► The US's blocking of semiconductor sales to Huawei will almost certainly hit the company's supply chain.
► Huawei is trying to get out of the woods by establishing a domestic supply chain and selling in the Chinese market.
On May 19, Gan Bin, vice president of Huawei's wireless product line, said (in Chinese) that 200,000 5G base stations have been built nationwide, and a total of 800,000 stations is expected to be built by the end of this year. This is higher than what the Ministry of Industry and Information Technology (MIIT) projected last month – more than 600,000 5G base stations expected in China by the end of 2020.
As the main Chinese buyers of 5G base stations, three carriers – China Unicom, China Mobile and China Telecom – have completed CNY 76 billion collective purchasing. Huawei and ZTE won (in Chinese) 57.2% and 28.7% respectively in China Mobile's 5G Phase II main equipment project, and two companies totally accounted for 88% shares of the bid of China Telecom and China Unicom in 2020.
Because 5G infrastructures have not been completely established, 4G-related businesses were still an important element of telecom companies. Stable earnings coming from the 4G infrastructure contracts enabled the firm to develop a strong presence in the consumer electronics area. In the past two years, sales of handsets, wearables, laptops, home appliances and other devices designed to make our lives easier brought it CNY 815 billion (around USD 115 billion).
Apart from that, its chip business performed well in the first quarter of this year. HiSilicon, a chipmaker affiliated with Huawei, has surpassed Qualcomm in the market share for the first time. CINNO Research's latest monthly semiconductor industry report showed (in Chinese) that in the first quarter of 2020, the shipment volume of HiSilicon was 22.21 million, a slight increase year-on-year. It officially became the largest mobile processor brand in the domestic market, with a market share of 44%, 11% higher than Qualcomm. The main reason was that Huawei phones were sold well and 90% of their processors were Kirin990, Kirin820 and Kirin985 from HiSilicon. Among them, Kirin990 is the first flagship 5G SoC chip.
Although HiSilicon performed well in the domestic market in this period, its supply chain has been negatively influenced by the new ban released by the US: this prevents any company from using US. software or technology to do business with Huawei without specific U.S. approval, and leaves a 120-day buffer period for relevant firms.
Compared with the ban released in May last year, the new one is stricter in terms of the scope of regulated companies. The technology threshold reduced from 25% to 0. How will the latest ban affect the supply chain of Huawei?
A large number of Huawei’s chips still need external procurement. Moreover, its self-developed microcomponents are mainly made by HiSilicon, which is a fabless design company. Huawei is the second-largest client of Taiwanese foundry TSMC, which is currently caught in the crossfire between the two largest economies.
Actually, before the release of the new ban, Huawei was gradually trying to transfer internal design chip production work from TSMC to SMIC. In April this year, the media reported (in Chinese) that Huawei had placed an order for a new 14nm chip released by SMIC, and to support China's semiconductor industry development, the government invested around CNY 16 billion in the subsidiary of SMIC in May 2020.
However, Huawei needs 5nm/7nm chips for its own most advanced 5G products. Therefore, as the US government released the latest and stricter ban, the firm placed a new USD 700 million order (in Chinese) for 5nm/7nm chips to TSMC, but the factory was reportedly working on full capacity and won't be able to take any more orders.
Besides, Huawei is also trying to substitute other suppliers with local companies. For instance, for Huawei mate 20, the main camera sensor still comes from Sony but the 8-million-pixel telephoto lens is produced by OmniVision Technologies, which was acquired by Will Semiconductor Company.
Chinese semiconductor companies are making efforts to improve productivity, technology and competitiveness by M&A, recruiting experts and increasing R&D expenditures. They are responsible for various phone chips, including mobile phone processors, baseband chips (signal), radiofrequency chips (signal), camera chips (photograph), power chips and storage chips.
In summary, the pressure from the US has pros and cons. On the one hand, it will push Chinese companies to innovate and make totally local chips. On the other hand, if Chinese firms cannot stand for the challenges, some of them will go bankrupt, and lots of employees will lose their jobs. In addition, in the worst scenario, China will still need to rely on the US’s technologies and be put in such a dilemma again and again.