by Fabrice Jacob, CEO JK Capital Management Ltd., a La Française group-member company
On 15th May, the Trump administration slapped Huawei with further sanctions that are meant to restrain Huawei from selling products that are using its own chips, or to be more precise chips designed by its own design house subsidiary HiSilicon. From now on, any company anywhere in the world that designs or manufactures chips for Huawei and that is using either US equipment or US software to do so needs to obtain a licence from the US government before it can proceed. And most likely this licence will never be granted as an official “presumption of denial” is the starting point of the licensing process.
Chipmakers including the largest of all, TSMC from Taiwan, all use US equipment, and some of these machines, such as those made by Applied Material, Lam Research or KLA-Tencor, do not have foreign competition. It is the same situation for Electronic Design Automation software that are necessary for design houses such as HiSilicon to design chips. This software can only be bought from Synopsys or Cadence Design Systems, two American companies.
Is Huawei going to disappear as a result? Quite certainly it will not.
On the chip making side, HiSilicon can always decide to replace its long-term partner TSMC with Chinese manufacturers to produce the chips – SMIC and Hua Hong Semiconductor are the first names that come to mind. Although their technology is still not as advanced as TSMC’s, we believe these manufacturers can adopt a “multiple-patterning technology” that does not require US-made equipment to deliver 12 nanometre chips (12nm) or 10nm chips that would still be acceptable for Huawei phones. It is true that the chips would not be as performant as the current top-of-the range 7nm chips produced by TSMC, however this is exactly what Intel is currently doing as it has extensively adopted the multi-patterning process at 10nm. It will still slow down Huawei’s current semiconductor speed by approximately 20-30%. In addition, the yield and capacity of Chinese semiconductor factories such as SMIC and Hua Hong are still far from being optimum, which means the cost of production might end up being higher than what it is now with TSMC as the manufacturing partner.
But in the end, Huawei will still be able to deliver the chips and the phones it currently sells, without using any US technology.
Interestingly, on the same day that the Trump administration announced its latest batch of sanctions against Huawei, TSMC announced that it will invest $12bn over 2021-2029 to build a factory in Arizona, with production to start in 2024. The fact that this announcement was made on the same day is certainly not a coincidence. Our understanding is that TSMC negotiated a deal with the US government to build chips for Huawei on US soil and under strict supervision by US regulators. Whether these chips will be designed by HiSilicon or by an independent design house is a matter of speculation at this stage. But it is certainly a smart way for TSMC not to lose the Huawei smartphone chip business that represents 8% to 10% of its total sales. In other words, notwithstanding the fact that Huawei stocked up a lot of chips designed by HiSilicon and made by TSMC prior to the sanctions being announced, we believe the smartphone business of Huawei will be only slightly affected, if at all, by the latest move made by the Trump administration.
Unfortunately, the other division of Huawei that is responsible for telecom equipment, the so-called High Performance Computing division, may not be as lucky.
This is the largest such company in the world. It competes with Nokia, Ericsson and with Samsung Electronics to make network equipment using 4G and 5G, and it is known for offering the most performant technology. This is the division that Trump wants to kill for fear of security breaches. It is the one that the Chinese government will defend at all costs at it is literally the flagship of Chinese know-how. The central processing units that are made (once again) by TSMC are not as sophisticated as they could be for smartphones as miniaturisation is not an issue for telecom equipment. However, these 5G machines need other chips that are only made in the US. Baseband processors are one of these bottlenecks that Huawei managed to circumvent by launching last year its own 5G baseband processor, named Tiangang and manufactured by TSMC, but TSMC uses American equipment to produce them. It is public information that TSMC and those absolutely critical US chip makers (such as Broadcom, Qualcomm, Marvell) have already provided inventory to Huawei that should last until 2021. This is when Huawei will be cut off from its critical suppliers if no agreement can be found between the US and China until then and will have to stop making 5G communication equipment.
How has China reacted? It has threatened to take reciprocal actions against some carefully-selected US companies. Global Times, a mouthpiece of the Chinese government, has indicated that Beijing was considering banning the sale in China of all products made by Qualcomm (representing 48% of its total sales), Cisco (3%), Apple (17%) and Boeing (17%) if the US administration was to pursue on its path.
This is the latest chapter of a story that has already created major headaches for chipmakers both in Asia and in the United States. Very likely there will be many more chapters to come.
Informative Document for non-professional investors as defined by MIFID II. The information contained herein is issued by JK Capital Management Limited. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. The information and material provided herein do not in any case represent advice, an offer, a solicitation or a recommendation to invest in specific investments. To the best of its knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report.