Europe and Japan in place of U.S. products.

Such 28-nanometer technology is relatively older, with TSMC recently achieving mass-production of chips using the most advanced 5-nanometer technology. Next-generation 4- and 3-nanometer chips could come as early as 2022. Generally speaking, making technology smaller means more complex circuitry can be etched on a single microchip. But while relatively old by technology standards, 28-nanometer is still suitable for chips with a wide range of applications, from the internet of things to car electronics.

Chips using 28-nanometer and older technology are still in relatively frequent use, and accounted for up to 45% of TSMC’s business in this year’s second quarter, equating to about $15 billion in annual revenue, pointed out Chinese Academy of Sciences computing researcher Bao Yungang.

“Such 28-nanometer technology is acceptable for many processor chips, and it doesn’t necessarily require advanced processes such as 10- and 7-nanometer technology,” Bao said. “Domestic chipmakers shouldn’t invest all their manpower developing the most advanced processes. Perhaps they should allocate sufficient resources to improve the service capabilities of low-end and mid-end processes, and increase investment to improve the ecosystem of mid- and low-end processes.”

But 28-nanometer technology is already too outdated for Huawei’s smartphone businesses, which was using 7-nanometer chips made by Qualcomm and its own chips using 5-nanometer technology. However, such technology would be adequate for chips used in some of Huawei’s other products, such as TVs and surveillance equipment.

Such technology wouldn’t help its 5G base station business either, which uses 7-nanometer chips to reduce power consumption. But a Huawei insider pointed out that such energy-saving considerations are less important for base stations than for consumer products like smartphones, whose battery life is an important consideration for buyers.

Huawei is also trying to build its own supply chain by nurturing a new generation of domestic companies through its investment company, set up in April last year, which has already invested in 17 companies.

“Huawei is a company, we aren’t a supply chain, so we hope to help create a mature and stable supply chain through our own investment and Huawei’s technology,” said Rotating Chairman Guo. “Huawei is good at helping reliable suppliers to strengthen their capabilities in chipmaking, equipment assembly and raw materials. Helping them is like helping ourselves.”

Contact reporter Yang Ge (geyang@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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