A new U.S. trade policy against Huawei unravels the network of relationships that have tied the electronics industry and global trade together, and threatens the leadership of the U.S. semiconductor industry.

• The effects go well beyond the 5 to 15 percent sales impact that many U.S. firms are starting to feel, and could reach 40 percent or more, damaging R&D spending and the ability of U.S. semiconductor firms to compete.
• China is likely to retaliate, and has already vowed to cut its dependence on imported semiconductors by putting more investment into its own semiconductor industry.
• In the meantime, the new policy has sown confusion in the industry, sent Huawei off on a mission to stockpile chips and find alternative sources, and has sent a chill through the wireless telecoms industry, particularly in 5G.

Rather than demonize China, Huawei, and other Chinese companies, the U.S. should develop comprehensive trade policies that recognize and that take into account China’s self-interest, and develop a long-term strategy to promote and maintain the strength of innovation in the U.S.

Analysis

In the latest round in the deteriorating relations between the United States and China, on May 15, 2020 the Trump administration said it would halt all sales of semiconductors to Huawei by U.S. firms.  Annoyed by the parts of the semiconductor supply chain outside of U.S. control, the Trump administration then added that it would also block sales of semiconductors by any manufacturer around the world that uses U.S. semiconductor equipment, and would impose sanctions on any countries that do not cooperate.  Companies have 120 days to comply with the new semiconductor sales policy.

Senator Ben Sasse (R) from the state of Nebraska has stated “The U.S. needs to strangle Huawei.”  A majority of Nebraska voters backed Trump in the 2016 election.  Secretary of State Mike Pompeo, a Trump appointee, recently said that “Huawei equipment is a Trojan horse,” a reference meaning that it hides malware and subterfuge. 

Why does the U.S. Government oppose Huawei so vehemently?

Since World War II, countries have rebuilt and modernized, and the world has benefitted from expanding global trade.  This has, on a relative basis, reduced the importance of the U.S.  Some workers and communities within the U.S. have had to adjust to production going overseas, and some citizens in the U.S. blame China as the culprit.

China hawks in the U.S. who blame China, sometimes for problems that China has nothing at all to do with, helped put Trump into office. 

At first, Trump seemed to be using threats against Huawei as leverage in trade negotiations, but the new policy against Huawei goes well beyond this, and comes at a time when trade agreements between the U.S. and China seem to have completely broken down. Huawei has come under particular attack, in our view, as a symbol of China’s modernization and progress in technology, and especially because of Huawei’s strength in 5G, which everyone understands could transform businesses around the world through improved efficiency of communications. 

Bashing Huawei and China plays to Trump’s voters, and conveniently for Trump, it deflects attention away from the Trump administration’s muddled response to COVID-19, which at the time of this publication had claimed 100,000 lives in the U.S.

A complete history of the escalating trade war between the U.S. and China is beyond the scope of this blog, as is a point-by-point examination of the charges made against Huawei.  Suffice it to say that opponents of Huawei have produced little or no evidence and no proof of wrong-doing. 

Short-term Effects

TSMC and other foundries that manufacture chips with U.S. semiconductor equipment have increased production ahead of the 120 day deadline.  This is especially true for cellphone chips produced at the 7 nm CMOS process node, which mainly go to Huawei and Qualcomm’s cellphone customers.  These chips include Hisilicon’s Kirin 810, Kirin 980, and Qualcomm’s Snapdragon 855 processors used in advanced 4G and 5G smartphones.  Demand for 7 nm chips at TSMC was straining capacity even before the new U.S. policy.

More than sixty percent of all semiconductors are designed by fabless chip companies such as Qualcomm, with actual production coming from foundries such as TSMC, GlobalFoundries, UMC, SMIC, Powerchip, and Samsung’s foundry group.  In cellphone chips, especially the processors, the proportion produced by fabless companies is close to 100 percent; all of these foundries use U.S. semiconductor equipment. 

Huawei cannot simply switch from Hisilicon or Qualcomm to MediaTek or even UniSoc chips without violating the new U.S. policy, as these companies are fabless and use foundries that make chips with U.S. semiconductor equipment: 

• US semiconductor equipment makers include Applied Materials, KLA, Teradyne, Lam Research, and Cohu.These companies together have about 50 percent share of the market for equipment used in semiconductor production.
• U.S. made semiconductor equipment includes that used for packaging and test by service providers such as Advanced Semiconductor Engineering, Amkor Technology, Siliconware Precision Industries Co., Ltd., STATS ChipPAC, Powertech Technology, CORWIL Technology, and Chipbond Technology.
• We do not have exact figures, but we would estimate that more than 90 percent of all semiconductors are made using at least some U.S. semiconductor equipment.

While many semiconductor equipment companies were founded in the US and still have headquarters in the US, they are all global companies with global offices and manufacturing sites, and all semiconductor equipment uses sources of parts from around the world.

Sowing Confusion.   The new U.S. policy has semiconductor executives scurrying to review their product lines, production partnerships, customers and distributors, and this has put many lawyers to work reviewing the consequences of different responses to the policy.  More than a few semiconductor companies have told us that they are looking for loop-holes and work-arounds so that they can somehow continue to supply Huawei.   The confusion created by the policy alone has had a stifling effect on the entire electronics industry.

We doubt that the U.S. can enforce a ban on semiconductors made outside of the U.S. using U.S.-made semiconductor equipment.   In China, Chinese semiconductor stocks prices jumped higher when the U.S. announced the new policy against Huawei.  One unintended consequence of the new Trump policy is that it will help China’s efforts to achieve self-sufficiency in semiconductors, as apparently recognized by investors in Chinese semiconductor companies.

Long-term Effects

The new U.S. policy if fully enacted, enforced, and complied with, would halt almost all semiconductor shipments to Huawei, making it very difficult for Huawei to produce mobile phones, cellular network equipment, or other electronic systems.  This would seem to mean very hard times for Huawei, which employs more than 194,000 worldwide, and more than 1,000 in the U.S. alone.  However, Huawei will find alternate sources of supply, and the policy will very likely backfire on the U.S.

• Huawei purchases about $20 billion of semiconductors each year, representing about 5 percent of a $400 billion semiconductors market.
• Huawei purchases between 12 and 15 percent of all semiconductors used in the telecommunications sector, we estimate.  Huawei had about 17 percent unit share of all smartphones shipped in 2019, putting it second to Samsung and ahead of Apple.In wireless networking equipment, Huawei had about 50 percent share in 2019.

Based on these estimates and public financial reports, U.S. semiconductor firms stand to lose about $7 billion of business with Huawei.  Most U.S. semiconductor companies have been reluctant to admit exactly how much business they do with Huawei, but here are a few estimates:

• Broadcom has stated that Huawei accounts for about $2 billion, or about 8.7 percent of annual sales.
• Strategy Analytics estimates that Intel sells at least $1.5 billion per year of data center chips to Huawei.
• Micron supplies flash memory for Huawei phones.Huawei represented 13 percent of business in the first half of 2019, or about $1.1 billion.This business could go to competitors Samsung and Hynix.
• Skyworks has sold as much as $450 million per year of semiconductors to Huawei, or 12 percent of Skywork’s sales.
• At Qorvo, Huawei represented 22 percent of sales during one quarter in 2019, or $170 million.
• The sanctions against Huawei also include software.Google has stopped supplying the Android OS to Huawei.Huawei smartphones represented about 20 percent of Google’s Android smartphone OS volume before the sanctions.
• At foundry TSMC, which makes the chips sold by fabless companies such as Qualcomm, MediaTek and Broadcom,Huawei may represent as much as 10 percent of sales.TSMC uses U.S.-made semiconductor equipment, and has said it will comply with the new U.S. policy.

Most U.S. semiconductor firms were granted temporary export licenses by the U.S. Government when the first round of sanctions against Huawei went into effect in 2019, especially for chips used in cellphones.  Under the new policy, all licenses will expire in August 2020, and U.S. semiconductor exports to Huawei must stop.

While a 5 percent decline in global semiconductor sales may not seem very significant, the new policy will hit U.S. firms especially hard and will have global consequences.

• Trade retaliation by China seems likely.  Keep in mind that China not only buys U.S. semiconductors; China is the largest trading partner of the U.S., with more than $120 billion in goods exported from the U.S. to China, from electronics to agricultural products, raw materials and commodity goods.
  • While Huawei will find alternate sources for semiconductors, how would Apple produce smartphones without drawing on parts and facilities in China? New factories are not built overnight and cost money.
  • Huawei has already moved to increase orders from its HiSilicon subsidiary, and has said it would develop server chips, FPGAs, and other chips for wireless infrastructure that it now purchases from U.S. firms.
  • The new policy has also had a chilling effect on other Chinese telecommunications firms such as Xiaomi, which has reportedly increased chip orders to stockpile against an uncertain future.
• An end to U.S. semiconductor leadership.  The trade war with China and the new policy against Huawei could end U.S. leadership in semiconductors according to a report from the Boston Consulting Group.Lower sales for U.S. semiconductor companies means lower R&D spending, the kiss of death in the highly competitive semiconductor industry.  The ripple effects of further escalations in a trade war with China could reduce global semiconductor demand by almost 40 percent according to the BCG report.
• Big gains for China’s semiconductor industry.  The Chinese government has said it would inject more than a trillion dollars into the Chinese economy to drive investment in new technologies such as 5G and artificial intelligence, reducing imports of foreign technology.  This investment would be made over and above those earmarked for the Made in China 2025 program.
• Delays in 5G.  Without Huawei able to provide wireless networking equipment, the rollout of 5G would suffer.Huawei is a key member of the 3GPP, which helped define the 5G standard, and Huawei is a leading 5G developer and holder of 5G patents.Fortunately for Huawei and 5G, many wireless operators around the world have already committed to using Huawei equipment for 5G.However, Huawei needs semiconductor chips to continue building 5G equipment.

What Should the US Do Instead of Beating up Huawei?

The new policy against Huawei unravels the network of relationships that have tied the electronics industry and global trade together.  The electronics industry uses chips designed, produced, packaged & tested, soldered onto printed circuit boards, and assembled into final products in facilities all over the world, with different countries specializing in different aspects of production, in line with the economic law of comparative advantage.  This cooperative web has made laptop PCs, flat panel televisions, smartphones and a host of other electronic products affordable, and has helped create and enhance consumer wealth almost everywhere.

The U.S. semiconductor industry has benefitted immensely from the global supply chain, and continuing down the road of escalating trade sanctions against Huawei and China will have ruinous consequences, especially in tandem with the present COVID-19 global economic slowdown.

Rather than demonize China, Huawei, and other Chinese companies, the U.S. should develop comprehensive trade policies that recognize and that take into account China’s self-interest, and develop a long-term strategy to promote and maintain the strength of innovation in the U.S.

The semiconductor and wireless industries are truly global, with innovations benefitting all countries and people all around the world.  It is madness to risk hobbling these industries.  International cooperation is needed to face challenges that have no borders such as scientific advancement, economic development, pandemics and global warming.