The United States put up another major roadblock this month against Huawei, as China's big telecommunications company moves to set up the latest 5G mobile networks worldwide.
On May 19, the Commerce Department issued new export rules to choke off Huawei's access to semiconductor chips it needs to build cellphones and 5G infrastructure.
The new controls ban chipmakers — mostly based in South Korea and Taiwan — from using U.S. machines and software to manufacture semiconductors for Huawei. That closes a loophole that had allowed semiconductor makers to continue to sell components and designs to Huawei as long as they were made outside the U.S.
Analysts say this latest move likely spells a death knell for Huawei's global ambitions by freezing out the Chinese company from fundamental semiconductor technology and by raising the costs for hundreds of countries that were relying on Huawei components for their 5G expansion plans, including many in Europe. The new restrictions dramatically raise the stakes in the ongoing battle for technological superiority between the U.S. and China.
How the controls are enforced will be a sweeping test of how far America's historical dominance in high-tech sectors like semiconductors can extend in dictating the behavior of non-U.S. firms.
"It's an absolute watershed moment because it's the beginning of an emerging techno-nationalist reality," says Alex Capri, a fellow at the National University of Singapore who researches supply chains.
Huawei's rotating chairman, Guo Ping, acknowledges the obstacles in the past year of components out of reach. "Survival is the keyword for us now," he said at the company's annual analyst conference last week.
According to the U.S. government, the company and its affiliates pose a national security threat because they could access sensitive information and hand it over to China's government.
"We must amend our rules exploited by Huawei and HiSilicon and prevent U.S. technologies from enabling malign activities contrary to U.S. national security and foreign policy interests," Commerce Secretary Wilbur Ross said in a statement.
Huawei's executives say the company follows the law and deny it would give data to the Chinese government.
Huawei's way
A year ago, Huawei defiantly vowed to overcome a U.S. ban that stopped it from buying U.S.-made components, though the Trump administration since gave the company several temporary exemptions. "Huawei is going to climb this mountain ... one thing for sure is we'll make it out alive," Ren Zhengfei, the company's founder, told Business Insider then.
But the newest rules will likely end Huawei's ambitions to become the dominant provider of next-generation mobile technology, analysts say.
Huawei has invested heavily in its own research and development as part of a broader Chinese effort to move away from reliance on foreign technology. HiSilicon, a Huawei subsidiary in Shenzhen, is now one of the most advanced Chinese chip designers.
But even HiSilicon still uses electronic design automation software sold by U.S. firms Cadence and Synopsys to design its chips. HiSilicon also relies completely on the Taiwan Semiconductor Manufacturing Co. and Korean chipmakers like SK Hynix and Samsung to manufacture the actual chips. Those chipmakers in turn rely on American machines from companies like Lam Research and Applied Materials.
China's Semiconductor Manufacturing International Corp., widely seen as the country's most promising competitor to the Taiwanese company, uses U.S. machines as well. But SMIC's manufacturing technology is at least several years behind its Taiwanese competitors, analysts say, meaning it could not immediately substitute even mid-range chips — 14- and 16-nanometer chips — in Huawei's current smartphones.
"Even if you buy the talent and the professors, you can't buy the equipment," says Brett Simpson, a senior analyst at Arete Research. "You design a chip using U.S. software and you build a 'fab' [or manufacturing plant], using U.S. capital equipment. That's the bottom line."
Some Chinese tech companies briefly considered using open-source design standards for future processors and avoid the export controls. Chinese tech giant Alibaba even unveiled a new processor last year using these standards, called RISC-V, but industry experts say such efforts cannot easily be scaled.
"The U.S. government has decided to sort of weaponize this U.S. technology dominance in semiconductor manufacturing and semiconductor design and across the board," says Paul Triolo, a technology policy analyst at Eurasia Group. He says that will have reverberations around the world.
Up to 40% of current European 4G mobile network infrastructure is from Huawei, and much of the 5G upgrading will go on top of that. That includes the United Kingdom, where the government is under pressure to bar Huawei from the U.K.'s networks. The new U.S. export controls could cut off procurement of new parts to service existing 4G base stations and thus jeopardize the building of future 5G networks in partnership with Huawei.
"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," Huawei said in a statement after the U.S. controls were announced.
Stuck in the middle
As early as last October, Trump administration officials were pressuring Taiwanese diplomats to stop selling chips to Huawei, according to people with direct knowledge about the negotiations. They spoke to NPR on condition of anonymity to discuss private, contentious world trade issues. The news was first reported by the Financial Times.
Taiwan, home to the world's top contract chipmaker, TSMC, and competing chipmaker United Microelectronics Corp., has long been a geopolitical flashpoint. Beijing considers Taiwan part of China and has vowed to annex the island by force, if necessary. Dictating whether a Taiwanese company can produce chips for Huawei, a tech champion favored by Beijing, could push the U.S. and China into even greater conflict.
Now the top contract chipmaker faces a delicate geopolitical balancing act as it is aggressively courted by both the U.S. and China. "It's key for TSMC as a business model ... that they remain neutral through this whole process," says Arete Research's Simpson.
The company announced last week it would build a $12 billion plant in Arizona, its first in the U.S. But the facility will be relatively small and will make 5-nanometer node chips — sophisticated, but not at the company's leading edge. It has already built two plants in mainland China, but they also do not contain TSMC's most advanced production lines.
Other U.S. trading partners have also come under the administration's pressure to halt semiconductor equipment sales to China. Beginning in 2018, U.S. officials successfully pressured Dutch authorities to halt export licenses that would have allowed the sale of cutting-edge lithography machines used to etch and print tiny semiconductor chips. The machines, made by the Dutch company ASML, were destined for China's SMIC, according to Reuters.
The halted extreme ultraviolet lithography machines represent the next major advancement in shrinking chip sizes; denying Chinese chipmakers the machines, which can take years to install and get up and running, would further widen the gap between Chinese semiconductor manufacturing capabilities and those of Taiwanese and South Korean chipmakers.
"You don't want to threaten America or they may do something even more extreme," says an ASML executive who asked to remain anonymous because they were not authorized to speak on the matter.
ASML owns a company in San Diego that makes a critical laser component in its lithography machines. So the U.S. could interpret its export controls to restrict ASML product sales to China even further, according to Dan Wang, a tech analyst at research firm Gavekal Dragonomics.
"The U.S. puts you between a rock and a hard place. You either ship to China and anger the U.S., or you anger China. It's not a great position to be in," the ASML executive says.
More rules to come
Navigating global semiconductor sales will only become rockier going forward.
At the end of June, another round of U.S. export controls encompassing semiconductors goes into effect. They drastically broaden what can be construed as the sale of U.S. technology to final military users in China, Russia and Venezuela. Companies will have to verify their products and services won't end up being used for military or military-linked purposes — which could be hard to prove.
"Effectively everything in semiconductors can be traced to military use," says Risto Puhakka, president at VLSIresearch, a chip industry research firm. Given how broad the forthcoming controls are, "they could become a sword of Damocles, ready to fall on anyone exporting technology to China," explains Martin Chorzempa, a research fellow at the Peterson Institute for International Economics.
Other experts say it is in America's interests to keep the guidance vague.
"The idea here is not to make it clear and precise for the industry, because if this has a chilling effect that causes the industry to become more conservative and hesitate to sell [to China], that's still consistent with the policy end game of the [Trump] administration," says Reid Whitten, an international trade partner at law firm Sheppard Mullin.
As the U.S. fences off access to its semiconductor technology, Beijing has doubled down on seeding its own, self-contained semiconductor ecosystem.
"Under such circumstances, China should switch its strategy from integration with the international mainstream to independently develop own core technologies," according to an editorial in nationalistic Chinese state tabloid Global Times.
Hours after the Commerce Department issued the latest export controls, the Chinese company SMIC announced that it had received $2.2 billion from two Chinese state investment funds.
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