US vs. Huawei: Be careful what you wish for

Huawei could run short of key chips for its networking gear by early next year, as US sanctions take their toll.

The Shenzhen-based vendor is uncertain if it can even fulfill its existing contracts to supply 5G kit to operators in China and around the world, Bloomberg is reporting.

So, the latest and harshest round of Huawei bans is already having the desired effect. But be careful what you wish for.

If Huawei can't fulfill its 90-plus 5G contracts, the result will be messy and costly for operators.

Presumably those telcos will be forced to turn, directly or indirectly, to Nokia, Ericsson, Samsung and/or NEC, and pay whatever it takes. Neither they nor their governments will thank Washington for that.

Even Attorney General Bill Barr is asking just whose equipment are telcos going to buy if they are warned off Huawei.

More than that, the blowback from this kind of total ban could mean long-term harm to the US chip industry.

China accounted for 23% of global semiconductor demand in 2018. Since the US-China trade war began, average annual growth for US chip firms has declined from 10% to around 1%, Boston Consulting Group points out.

It argues that under current restrictions US firms could lose 8% of global share and 16% of revenue. If the US enforces a total semiconductor ban on China, this could rise to 18% of global share and 37% of revenue.

These falls in revenue would mean cuts in R&D spending, capital investment and jobs.

So even allowing for the need to push back against China's forced technology transfers, IP theft and extensive state subsidies – not to mention its alarming penchant for hostage-taking – there are good reasons for trying to cut a deal.

The phase one trade agreement in January did include some measures relating to technology transfers and IP theft, though nothing on subsidies.

But the impact of the latest Huawei measures means the US could return to the negotiating table in a position of strength.

China's efforts to build a world-class chip industry go back to the 1950s.

A recent Brookings Institution research paper says the national champion, SMIC, is around five years behind the world's leaders.

SMIC and the next-biggest firm, Unigroup, received state subsidies equivalent to 40% and 30% respectively of total revenue between 2014-18.

That's not much of a result. In aggregate, China accounts for just 3% of global capacity in advanced chips.

But some analysts believe this may change as the nation turns toward domestic suppliers as a result of the Huawei bans.

In a scale game such as chips, money makes a difference. There's an avalanche of cash waiting to be tipped into the sector. Last year the government created a new $29 billion national IC fund, and Brookings says at least $80 billion has also been raised through provincial and municipal funds.

It might be too much to expect reasonable compromise from either national leader at this stage. But giving Huawei a little breathing space might be better than trying to kill it off altogether.

— Robert Clark, contributing editor, special to Light Reading

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