PALO ALTO, U.S. — When Washington added Huawei Technologies to its trade backlist last year, U.S. suppliers to the Chinese tech giant lost billions of dollars in revenue. Now, the latest crackdown threatens to take an even bigger toll on America’s tech industry by driving U.S. and Chinese supply chains even further apart.
Extending efforts to restrict Huawei over national security concerns, the U.S. Commerce Department announced in May that it will require any company using American technology to supply it, or its affiliates, to apply for a license. U.S. tech companies fear that will drive away, not only Huawei, but other business as well.
“Securing new clients in China, or even in Asia, could be more challenging from now on as prospective clients would think twice before they buy American equipment or technologies like ours,” an executive at a California-based semiconductor company, who asked not to be named, told the Nikkei Asian Review after new rules were announced.
The California company, like many of its peers, has close ties to the Chinese market, which accounted for more than 60% of global semiconductor consumption in 2019, according to a report by Beijing-based market research agency Daxue Consulting.
Although the firm does not supply to Huawei or its affiliates directly, “a lot of Chinese tech companies, those buying from us included, have some sorts of relationships with Huawei,” the executive said. “There is no way to know whether what we sell to a non-Huawei company will not eventually become part of a Huawei product.”
The latest restrictions, which take effect in September, stipulate that companies must to obtain a special license if they have “knowledge” that their technology is being used to design or make products that are destined for Huawei and its affiliates.
“There are still a lot of unknowns at this current juncture,” said Brad Gastwirth, chief technology strategist at Wedbush Securities. “It is unclear for U.S. companies, let’s say, whether they can even sell a product to a potential customer that may potentially use it for Huawei.”
And that is not all: Because non-U.S. companies must also apply for a license if they use American equipment or software to supply Huawei, there are concerns these companies, too, could shift away from U.S. vendors to avoid the regulatory uncertainty and red tape.
“It seems crazy to me to tell somebody what they can and cannot do with something that they bought previously,” Gastwirth said.
With American tech companies afraid of losing foreign customers due to the new restrictions, he added, “there is a lot of lobbying going on right now in DC from the U.S. side.”
Even more worryingly, the latest U.S. crackdown is expected to accelerate the broader “decoupling” of global supply chains, which started when trade tensions broke out last year and gathered urgency amid the COVID-19 pandemic.
“I think the Huawei controversy will add to bilateral tensions… and it is likely to accelerate efforts by both countries to disentangle supply chains,” said Timothy Heath, senior international and defense researcher at global policy think tank RAND Corporation.
The U.S. has been calling for supply chain independence and shifting manufacturing power from China as coronavirus exposed the country’s reliance on Asian manufactured goods.
American lawmakers have proposed several stimulus bills to ease the blow of trade tensions on the semiconductor sector and strengthen supply chain independence. The latest proposal is a bipartisan bill announced on Wednesday — named the CHIPS Act — that will allocate $10 billion in federal funding domestic chipmaking and a further $12 billion for research and development.
“In addition to securing our technological future, the CHIPS Act will create thousands of high-paying U.S. jobs and ensure the next generation of semiconductors are produced in the U.S., not China,” said U.S. Representative Michael McCaul, one of the bill’s sponsors.
Meanwhile, China is also pushing for structural supply chain reforms, primarily through its “Made in China 2025” strategy aimed at reducing the country’s dependence on foreign technology.
“It is unfortunate, but it seems [supply chain decoupling is] a trend that both sides are pursuing,” said Heath.
A decoupled supply chain would be especially bad news for the U.S. semiconductor sector, which relies on access to the global market.
Semiconductors were the fourth-largest U.S. export product by value in 2018, only after aircraft, refined oil and crude oil, according to data from the U.S. International Trade Commission. With China now accounting for more than half of the world’s semiconductor consumption, the industry is banking on the country’s rapidly growing 5G market for future growth.
Chinese government plans to invest 1.2 trillion yuan, or about $170 billion, over the next five years to build its 5G infrastructure and is expecting to have more than 600,000 5G base stations installed by the end of 2020. The scale of investment and market size of 5G is far and away the biggest in the world, making the country a key source of growth for semiconductors and related industries.
Qualcomm, Broadcom, Intel, Micron Technology and several other major Huawei suppliers have repeatedly cited 5G deployment and China’s 5G investment and infrastructure as major tailwinds for 2020 in their earnings outlooks.
Such tailwinds would be welcomed news for companies after they lost billions in 2019 due to the impact of the initial Huawei ban.
Qualcomm, which used to get about 2%-3% of its revenue from Huawei, has been excluding revenues from the Chinese handset giant in its earnings outlook since August 2019. Another mobile chipmaker, Broadcom, which has 5% revenue exposure to Huawei, said the loss of that one business cost them $2 billion in 2019. Micron, a major memory chip supplier that counted roughly 13% of its revenue from Huawei in the first half of 2019, reported a 23% full-year revenue decline last year partially due to the Huawei entity list restriction.
2020, however, is not turning out as rosy as America’s chipmakers had hoped.
Escalated tension between the two countries pose a direct risk to the “estimated $49 billion of revenue that the US semiconductor industry derived from Chinese market” as a result of American companies being denied full access to China’s 5G market, according to a report published by Boston Global Consulting in March.
“Continuation of the bilateral conflict could jeopardize U.S. semiconductor companies’ ability to conduct business in China on an equal footing with their competitors, both Chinese and from other regions,” Antonio Varas and Raj Varadarajan, managing directors at Boston Global Consulting, wrote in the report.
The $49 billion estimate did not include in a loss of business from outside China. If companies in other regions also choose to diversify their supply chains and shift to non-U.S. vendors to avoid being caught up in Washington’s restrictions, the damage could be even bigger.
The latest ban is already putting some foreign companies in a tough spot, including Taiwan Semiconductor Manufacturing Co., a key producer of Huawei chips.
Because TSMC uses American technology in its foundries, it must also obtain a license from the U.S. to continue business with one of its biggest customers. The leading chip manufacturer is now at risk of losing business to competitors such as Samsung and Chinese domestic foundries, Nikkei Asian Review previously reported.
Indeed, while U.S. companies are calculating their potential losses, South Korean companies like Samsung are attempting to seize the opportunity.
“We have recently seen the interesting new trend that Korean companies are becoming more willing to work with Chinese companies than previous years,” said Gastwirth at Wedbush.
In the long run, U.S.-China decoupling could even knock American semiconductor industry from their No. 1 spot. Boston Global predicts that it if tensions lead to further restrictions on U.S. tech sales to Chinese customers, it would take only a few years for South Korean semiconductor industry to overtake their American rivals in the global market.