[Analytics] Can US export controls on chips stop Huawei?

The world’s semiconductor industry is struggling to understand reports from Washington that the Trump Administration may try to block sales of chips to Huawei Technologies if they are manufactured with American equipment. David P. Goldman specially for the Asia Times.

It isn’t clear that the United States has the technological clout to make export controls work. The result might be to push Huawei and other Chinese companies to speed up the adoption of more advanced chip-making techniques that American companies do not offer, producing faster and more efficient chips.

The Wall Street Journal reported Feb. 17, “The Trump administration is weighing new trade restrictions on China that would limit the use of American chip-making equipment, as it seeks to cut off Chinese access to key semiconductor technology, according to people familiar with the plan. The Commerce Department is drafting changes to the so-called foreign direct product rule, which restricts foreign companies’ use of US technology for military or national-security products. The changes could allow the agency to require chip factories world-wide to get licenses if they intend to use American equipment to produce chips for Huawei Technologies Co., according to the people familiar with the discussions.”

In a separate action, the US Department of Defense reportedly suspended its opposition to a plan to block sales of components to Huawei if 10% of their value is derived from American technology. In January, the Pentagon reportedly blocked a Commerce Department proposal to impose a 10% threshold because it would harm US technology companies, and White House economic adviser Larry Kudlow said that the proposal was rejected because “We don’t want to put our great companies out of business.”

Taiwan Semiconductor, the world’s leading foundry and Huawei’s biggest supplier, has told the industry press that its most advanced chips embody US content under the proposed 10% threshold. “According to TSMC internal assessment, its 7 nm uses less than 10% of US technology thus it will have no issues. However, its 14 nm supply to Huawei may face some problems,” Gizchina reported on Dec. 23.

Taiwan Semiconductor already manufactures 7-nanometer chipsets for Huawei’s subsidiary Hsilicon – the Kirin 980 and 990 sets for 4G as well as 5G broadband. The chip architecture stems from Britain’s ARM, a subsidiary of Japan’s Softbank.

ARM declared last October that its technology was not of American but of British origin and therefore exempt from US controls. Huawei’s Ascend 910 Artificial Intelligence chip for high-speed servers also uses 7-nanometer fabrication from Taiwan Semiconductor. TSMC has been producing 7-nanometer chips since 2016 with what the company claims are acceptable yields. In October 2019, the Taiwanese firm announced that it already was delivering 7-nanometer chips to customers in “high volume.”

The 7-nanometer process requires Extreme Ultraviolet (EUV) lithography, which etches billions of transistors onto the chip’s surface. The denser chips provide 20% more processing capacity with lower power consumption than older chips. In 2020, TSMC promises to introduce 6-nanometer chips with yet another 20% gain in efficiency.

According to Huawei, the Ascend chip design is a game-changer in artificial intelligence. The company markets the Ascend chipset with its proprietary AI software framework Mindspore, and claims that the new development framework doubles the efficiency of developers through the use of natural language processing that requires fewer lines of code.

Most of Huawei’s products still use 14-nanometer chips, but the Chinese national champion can source the older chips on the Chinese mainland, Taiwan News commented Dec. 25: “In the event the US does go ahead with its plans, Huawei could either choose to buy 14-nm chips from China’s Semiconductor Manufacturing International Corporation (SMIC) or switch to 7-nm or even 5-nm products from TSMC.”

Speaking on background, a senior Huawei executive said, “We, as do others, have plans to produce chips below 7 nanometers, to 5 and below over the course of several years. This is clearly the direction of all chipmakers. The important thing isn’t who gets there first, as long as you have your own independent capability.”

There are several technologies that can produce 7-nanometer and under chips, but the most promising is extreme ultraviolet lithography (EUV), now employed by TSMC as well as Samsung, the second-largest chip producer.

Although American companies like LAM Research and Applied Materials are the largest providers of chip-making equipment, the only producer of EUV lithography equipment is the Dutch firm ASML. Last year the United States persuaded the Netherlands to delay the sale of EUV equipment to China’s SMIC, but Taiwan’s TSMC has already purchased 30 lithography machines from ASML. Presumably, chips manufactured by TSMC for Huawei using Dutch equipment would not be subject to American controls.

Huawei started preparing a year and a half ago for intensified US sanctions, Nikkei Asian Review reported last September in a cover story headlined “Insight Huawei’s Secret Plan to Beat American Trade War Sanctions.”

According to reporters Cheng Ting-Fang and Lauly Li:

In the first few weeks of 2019, 20 engineers from Huawei Technologies arrived in the riverside town of Jiangyin in eastern China on a secret mission. They took up stations at the state-backed Jiangsu Changjiang Electronics Technology, China’s largest chip packaging and testing company, where they went to work upgrading the facilities and increasing the site’s capacity, ahead of a production surge in the autumn.

“These Huawei staff are on-site almost seven days a week, from day to night, nitpicking and reviewing all the details … demanding strictly that the local company meets global standards as soon as possible,” one chip industry executive familiar with the situation told the Nikkei Asian Review. “It’s honestly like preparing for wartime.”

All across Asia, companies in the computer chip industry were receiving similar messages from Huawei: Boost your production, and we will buy your product. In a slowing global market, Huawei made a commitment that was impossible to resist: The company guaranteed up to 80% utilization rates for the next two years to potential and current suppliers.

In April 2018, the United States punished the second-largest Chinese telecommunications company ZTE by suspending sales of US chipsets for its smartphone handsets, effectively shutting the company down.

President Trump intervened to allow ZTE to pay a multi-billion-dollar fine and accept American monitors in return for the restoration of chip sales. By December 2018, though, Huawei Technologies surprised the world by launching its own Kirin chipset, which competes with Qualcomm’s Snapdragon offering.

The speed with which China reached self-sufficiency in chip design surprised the United States. Washington has escalated its attempts to deny Huawei access to critical technology, including the April 2019 announcement that all component sales to Huawei would require special licenses from the Commerce Department. Through domestic substitutes and Asian suppliers, Huawei quickly produced handsets as well as 5G telecommunications equipment with no US components.

The trouble is that the United States stopped investing in high-tech manufacturing after the 2000 tech stock crash, which in part was occasioned by excessive investment in telecom hardware. Investment in physical production of electronics rapidly shifted to Asia. In 2019, virtually no venture capital commitments were assigned to manufacturing, as US investors preferred software.

After nearly two decades of neglect of the US high-tech industrial base, so much capacity and know-how have shifted overseas that the US may lack the clout to deny access to Chinese companies.