Commerce Department’s Huawei chip rule could deliver ‘death blow’: analyst

According to a group of analysts, Huawei could face a “near total” shutdown of major semiconductors after the United States tightened restrictions on the Chinese firm’s ability to obtain critical components.

The latest rule could be a blow to the tech giant, which already faced limited options for sourcing the chips it needs.

If Huawei is unable to access the components it needs, billions of dollars in revenue are at stake for its entire business.

“The actions taken in the United States represent a significant tightening of restrictions on Huawei’s ability to source semiconductors. This jeopardizes its ability to continue to manufacture smartphones and base stations, which are its staples, ”Dan Wang, technology analyst at Gavekal Dragonomics, a research firm, told CNBC.

Huawei was not available for comment when contacted by CNBC.

In May, Washington changed the Foreign-Made Direct Products (FDPR) rule requiring foreign manufacturers using U.S. chip-making equipment to obtain a license before they can sell semiconductors to Huawei.

On Monday, the Commerce Department took further action. It added 38 Huawei affiliates to a blacklist called the Entity List. US companies are prohibited from doing business with companies on the entity list.

And Washington has further amended the FDPR to include instances where US software or technology is the basis of a foreign produced item that will be used in the “production” or “development” of any part, equipment. or component produced, purchased or ordered by any Huawei Entity on the blacklist.

The amended rule will apply when a blacklisted Huawei entity acts as a “buyer, intermediate recipient, end recipient or end user”.

These designations are important because they essentially broaden the scope of US sanctions.

Huawei is designing its own line of Kirin chips that go into its smartphones. It also designs a line of chips called Ascend that are integrated into the servers in its data centers that support its rapidly growing cloud computing division.

But the actual manufacturing is done by TSMC of Taiwan, which has previously said it will no longer ship chips to Huawei from mid-September.

After the initial modification of the FDPR in May, Huawei was already facing very limited options for procuring chips.

The most viable, experts said, was to buy from Taiwanese company MediaTek, which produces so-called “off-the-shelf” chips for smartphones that Huawei could buy. Acquiring semiconductors from Chinese company Unisoc was also an option. As is the potential transfer of production to SMIC, the largest contract chip maker in China.

However, all of the options presented serious problems. For example, SMIC uses American equipment to manufacture chips, while it also lags far behind TSMC in terms of technology.

But the Commerce Ministry’s latest move is one of the toughest moves to date against Huawei and threatens to restrict the company’s options even further.

“This move is the latest and potentially the most serious effort by the US government to stifle the company’s ability to obtain advanced semiconductors for all of its lines of business,” Eurasia Group said in a note Monday.

“A worst-case scenario, which looks increasingly likely, could amount to a near-total semiconductor shutdown for Huawei, dealing a fatal blow to China’s largest global technology company.”

The effect on Huawei could be severe, targeting some of its most important businesses. Last year, Huawei’s consumer division, which includes smartphones and laptops, achieved sales of 467.3 billion yuan or $ 66.93 billion in 2019 and accounted for more than 54 % of total turnover.

Washington’s latest rule change could hit that directly.

Huawei might have enough chips to release the rest of the year, but 2021 could be tough.

“The new US decision makes it even more difficult for Huawei to procure adequate smartphone chips for 2021,” Neil Mawston, executive director of wireless device strategies at Strategy Analytics, told CNBC via email.

Eurasia Group said Huawei had stored chips that “could keep it in business, but these are not expected to last more than about a year.” Analysts note that there is also a risk that customers will abandon Huawei technology.

“Huawei’s customer base may also have determined that they need to switch to another supplier, which means the business of the company could quickly collapse,” noted Eurasia Group.