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Cutting Huawei off from TSMC would be end-of-days move

In its fight against Huawei, the US has often resembled an overweight boxer struggling to connect with a muscular but nimble opponent. Loopholes allowed Huawei and some of its most important US suppliers to dodge the uppercut of last year's trade restrictions, when the Chinese vendor's name was added to the sinister-sounding Entity List. Supportive customers and resistant policymakers helped neutralize the punches thrown by Mike Pompeo, the US secretary of state, as he urged European governments to ban the vendor outright.

But a move to cut Huawei off from TSMC, a Taiwanese semiconductor firm, would be the roundhouse blow that finally leaves the Chinese vendor on its knees. Any restraint that Chinese authorities have shown so far, as they watch their country's networks champion dance around a pugilistic US, would quickly vanish. In retaliation, China could escalate the trade dispute to a dangerous new level, threatening a global economy already reeling from the impact of the COVID-19 pandemic.

Struggling to land a blow on Huawei, US authorities earlier this year were said to be considering much tougher restrictions that would stop companies with US-made production equipment from supplying the Chinese vendor. Such rules would affect numerous component makers outside the US, including TSMC, whose semiconductors are a vital ingredient in Huawei's products.

That much was made clear when Eric Xu, one of Huawei's rotating CEOs, was asked during last week's earnings update about the impact of any US moves to cut off TSMC. "China's government will not stand by and watch Huawei get slaughtered on the chopping board," he said. "They may also take some counter measures." The warning serves to illustrate just how harmful to Huawei a TSMC blockade would be.

TSMC's importance to Huawei is hard to overestimate. Usually described as the world's largest foundry, TSMC essentially makes semiconductors at the behest of other companies. Last year, it generated about $34.6 billion in revenues, and a net profit of nearly $11.2 billion. Writing this week for Seeking Alpha, Robert Castellano, the president of market research firm The Information Network, reckons Huawei accounted for about 15% of those revenues, making it TSMC's biggest customer after iPhone maker Apple. Several of Huawei's 5G chips and server microprocessors rely on TSMC's manufacturing capabilities.

Blocked from using TSMC, Huawei would probably turn to SMIC, a Chinese rival, for server chips, says Castellano. The trouble here is that SMIC lacks the manufacturing systems needed to support Huawei's latest designs. "Some of Huawei's newest server processors are being made at 7nm [nanometers]," says Castellano in his Seeking Alpha report. "SMIC does not have 7nm capabilities."


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The full impact could be far more crippling than previous US measures that were focused on US component suppliers. "The embargo on Huawei hasn't really slowed them down," says Earl Lum of EJL Wireless Research. "You slightly put a bump in their roadmap, but you haven't stopped them. If the whole point of this was to stop them, it has failed, given the innovation they are coming out with."

Huawei's R&D muscle partly explains its resilience. Besides exploiting loopholes to continue trading with the likes of NeoPhotonics and Lumentum, it spent about $18.6 billion on R&D last year, roughly $4.3 billion more than in 2018. The sum dwarfs Ericsson's investment of $3.8 billion and Nokia's of $4.8 billion, and it bought an additional 16,000 R&D specialists for Huawei in 2019. About 96,000 of its 196,000 employees now work in this area. "There are so many people in China to hire," says Lum. "It doesn't matter that everyone you are hiring isn't an Einstein. One of them will be."

But there is no R&D fix to losing a foundry that accounts for about 40% of the industry's total capacity, according to Castellano's research. For that reason, China is likely to respond to any moves against TSMC by going on the attack. Counter measures, argued Xu, could include a ban on the use of US equipment in China, including "smart devices made by American companies." The biggest US company under threat is Apple, which has repeatedly lowered its sales guidance on wavering Chinese demand.

Retaliation would not have to be restricted to the telecom and technology sectors, however. "If you start messing with TSMC, whatever trade war is going on right now will escalate substantially," says Lum. "I don't see a positive outcome of that at all."

China could start by making further cutbacks to its purchase of US agricultural products, hurting US farmers in the Trump heartlands of the Midwest. As part of a long game, Chinese President Xi Jinping might also devalue the yuan to boost Chinese exports. This would inevitably harm the Chinese economy in the short term, but – in the absence of democracy – China's leaders may consider that a price worth paying.

"This type of destructive ripple effect on the global industry would be astonishing," said Xu last week. "If Pandora's Box was to be opened, we will probably see catastrophic destruction." He is probably right. The question is whether it stays the US hand.

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— Iain Morris, International Editor, Light Reading

Hadoren 4/12/2020 | 3:32:01 AM
China's Response You're so unimaginative about China's response, haha.

It won't be anything to do with American equipment or agriculture.

China would do a ban on medical exports to the United States.

And with half the world banning or strongly limiting (e.g. European Union, India, Indonesia, Korea, Malaysia, Turkey, Vietnam) exports of masks, good luck getting PPE without China.

https://macmap.org/fr/covid19
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