The latest US government action against Huawei Technologies Co (華為) takes direct aim the company’s HiSilicon (海思) chip division — a business that in over the past few years has become central to China’s ambitions in semiconductor technology, but is now to lose access to tools that are central to its success.
That could make it the most damaging measure by the US yet against a Chinese company.
On Wednesday, US officials told reporters that the Huawei’s chip division functioned as a “tool of strategic influence” for the Chinese Communist Party. Huawei, for its part, denounced the US allegations and called the new measures “arbitrary and pernicious.”
Established in 2004, HiSilicon develops chips mostly for Huawei, and for most of its existence has been an afterthought in a global chip business dominated by Taiwanese, South Korean, Japanese and US companies. Like most electronics firms, Huawei relied on others for the chips to power its products.
However, investment in research and development helped drive rapid progress at HiSilicon, and in recent years the 7,000-employee unit has been central to Huawei’s rise as a dominant player in the global smartphone business and the emerging 5G business.
HiSilicon’s Kirin smartphone processor is now considered to be on par with those created by Apple Inc and Qualcomm Inc — a rare example of an advanced Chinese semiconductor product that competes globally.
HiSilicon is also central to Huawei’s leadership in 5G, stepping into the breach when the US cut off the Chinese company’s access to some US-made chips last year.
In March, Huawei said that 8 percent of the 50,000 5G base stations it sold last year had no US technology, using HiSilicon chipsets instead.
However, the US export control rule aims to block HiSilicon’s access to two crucial tools: chip design software from US firms including Cadence Design Systems Inc and Synopsys Inc, and the manufacturing prowess of companies such as Taiwan Semiconductor Manufacturing Co Ltd (TSMC, 台積電), which builds chips for many of the world’s top semiconductor firms.
With the new restrictions, 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 any more,” said Stewart Randall, who tracks China’s chip industry at Shanghai-based consultancy Intralink.
Without its own processors, Huawei would lose its edge over domestic smartphone rivals, analysts said.
International sales had already been gutted by a ban on the use of key software supplied by Google.
However, Huawei has stockpiled chips, and the new US rule is not to go into full force for 120 days, according to industry sources.
US officials also said that licenses could be granted for some technologies.
HiSilicon can also keep using design software it has already acquired.
Still, analysts agree that HiSilicon is in a tough spot. Nearly all chip factories globally buy gear from the same equipment makers, led by US firms Applied Materials Inc, Lam Research Corp and KLA Corp.
The new US rule requires licenses for companies using US machinery to build Huawei-designed chips and chips to be delivered to the Chinese firm.
To be sure, the new rule is not to catch items shipped to a third party, allowing HiSilicon’s fabricators like TSMC the ability to ship chips to HiSilicon’s device manufacturers who can send them directly to a customer.
While there are alternatives to US machines, replacing US technology is not as simple as swapping out a machine.
“You almost have to think about it like a heart transplant,” said VLSI Research Inc president Dan Hutcheson, adding that chip production lines are finely calibrated systems where everything has to work well together.
Huawei had a few options, said Doug Fuller of the Chinese University of Hong Kong.
It could slip around the rule by having suppliers ship directly to Huawei customers, although US officials would be vigilant about such workarounds, Fuller said.
Huawei and the Chinese government could redouble efforts to build production capabilities that did not require US tools, by investing in nascent Chinese competitors and buying from other companies, even if that required quality sacrifices.
Huawei could possibly turn away from HiSilicon and revert to buying from overseas suppliers — just not US ones.
“There’s talk of Huawei just turning to Samsung processors,” for its smartphones, Fuller said.
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