Huawei’s rotating chairman, Eric Xu, used his keynote session at the company’s Global Analyst Summit in Shenzhen to warn of rising semiconductor prices. As shortages, largely caused by the pandemic, affect some industries, the impact will be worsened by US trade sanctions against Huawei and some other Chinese firms, which have a significant knock-on effect on the whole supply chain.
Xu pointed to the urgent need to rebuilt trust and cooperation in the global semiconductor supply chain, saying: “In the coming years, higher costs for the semiconductor industry are something we’re pretty sure of. The unwarranted US sanctions undermined our company … I hope they can help restore trust and cooperation as soon as possible.”
The restrictions on Huawei’s access to US components and chipmaking technology – imposed by the Trump administration and so far maintained by the Biden government – have not only impacted Huawei itself, but its wider ecosystem and the whole chip business.
They have deprived many US component suppliers of a large customer (as well as other Chinese firms placed on the Entity List), and giants like Intel and Qualcomm, which have major Chinese revenues and investments, fear that there will be retaliatory restrictions on other Chinese companies buying US products.
Huawei has taken several steps to protect its supply chain and access to components, including stepping up investment in its own silicon, hardware and software assets and those of local partners. Xu highlighted R&D investment of RMN142bn ($21.7bn), almost 16% of revenue, last year. It has spun off its midrange smartphone business, Honor, to give it better ability to buy US components and address US markets. And it has preserved its financial performance to a far better extent than many expected, because of the strength of its domestic market, though it only saw 3.8% year-on-year sales growth in 2020, compared to almost 20% in 2019.
Another rotating chairman, Ken Hu, recently told analysts of the impact of semiconductor sanctions, especially on the smartphone business, where Huawei had briefly taken the global top spot in early 2020. “The supply restrictions for our smartphone business have caused us a great impact and we haven’t really been able to see a clear picture about the supply for the smartphones so at the moment it is very difficult to make a clear forecast for the business,” Hu said when Huawei announced its 2020 financial results earlier this month.
The main issue is not the design of smartphone system-on-chip products, since that is handled by Huawei’s HiSilicon chip division. The problems relate to other components for which a Chinese supplier of equal performance to an existing US provider may not exist; and of course, the ability to manufacture HiSilicon’s designs to scale and with the cutting edge process required by advanced smartphones.
Huawei was the second largest customer for Taiwanese foundry TSMC until the latter was effectively forced, by a second wave of US sanctions, to choose between its US clients and Huawei. Encouraged by financial support for a major new plant in the USA, and its long list of US customers such as Apple and Qualcomm, TSMC broke ties with Huawei. That has left Huawei reliant on Chinese foundries, which so far are behind those of Taiwan and Korea in their processes – the largest, SMIC, has moved to scale production with 14-nanometer and has announced a process that takes it closer to 7nm, but meanwhile, TSMC and Samsung are already on the path to 5nm and even 3nm.
Victor Zhang, Huawei UK’s VP, recently said that the firm had “enough inventory for supporting global customer applications, especially for 5G and software and the smartphones business”, having stockpiled components ahead of anticipated US actions. Operating cashflow fell by 61.5% last year, to RMB35.2bn ($5.4bn), partly because of stockpiling, and Huawei booked more than RMB167bn ($25.5bn) for inventory in both 2019 and 2020, up from about RMB97bn ($14.8bn) in 2018.
The challenge is for Huawei to ramp up development and manufacturing capacity, whether inhouse or from local partners, before its stockpiles run down – very possible in some lower-volume areas, or where Chinese suppliers already have a strong position, but unlikely in mainstream, high end smartphones with their reliance on advanced process nodes to drive down power consumption and cost while driving up performance.
All of this will, of course, stimulate the already ambitious Chinese goal to become self-sufficient in semiconductors in strategic technologies such as 5G, AI/ML, cloud and security. This goal was enshrined in 2015’s Made in China program and only intensified by recent geopolitics. Last month saw China publishing its fourteenth five-year plan, which has significant 5G content and a reiterated commitment to control of semiconductors, intellectual property and the supply chain.
The plan’s 5G goals will be able to leverage China’s 341 5G-connected cities, plentiful low cost 5G devices, about 360m 5G subscribers, and 5G networks that will number well over one million base stations before the year is out.
“China can now look the world in the eye,” Chinese leader Xi Jinping told media during last month’s annual session of the National People’s Congress. “It’s not like back in the day, when we were all bumpkins.”
Instead of setting average yearly growth targets over the five years of the plans, as previous roadmaps did, Beijing will now set growth targets every year to reflect changing conditions, including geopolitics.