|Huawei's Day of Reckoning | Impact of Sanctions on Chips |
>> Huawei will run out of smartphone chips early next year
Huawei's day of reckoning finally arrived this week.
Starting from September 15, the third and most severe round of US sanctions began, denying Huawei access to any components made with US technology.
Key Asian-based chip suppliers such as TSMC, Samsung, SK Hynix and Mediatek have all had to terminate their supply agreements with the Chinese firm.
Here are three key questions about the US sanctions and their impact.
How long can Huawei last?
The biggest hit on Huawei is felt by its handset division, which for the past two years has accounted for more than half the company's revenue.
In particular the latest ban means Huawei's Taiwan fab partner, TSMC, will no longer make the Kirin chips that power its high-end smartphones – a serious blow that almost certainly will eliminate Huawei as a competitor to Apple and Samsung.
Richard Yu, the head of Huawei's consumer division, has confirmed the termination of Kirin supply, though he did not say how much inventory remained.
China's National Business Daily, quoting a securities analyst with close supply chain sources, says Huawei has warehoused enough Kirin chips to last until early next year.
Already, Huawei has cut its forecast for smartphone shipments in 2021 to 50-70 million, compared to the 240 million units sold last year and an estimated 195 million this year, NBD reported.
By contrast, basestation chips are not nearly as much affected, mainly because of the much lower volume required. Huawei has stored up enough basestation components to support its network business for several years.
What is the impact on the global supply chain?
Taiwan chip and component firms enjoyed a mini boom as they worked overtime to supply Huawei before the latest sanction took effect, with more than 20 hitting all-time records. According to Nikkei Asia Review, in August MediaTek enjoyed a 42% year-on-year bump in sales and TSMC 16%.
But now that the ban has taken effect, Huawei – which spends around $70 billion a year on components – will exit from a large part of the global supply chain.
The broad nature of the ban means compliance could be tricky. Suppliers will need to be certain their products do not end up in Huawei kit. This uncertainty could be why even some Chinese suppliers have suspended sales to Huawei, according to a Digitimes report.
Traditionally, Huawei's most important suppliers have been in the US, which accounted for $11 billion in purchases in 2018. Many of those were able to continue shipping to Huawei in the wake of the initial ban in May 2019, but they will find it almost impossible to skirt the latest measure.
South Korean firms such as Samsung and SK Hynix will certainly feel the pain. Semiconductors are South Korea's biggest export and China its biggest market. It sold $22.5 billion worth of mostly memory chips to China and $11.4 billion to Hong Kong in the first seven months of the year, accounting altogether for 62% of chip exports.
Japanese companies sold about 1.1 trillion yen ($10.4 billion) in components to Huawei last year, Omdia has estimated.
For Taiwan's TSMC, the world's biggest chip fab, Huawei is its second-largest customer, while Mediatak is one of Huawei's biggest suppliers of components for mid- and high-end phones.
These suppliers are already chasing Huawei's smartphone rivals, such as Apple and Chinese brands Vivo and Realme.
Overall, we will see an accelerated restructuring of electronics supply chains and global partnerships.
What happens next?
The next key date is the US election on November 3.
Regardless of the outcome, Washington's China policy is unlikely to significantly change course. Sanctions and the decoupling of tech supply chain are not only here to stay but may well be expanded.
But there's a view that with the election gone the incoming administration will have the ability to dial back some of the harshest measures, not least because of the costly "disruption" to US industry.
In particular, there is no serious reason to constrain Huawei's handset business.
In Washington's 15-year pursuit of the firm, no agency has ever identified Huawei consumer devices as a threat. And it certainly doesn't make sense to sanction Huawei but not Xiaomi and Oppo. <<
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>> Huawei phone prices soar as chips supply gets cooked
The intensifying US-China tech trade war has seen Huawei smartphone prices rise in China, as fears grow over continued access to its Kirin chips.
Prices for both new and used Huawei smartphones in Shenzhen's Huaqiangbei electronics market have risen by 400 to 500 yuan ($59 to $74) since only a month ago. And Huawei's high-end Mate 30 was selling for 14,000 yuan ($2,067), compared with 10,000 yuan ($1,477) in January.
The threat to Huawei's chip supply began in May when the US announced it would tighten its export controls. The US Commerce Department said any chip manufacturers using US equipment, intellectual property or design software would need to apply for a license before shipping chips to Huawei.
Peeling away chips
Where it gets interesting is the Kirin chips Huawei relies on are actually not made in the US, but by the Taiwan Semiconductor Manufacturing Company (TSMC), located in Taiwan's Hsinchu Science Park.
The US regulation, which came into effect on September 15, targets any chipmaker anywhere in the world which uses any US equipment, intellectual property, or software, saying it needs a license to supply Huawei.
It was clearly drawn up with TSMC in mind. It will hurt the Taiwanese chipmaker as well as the Shenzhen consumer electronics maker.
Huawei accounts for between 15% and 20% of TSMC's annual revenue, and is its second-largest client after Apple.
TMSC is the world's most valuable semiconductor company, with a market capitalization of $408 billion.
Other chipmakers that supply Huawei are also warning the market for memory chips, like those made by Kioxia Holdings Corp (formerly Toshiba Memory), could quickly become oversupplied, with prices plummeting.
Huawei, like Apple and Samsung, designs its own chipsets, but outsources the making of them.
And its Kirin chips rely on an advanced technique known as a 7-nanometer process. The cutting edge is shifting towards the next standard, a 5-nanometer technique.
China's biggest homegrown chip manufacturer, Shanghai-based Semiconductor Manufacturing International Corp (SMIC), can't yet use 7-nanometer techniques at scale. It also uses US equipment.
Qualcomm would very much like to apply for a US government license to sell to Huawei. And in its favor, it is an American company, based in San Diego. Whether it meets with success largely depends on the outcome of the November US presidential election.
With Trump's sharply anti-China stance, Democratic nominee Joe Biden may try to win support from US tech firms, which would benefit from selling to Huawei. If the stakes are high for Qualcomm, they're enormous for Huawei.
Huawei became the world's largest smartphone vendor in the world in July, selling 55.8 million devices in the second quarter, compared with 53.7 million for second-placed Samsung. Even then, though, its overseas sales were quickly shrinking, dropping 27% from April to June compared with the same period in 2019.
Huawei's smaller Chinese competitors, like Xiaomi and Oppo, are seeing their European sales climb.
A big problem for Huawei is its newest devices can't use Google services. "Due to government restrictions, Google’s apps and services are not available for preload or sideload on new Huawei devices," says Google.
This is less of a problem in the domestic Chinese market, where Google services are blocked anyway – but it's a big one for overseas markets.
There are 1.5 billion active Gmail users. Google Chrome controls about 64% of the browser market, with its mobile app downloaded over 5 billion times. Outside China, Google is a big part of the app market. And without apps, smartphones aren't very smart.
The more reason to worry if you are Huawei, or one of its many suppliers. If you're a competitor, though, you may well be icing the champagne. <<
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- Eric L =