The imagery has captured scenes of war, unforgiving weather and even an abattoir as the assault has continued. In March, Huawei faced slaughter on the chopping board, warned Eric Xu, one of its rotating chairmen, as the US threatened tougher sanctions. A month later, it was a seed caught in a storm. By the time the US government discharged another salvo, the Chinese vendor saw itself as a fighter plane riddled with bullets, trying not to crash.
The world's biggest maker of network equipment has always had a penchant for drama, but this time its contributions do not exaggerate Huawei's predicament. Frustrated that initial sanctions restricting supplies of US components had such a limited impact on the Chinese vendor, the US has gone directly for the jugular in its latest attack. Under new rules, semiconductors made with any US equipment or design expertise will be unavailable to Huawei. By cutting off vital chip supplies from TSMC, a Taiwanese foundry that relies on US manufacturing tools, the US aims to bleed Huawei dry.
Experts are unanimous in depicting the latest measures as a grave threat to the Chinese behemoth. Just how grave is where they disagree. At least one thinks Huawei can survive for only a year if the rules are fully applied. Others are more optimistic about the company's prospects. Yet regardless of its fate, the prevailing view is that a US campaign to stunt China's technological development will ultimately fail.
How long can this keep going on?
For Huawei, the doomsday scenario comes from New Street Research. "As things stand, Huawei has 12 months left to live," wrote analysts for the company in a report this week. The dilemma is the lack of alternatives to US manufacturing tools used by foundries including TSMC and even SMIC, a Chinese company that has been viewed as a potential fallback if the Taiwanese manufacturer is blocked.
Huawei's dependence on TSMC is hard to overstate. According to estimates prepared by The Information Network, and first published on Seeking Alpha, the Chinese firm is currently TSMC's second-biggest customer, after Apple, accounting for about 15% of its revenues. In 2019, that would have been roughly $5.2 billion, about half of what Huawei spent annually on US components before emergency stockpiling last year. Among other things, Huawei relies on TSMC for certain 5G chips as well as microprocessors used in network servers.
SMIC has never seemed an ideal substitute, purely because it is thought to lag TSMC in chip-building technology. One of the goals in this game is to shrink the size of transistors, measured in nanometers (nm), so that more can be crammed into a chip, boosting performance and efficiency. Huawei's new TIANGANG chip (a type of application-specific integrated circuit, or ASIC) for basestations uses 7nm manufacturing technology deployed by TSMC, according to Stefan Pongratz of market-research firm Dell'Oro. SMIC, he says, has been investing in 14nm technology. "The transition would likely impact the power efficiency and/or computing performance of the ASICs and the overall RAN [radio access network] performance," said Pongratz in an email.
Chinese funding should eventually produce a more competitive SMIC. Earlier this month, the Shanghai-based company was reported to have planned a sale of shares that could raise about $3 billion. This move, according to New Street Research, should help to "scale out production" and give China a stronger asset. But a shift from TSMC to a more capable SMIC could take too long for Huawei. "To port over any designs to a Chinese foundry would take time and to bring them up to TSMC levels would take years," says Earl Lum of EJL Wireless Research. China is probably about three to five years behind TSMC, reckons New Street Research.
The other problem is SMIC's apparent use of manufacturing tools made by US companies such as Applied Materials, Lam Research and Teradyne. This would make the Chinese foundry subject to the same restrictions that now threaten TSMC's relationship with Huawei. What remains unclear at this early stage is if these new rules are much harder to bypass than the initial blockade on US components, which Huawei's suppliers dodged by relying on their non-US facilities. "One of the key unknowns surrounding this latest change is whether or not there will be any loopholes that can be exploited if, for example, TSMC sends the chips directly to non-Chinese contract manufacturers for integration," says Pongratz.
For China, the only safeguard with an absolute guarantee is to invest in its own manufacturing tools. "The tool development can happen but will, again, take time," says Lum. The speediest path to manufacturing independence could be to reverse-engineer equipment currently provided by a range of European, Japanese and US firms, a tactic Huawei previously used to enter the network equipment market, according to its critics. "At first sight, this will take five to ten years for most tools," say analysts at New Street Research.
While the new US rules will not take effect for 120 days, no company has the inventory needed to survive over such a long period. In the meantime, many Huawei-reliant countries and service providers – already shaken by the US campaign – will be carrying out an urgent risk assessment. "Regardless of the overall outcome, some of the damage will likely be irreversible," says Pongratz. "This latest effort by the US government to curb the rise of Huawei could be one more reason for these operators on the fence to revisit the 5G supplier landscape."
Despite this warning, the Dell'Oro analyst is less convinced than New Street Research that the latest US attack will destroy China's biggest vendor. "I am very skeptical this will be enough to take out Huawei," he tells Light Reading. "In short, I believe these restrictions will have some, albeit limited, success in curbing the rise of Huawei."
Last year's upheavals confirmed the Chinese firm is a master of adaptation, exploiting loopholes and stockpiling inventory while simultaneously preparing for a future without US suppliers. Spending on research and development, which already dwarfed that of its European and US rivals, soared from $14.3 billion in 2018 to $18.6 billion last year. This year it plans to invest $20 billion. And notwithstanding its claim to have full independence from the Chinese state, it clearly expects China's government to intervene if the US keeps punching.
This obviously threatens a retaliation that could extend to other economic sectors and spheres of geopolitical influence. "The worst-case Chinese response is to take over Taiwan and shut down the majority of US semiconductor companies, which would be an even larger issue leading to armed conflict," says Lum. Unlikely as that may be, tensions have already mounted during the coronavirus pandemic. To New Street Research, the recent crackdown in Hong Kong is a demonstration of Chinese muscle linked to the "new cold war" between China and the US in which Huawei is embroiled.
Another danger for the US is that its efforts to block Chinese firms have unintended and negative consequences for US industry. Besides attacking Huawei, the US government has also recently added Fiberhome, a smaller Chinese vendor, to its trade blacklist. Lum says this move increases the likelihood it will re-include ZTE, a Chinese rival to Huawei that previously came off the list after its payment of hefty fines. "The US strategy is to clearly shut down all Chinese telecom companies to US technology," he explains. "All this is doing is to hurt US companies and move business to Europe, Japan and elsewhere."
Just as NeoPhotonics, Lumentum and other component suppliers to Huawei sought loopholes in the initial rules, companies may simply try to evade the latest US regulations. Nelson Dong, a senior partner at US law firm Dorsey & Whitney, previously spelled out the risks. "This move may well force the global semiconductor industry to look away from US suppliers of semiconductor design tools and semiconductor production equipment and even to create new rival companies in other countries, including China itself," he said in a statement sent by email.
There is precedent for this, too. Once dominant in the satellite technology sector, the US suffered a decline after imposing stricter export controls on the technology, says Dong. Those controls prompted many customers to avoid US suppliers, which ultimately lost billions of dollars in sales to their international rivals. More stringent controls in the semiconductor market could trigger "tectonic shifts within the microelectronics industry for decades to come," writes Dong.
China is already doubling down on technology investments. Last October, long before coronavirus and the recent escalations, it was reported to have set up a $29 billion state-backed semiconductor fund that will help it assert technology independence from the US. There can be little doubt that discussions about semiconductor manufacturing tools have now taken place in Chinese government circles.
There isn't true wealth but in people
These Chinese moves will not produce results quickly enough to save Huawei, according to New Street Research. Moreover, its prediction is that China will lose a technology battle to the US fought over the next five to ten years. "China won't be able to have competitive chips on that kind of timeframe, and will have nascent ecosystems, totally subscale to those in place in the US," write analysts in their report. "With an experience and a scale disadvantage, China cannot win."
But in the longer term, it probably will. "There isn't true wealth but in people," said Jean Bodin, a sixteenth-century French philosopher quoted by New Street Research, which points out that China's vast resources of human capital will ultimately be the only thing that matters. "The next fight will be on education and economic growth. Can the US win that one?"
This population imbalance is already a critical factor in today's telecom and technology markets. With its 1.4 billion people, China last year accounted for about 17% of total sales at Apple, the largest US gadget maker. It is responsible for as much as 60% of the 4G infrastructure market, according to Börje Ekholm, the CEO of Sweden's Ericsson, who thinks it will similarly dominate tomorrow's 5G sector. If this estimate is accurate, then limited access to China denies Ericsson and Finland's Nokia a bigger share of mobile industry revenues than Huawei misses due to restrictions in the US, Europe and parts of the Asia-Pacific.
In future, its human capital combined with its investments in digital technology will make China the dominant global force in artificial intelligence, explaining US efforts to upset Huawei, according to Kaan Terzioglu, a senior industry executive who previously led Turkish mobile operator Turkcell but is today a co-CEO at Veon. "Who do you think will have more success in training tech intelligence?" Terzioglu rhetorically asked Light Reading at last year's Mobile World Congress, before he had switched jobs. "Whoever has more data. Whoever is more digitalized today and has a bigger population. China is much more digitalized than the US."
In the research and development battle, in particular, the human capital imbalance will be hard for the US to counter. Last year, Huawei and ZTE together employed more than 124,000 people in R&D, a figure that equals about 63% of the entire combined workforce at Ericsson and Nokia. "There are so many people in China to hire," Lum told Light Reading during a conversation earlier this year. "It doesn't matter that everyone you are hiring isn't an Einstein. One of them will be."
Disentangling US technology from Chinese products will reduce security risks and stop China from ripping off US innovation, say defenders of US policy moves. Amid a virus-triggered backlash against China, critics of this isolationism are becoming harder to find. But the successor to the current system of global supply chains, partnerships and trade is a balkanized world of incompatible standards, concentrated risk and potential resource constraints. It is one in which a rapprochement between China and the US is even harder to envisage. In that environment, a technology arms race fought over decades is unlikely to produce a US victor.
- Huawei is running short of friends, but it still has options
- Huawei's CFO doesn't get her way in Canadian court
- Ericsson is not following Nokia into the unChinese Open RAN Policy Coalition
- Huawei moves to guarantee chip supply
- Huawei befuddled by reports of total 5G ban in UK
- China's 6G grandstanding will ruffle US feathers
— Iain Morris, International Editor, Light Reading