The ongoing hi-tech trade war between the USA and China escalated significantly last week when the USA increased its sanctions against Huawei. In a move which had been long-threatened, but which many supply chain players hoped would never happen, the US government barred any company using US technology to make semiconductors, from supplying Huawei.
This led TSMC of Taiwan, the world’s largest chip foundry, to suspend sales to Huawei, its second largest customer (after Apple). That puts the Chinese firm in a very bad position – it sources an estimated 90% of its most advanced mobile device and network chips from TSMC, and no Chinese manufacturer has the capability to make these instead. But it also deprives TSMC of a major customer, forcing it to choose between Huawei and its US business (which includes Apple and Qualcomm).
The new order extended the restrictions placed on supplying Huawei, when it was placed on the US entity list a year ago. That prevented US companies from trading with the Chinese giant without a special licence – although the processes and rules have remained confusing. The latest demands effectively give chip manufacturers an ultimatum – supply US customers or Huawei, but not both, since most have some elements of US hardware or software in their fabs.
The exception might be new Chinese semiconductor manufacturers, but they are, as yet, years away from being able to support the advanced technologies offered by the world’s biggest foundries. TSMC has already pioneered the 5-nanometer geometry, enabling extremely low power, compact chips and helping processor makers to mitigate the slowdown of Moore’s Law. In this respect, it is ahead of the other major foundries, Samsung and Global Foundries, and the world’s largest chip vendor, Intel. And some of Huawei’s new server processors are made in TSMC’s 7-nm process.
The latest move embroils TSMC in geopolitics, in particular the tensions between Taiwan and China. The company will, no doubt, be demanding significant favors from the USA in return for its compliance. It is discussing establishing factories in the USA, which could bring it additional US business, but also compensate for lower sales from its Taiwan and mainland China fabs. It is currently not restricted in making chips for other Chinese customers, but Huawei will leave a big hole to fill if no compromise is reached. So it is credible that the US government will foot much of the bill for the new US plants, and the deal could even inch the Trump administration closer to official recognition of Taiwan, which is claimed as a territory by China, and is currently recognized by very few countries.
A few hours before news of the additional sanctions against Huawei was broken by the US Department of Commerce, TSMC had said it would build a 5nm fab in Arizona, with support from the state and federal governments. The two were clearly connected, but it remains to be seen whether TSMC can also negotiate some easing of the restrictions so that it can continue to do some work for Huawei’s chip arm, HiSilicon, in future.
Some analysts believe the new sanctions are partly a PR exercise and that TSMC will have no trouble gaining a special licence to sell products to HiSilicon again. TSMC-watching analyst Andrew Lu told EETimes: “If they can do that, the deal to set up the US fab is worth it.”
TSMC insisted the decision to build in Arizona was “a business decision for TSMC, it’s not political. The reason we chose Arizona was supply chain readiness,” as Nina Kao, a company spokesperson, said.
The $12bn facility will produce up to 20,000 wafers a month using the 5nm process and will employ at least 1,600 people. Completion is targeted for 2024. Clearly, that 20,000 figure is a tiny percentage of the 12m wafers TSMC produces each year, but they will be for the most advanced products.
The US government is also said to be in talks with Intel to build a US foundry, expanding its own third party manufacturing business and taking the USA a step closer to the self-sufficiency in core technologies which, like China, it now craves. To improve its standing in the chip industry without reliance on foreign manufacturing facilities, it appears the administration is happy to provide financing and subsidies of the kind it often criticizes in its enemy state.
China, of course, has already been investing heavily in its response to the US bans on Huawei, and before that, its temporary sanctions against ZTE, which almost collapsed that company. A Bloomberg report noted that the Chinese government was investing $2.25bn in Semiconductor Manufacturing International (SMIC), its largest foundry, but the road to full semiconductor self-sufficiency is still a long one, given how far ahead of the curve TSMC (and Samsung) are when it comes to cutting edge processes.
Huawei executives, speaking last week in the firm’s global analyst summit (held virtually this year for non-Chinese analysts), sounded uncharacteristically rattled, but issued a firm statement. It said that, while the original entity listing had been “without justification”, Huawei had “remained committed to complying with all US government rules and regulations. At the same time, we have fulfilled our contractual obligations to customers and suppliers, and have survived and forged ahead against all odds.”
But, the statement went on, “in its relentless pursuit to tighten its stranglehold on our company, the US government has decided to proceed and completely ignore the concerns of many companies and industry associations. This decision was arbitrary and pernicious, and threatens to undermine the entire industry worldwide. This new rule will impact the expansion, maintenance, and continuous operations of networks worth hundreds of billions of dollars that we have rolled out in more than 170 countries. It will also impact communications services for the more than 3bn people who use Huawei products and services worldwide.”
The statement concluded: “Huawei is undertaking a comprehensive examination of this new rule. We expect that our business will inevitably be affected. We will try all we can to seek a solution. We hope that our customers and suppliers will continue to stand with us and minimize the impact of this discriminatory rule.”
However, it seems incredible that China would not start to freeze out US suppliers from its own markets, and so US giants like Intel and Qualcomm may face a big hit to their own businesses. A recent report by the Boston Consulting Group estimated that restricting Chinese access to US intellectual property, a key motivation, would risk the outcome that “over the next 3-5 years, US companies could lose eight percentage points of global share and 16% of revenues if the USA maintains the restrictions enacted with the current entity list.” The same report warned that US companies could see revenues decline by as much as 37% if the country were to ban semiconductor companies from selling to Chinese customers completely, in effect causing a “technology decoupling from China”.
At the analyst summit, rotating CEO Guo Ping did not give the firm’s usual revenue guidance at this event, for obvious reasons, but did say that the biggest division, the consumer group (which houses handsets and other devices), had suffered a 17% fall in smartphone shipments in the first quarter of this year, and had lost $10bn worth of handset revenues last year.
This was largely because Huawei has had to stop offering the Google applications suite that comes with Android, because of the entity listing, and has instead developed its own mobile operating system, HMS. This seems to be paying off in 5G devices, partly because so much demand is coming from China and other allied markets – Huawei shipped 15m 5G units in the past two quarters, to get 33% of the global market and 55% of its home market.