One of the features of more than two years of increasing hostility towards Huawei in Washington is how the company has steered ahead, apparently unperturbed. Its networking business has reported successive quarters of healthy sales and its consumer unit hit new heights in April by overtaking Samsung as the world’s biggest smartphone seller, according to research firm Canalys.
Behind the headlines there were doubts about how long Huawei could hold out against the gathering storm. The latest sales figures said as much: Huawei sold over 70% of its smartphones in mainland China in the second quarter, but shipments to international markets plunged 27% year-on-year, signposting the darkening mood.
The sense of foreboding took starker form on Monday when the US Department of Commerce formalised its ban on foreign chip firms from doing business with the Chinese giant. The Americans first ordered a halt on sales of US-made chips last year, before issuing another directive warning non-US suppliers against selling components made with US technology to Huawei. The final loophole has effectively been closed. For Huawei the day of reckoning is finally here.
Last month the British government cited uncertainty about semiconductor supply as a key factor in its backtracking on allowing Huawei to be part of the UK’s 5G network (see WiC504). But the chokehold on sales of US-supported components poses an existential threat to Huawei’s smartphone business as well. It has acknowledged that it is running out of parts, with Richard Yu, chief executive of the company’s consumer business, telling an industry conference this month that it is short of processor chips. “This year may be the last generation of Huawei Kirin high-end chips… This is a big loss for us,” he admitted.
Production of the Kirin chip showcases how Washington is homing in on the weaknesses in Huawei’s supply chain. Huawei designed the Kirin itself but it relied on tools from American companies to do so. Without support from the same firms it will be harder to make further advances or resolve technical problems. Even more fundamentally, Huawei relies on third-party foundries to make the Kirin. Restrictions on sales from US partners had seen much of the production shift to TSMC, a leading Taiwanese foundry. Now that route is closed off as well. There’s talk of production moving to SMIC, China’s top foundry, but it doesn’t have the know-how of its Taiwanese peer and it is equally reliant on US-supported technology, which will be withheld if it flouts the Huawei ban.
Huawei had anticipated Washington’s latest move, stockpiling as many chips as it could. But with no new orders likely to be fulfilled from Thursday this week, sales of its smartphones will surely be constrained in the months ahead. The same uncertainty will spread to business buyers of its 5G solutions, who will need convincing that Huawei can meet its contractual commitments for rolling out new telecoms networks as well.
Longer term the company will try to build a supply chain that doesn’t depend on US equipment. But that’s not achievable in the foreseeable future, forcing Huawei to fall back on warnings that the Chinese government won’t sit on the sidelines while it is suffocated out of existence.
Whether Beijing will order an early counterstrike on US tech firms remains to be seen. Some commentators reckon that it will hold off until after the US presidential elections in November in the hope that Joe Biden will win office and adopt a less confrontational stance. In the meantime Huawei’s best chance of keeping its supply lines open may depend on government lobbying from US chips firms like Qualcomm, which have achieved exemptions from the embargo in the past on commercial grounds (Qualcomm gets two-thirds of its sales from China). Attitudes at the Department of Commerce (run by the hawkish Wilbur Ross) may have hardened, but Qualcomm is negotiating for permission to carry on selling its chips to Huawei, including high-end devices for 5G smartphones, the Wall Street Journal reports.
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