Huawei resurgence may blow multi-billion-dollar hole in Qualcomm

In the dying days of the Trump presidency, just weeks before the Capitol riots of January 6, 2021, Qualcomm secured an exemption from the ban on sales of US technology to Huawei. For several years, the Chinese vendor had been squeezing Qualcomm's processors out of its phones and replacing them with chips made by HiSilicon, its in-house business. But starting in early 2021, Huawei's warehouses began to fill up with Qualcomm's chips.

Today, HiSilicon accounts for only between a fifth and a quarter of Huawei's phones, according to data seen by Light Reading. The rest are powered by the San Diego-based chipmaker. Since receiving that license in late 2020, Qualcomm has shipped $1.2 billion worth of chips to Huawei, charging high per-unit prices for its silicon, according to one estimate. Qualcomm declined to comment.

This lucrative business for Qualcomm was also a lifeline for Huawei's consumer business, a gadget-making powerhouse that generated sales of nearly $67 billion in 2020. US sanctions badly disabled it by cutting Huawei off from Samsung and TSMC, the only chip foundries capable of manufacturing the latest, transistor-crammed smartphone chips that HiSilicon designed.

Minus Qualcomm, Huawei simply had no viable alternatives. The market for application processors is highly concentrated, according to data published by Counterpoint Research, comprising just a handful of big companies. They include Apple and Samsung, which make chips for use in their own smartphones. Taiwan's MediaTek sits just ahead of Qualcomm as today's market leader, accounting for 36% of global shipments in the final quarter of 2023 (versus Qualcomm's 23%). But MediaTek, unlike Qualcomm, was denied an export license to serve Huawei. Since early 2021, it has gradually disappeared from Huawei's phones.

Saving the Chinese tiger

Qualcomm's license – which covers 4G but not 5G technology – is controversial. To US critics who are especially hawkish about China, it has given Huawei the time and opportunity to work on homegrown 5G alternatives. The fruits of that labor were displayed last September when Huawei unveiled its Mate 60 Pro, a 5G smartphone powered by the Kirin 9000s chip. Like the Kirin 9000, its predecessor, the Kirin 9000s is designed by HiSilicon. But while the 9000 was previously manufactured by TSMC, using a 5-nanometer (nm) process (the smaller the measurement, the more advanced the chip), the 9000s appears to be a 7nm chip cranked out by SMIC, a foundry based in China.

"At Yole Group, we confirm that the chip fabrication differs from HiSilicon's previous solution, the Kirin 9000," said Ying-Wu Liu, a technology and cost analyst for computing and software at analyst firm Yole Group, in a research note. "Indeed, we assumed the 9000s SoC [system-on-a-chip] die has been developed and manufactured using SMIC's N+2 (7nm) process, with 13 metal layers." The assessment came after a "teardown" of the Mate 60 Pro by Yole Group.

SMIC is also now subject to US sanctions. Moreover, it has never been able to obtain the extreme ultraviolet lithography (EUV) machines used in the production of the most advanced chips. Today, these EUV tools are made solely by a Dutch company called ASML, and the Dutch government has long denied ASML an EUV export license to serve China. The workaround, for SMIC, seems to have been an older technology known as deep ultraviolet lithography (DUV), which ASML sold to China before a tightening of rules. Making 7nm chips with DUV is reckoned by experts to be less efficient than producing them with EUV – but not impossible.

Commercial proof seemed to come with the publication this week of Huawei's latest annual report. Annual sales at Huawei's consumer business tumbled from that $67 billion high in 2020 to less than $30 billion in 2022, after Huawei sold off 5G smartphone assets under the Honor brand. But last year, apparently buoyed by Chinese demand for the Mate 60 Pro, revenues were up 17.3%, to almost $35 billion.

Support for the story comes from Counterpoint Research. "Huawei ranked first in China in terms of smartphone sales during the initial two weeks of 2024, according to Counterpoint's China Smartphone Weekly Model Sales Tracker," said Ivan Lam, a senior analyst, in a short online update. "This is Huawei's first time capturing the top spot as the US sanctions imposed on the company since 2019 have continuously eroded its sales share."

Chip dip

This is bad news for Qualcomm, as the company itself acknowledged in a November filing with the US Securities and Exchange Commission (SEC). Noting the likelihood of further US restrictions, it went on to say that "we do not have a license to sell 5G products to Huawei, and Huawei has recently announced the launch of new 5G-capable devices using its own integrated circuit products. As a result, we do not expect to receive material product revenues from Huawei going forward."

If Huawei has accounted for sales of about $1.2 billion since 2020, the loss of it as a customer would hardly be a disaster for a company that made $35.8 billion in revenues last year. But Qualcomm has been having a rough time amid a slump in smartphone demand. Sales fell 19% for its last fiscal year and net profit shrank a third, to less than $9.5 billion, although it did report 5% year-on-year revenue growth, to about $9.9 billion, for its recent first quarter (ending on December 24).

The big concern is that Huawei grabs market share in China from other smartphone vendors using Qualcomm's chips. "Additionally, to the extent that Huawei's 5G devices take share from Chinese OEMs [original equipment makers] that utilize our 5G products or from non-Chinese OEMs that utilize our 5G products in devices they sell into China, our revenues, results of operations and cash flows could be further impacted," acknowledged Qualcomm in its SEC filing.

Data from Counterpoint Research shows that Huawei's market share in China soared from 9% for the first six weeks of 2023 to 17% for the corresponding period of this year. Besides Apple, the main losers appear to be Chinese brands such as Oppo and Vivo, both of which are customers of Qualcomm. Those chip sales to Huawei may ultimately carry a much steeper cost.